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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM .............. TO ..............
COMMISSION FILE NUMBER 1-7981
AMERICAN GENERAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS ARTICLES OF INCORPORATION)
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<S> <C>
TEXAS 74-0483432
(State of incorporation) (I.R.S. Employer Identification No.)
2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019-2155
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (713) 522-1111
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------------------------- ------------------------------------
<S> <C> <C>
New York Stock Exchange
Common Stock, Par Value $.50 G Pacific Exchange
Preferred Share Purchase Rights
(one Right attached to G New York Stock Exchange
each share of Common Stock) Pacific Exchange
7% Convertible Preferred Stock,
Par Value $1.50 G New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value based on published prices as of February 28,
1999 of American General's voting Common Stock held by non-affiliates was
approximately $18.2 billion. As of February 28, 1999, there were 251,702,957
shares of American General's Common Stock and 2,317,701 shares of American
General's 7% Convertible Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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<CAPTION>
PART OF THE FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
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Portions of American General's 1998 Annual Report to
Shareholders Parts I, II, and IV
Portions of American General's definitive Proxy Statement
filed March 19, 1999, for the Annual Meeting of
Shareholders to be held April 29, 1999 Part III
</TABLE>
1998 FORM 10-K
1
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PART I
ITEM 1. BUSINESS
GENERAL
American General Corporation (American General) is one of the nation's
largest diversified financial services organizations. American General's
operating subsidiaries are leading providers of retirement services, life
insurance, and consumer loans. American General was incorporated as a general
business corporation in Texas in 1980 and is the successor to American General
Insurance Company, an insurance company incorporated in Texas in 1926.
Much of the information provided in response to this Item 1 is incorporated
herein by reference to selected portions of American General's 1998 Annual
Report to Shareholders (ARS). Appropriate references to such incorporated
information are specified throughout the text of this Item 1. Portions of
American General's 1998 ARS are provided as Exhibit 13 to this Form 10-K.
CORPORATE DEVELOPMENT. Over the last four years, American General completed
acquisitions with total consideration (excluding assumed debt) of approximately
$6 billion. Financial data of American General and its subsidiaries
(collectively, the company) included in this Form 10-K includes the operations
of Western National Corporation effective January 1, 1998. The company acquired
the remaining 54% equity interest of Western National Corporation on February
25, 1998. Earnings attributable to minority interests through February 25, 1998
are reflected as a charge against 1998 consolidated income. The financial data
for all periods presented also includes the operations of USLIFE Corporation
(USLIFE), which was acquired on June 17, 1997 and reported in accordance with
the pooling of interests method of accounting. The operations of Home Beneficial
Life Insurance Company and The Independent Life and Accident Insurance Company
are included beginning April 16, 1997 and February 29, 1996, their respective
acquisition dates. Additional information regarding acquisitions during the past
three years is incorporated herein by reference to Note 2 of Notes to Financial
Statements in American General's 1998 ARS.
NEW ACCOUNTING STANDARDS. During 1998, the company adopted Statement of
Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in the financial statements. Effective December 31, 1998, the
company also adopted SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information," which changes the way companies report segment
information. Adoption of these standards did not impact the company's
consolidated results of operations or financial position. Information regarding
these accounting standards is incorporated herein by reference to Note 1.16 of
Notes to Financial Statements in American General's 1998 ARS.
BUSINESS DIVISIONS. The company reports the results of its operations in
three business divisions: Retirement Services, Life Insurance, and Consumer
Finance. A description of each business division, including principal products,
methods of distribution, and principal markets, is incorporated herein by
reference to Note 18.1 of Notes to Financial Statements in American General's
1998 ARS. Financial information for each business division is incorporated
herein by reference to the sections "Business Divisions," "Capital Resources,"
"Asset/Liability Management," and "Liquidity" of Management's Discussion and
Analysis (MD&A) and Note 18.2 of Notes to Financial Statements in American
General's 1998 ARS, and to Schedule III of Item 14 of this Form 10-K.
EMPLOYEES. As of December 31, 1998, the company employed approximately 16,100
full-time salaried employees.
INSURANCE DEPOSITS AND PREMIUMS. The following table lists deposits and
premiums and other considerations of American General's retirement services and
insurance subsidiaries for the past three years:
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In millions 1998 1997 1996
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<S> <C> <C> <C>
Deposits* $8,210 $5,046 $4,415
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Direct premiums and other
considerations
Individual life premiums $1,490 $1,530 $1,462
Insurance charges 863 768 698
Group and credit health premiums 621 608 598
Group and credit life premiums 360 310 294
Individual health premiums 157 174 188
Other premiums 226 152 187
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Total direct premiums and
other considerations 3,717 3,542 3,427
Reinsurance premiums assumed 373 119 125
Reinsurance premiums ceded (485) (299) (308)
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Premiums and other
considerations $3,605 $3,362 $3,244
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</TABLE>
* Represents premiums received for interest-sensitive life insurance and annuity
products.
AMERICAN GENERAL
2
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LIFE INSURANCE SALES AND IN FORCE. The following table summarizes the face
amounts of life insurance sales and life insurance in force for American
General's insurance subsidiaries for the past three years:
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<CAPTION>
In millions 1998 1997 1996
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<S> <C> <C> <C>
Individual life insurance
sales:
Permanent (non-participating)
Interest-sensitive $ 11,590 $ 13,293 $ 13,289
Guaranteed-cost 5,242 4,062 3,598
Term 24,059 23,269 22,753
Permanent (participating) 3,547 5,778 5,710
Group life insurance sales 15,284 8,428 6,777
Credit life insurance sales 7,872 9,098 8,266
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Total 67,594 63,928 60,393
Less: reinsurance assumed 394 386 351
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Total direct sales $ 67,200 $ 63,542 $ 60,042
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Individual life insurance in force
(at December 31):
Permanent (non-participating)
Interest-sensitive $106,165 $103,069 $ 97,120
Guaranteed-cost 38,135 36,806 38,281
Term 104,465 98,267 96,971
Permanent (participating) 28,813 28,686 25,810
Group life insurance in force 56,555 50,854 45,774
Credit life insurance in force 13,198 13,994 13,068
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Total life insurance in
force(a)(b) $347,331 $331,676 $317,024
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</TABLE>
(a) Before deductions for reinsurance ceded.
(b) Includes reinsurance assumed.
ANNUITY PRODUCTS. The following table summarizes annuity liabilities by
product type for American General's Retirement Services and Life Insurance
divisions at December 31:
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In millions 1998 1997 1996
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<S> <C> <C> <C>
Retirement Services division
Fixed $ 34,024 $ 21,355 $ 20,441
Variable 14,771 10,545 7,118
Payout annuities 2,791 659 642
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Total annuity liabilities $ 51,586 $ 32,559 $ 28,201
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Life Insurance division
Fixed $ 5,012 $ 5,263 $ 5,857
Variable 1,066 721 602
Payout annuities 2,114 1,952 1,600
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Total annuity liabilities $ 8,192 $ 7,936 $ 8,059
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</TABLE>
The Retirement Services division offers both tax-qualified and non-qualified
annuities through plans that are qualified for tax deferral under the Internal
Revenue Code. The division provides retirement annuities and employer-sponsored
retirement plans to employees of educational, health care, public sector, and
other not-for-profit organizations. The division also offers non-qualified
annuities sold through a distribution network of financial institution
representatives. In 1998, minimum guaranteed interest crediting rates for the
division's fixed accounts ranged from 3.0% to 5.5%; actual interest crediting
rates on fixed accounts ranged from 4.8% to 10.0%.
The companies in the Life Insurance division offer a variety of annuity
products through multiple distribution channels focused on specific market
segments. At December 31, 1998, deferred individual fixed annuities comprised
approximately 54% of the division's annuity liabilities. In 1998, minimum
guaranteed interest crediting rates on these annuities ranged from 2.5% to 5.5%;
actual interest crediting rates ranged from 2.5% to 7.0%.
Both the Retirement Services and Life Insurance divisions offer variable
annuity accounts, in which the investment risk lies predominately with the
policyholder. Assets and liabilities related to these accounts are included in
Separate Account assets and liabilities in the company's consolidated balance
sheet.
The Retirement Services and Life Insurance divisions also offer payout
annuities that consist primarily of structured settlements of indemnity claims.
Interest is credited to these annuities at fixed rates determined when the
contracts are issued, consistent with the related investment yield at the time.
In 1998, interest crediting rates ranged from 2.0% to 13.5%.
INVESTMENTS
Information regarding investments is incorporated here-
in by reference to the sections "Investments" and "Asset/ Liability Management"
of MD&A and Notes 1.2, 4, and 15 of Notes to Financial Statements in American
General's 1998 ARS, and to Schedule I of Item 14 of this Form 10-K.
INSURANCE AND ANNUITY RESERVING METHODS
Individual life insurance reserves are based on assumptions similar to those
used to establish premium rates. Further information regarding reserving methods
is incorporated herein by reference to Note 1.8 of Notes to Financial Statements
in American General's 1998 ARS.
REINSURANCE
Information regarding reinsurance is incorporated herein by reference to Note
1.11 of Notes to Financial Statements in American General's 1998 ARS, and to
Schedule IV of Item 14 of this Form 10-K.
FACTORS AFFECTING PRICING OF PRODUCTS
INSURANCE AND ANNUITY PRODUCTS. Premium rates are based on assumptions, which
American General's insurance subsidiaries believe to be realistic, as to future
mortality,
1998 FORM 10-K
3
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PART I (Continued)
investment yields, expenses, and lapses. In addition, the
pricing is influenced by competition and the company's objectives for return on
capital. Although a profit margin is included in the price of the products, the
actual profitability of the products can be significantly affected by the
variation between actual and assumed experience.
CONSUMER FINANCE PRODUCTS. Pricing of consumer finance products is influenced
by such factors as cost of borrowed funds, credit risk, competition, the expense
of operations, and the company's objectives for return on capital. In addition,
pricing is affected by state regulation of interest rates based on contractual
terms and loan amounts, charges for individual loans, and insurance premium
rates.
COMPETITION
Competition in life insurance and financial services markets and the recent
trend of consolidations in the industry may affect, among other matters,
corporate development activities, business growth, distribution methods, and the
pricing of products and services.
American General's retirement services and life insurance businesses operate
in a highly competitive industry that consists of a large number of insurance
companies, banks, mutual fund companies, and other financial institutions. No
single competitor nor any small group of competitors dominates any of the
markets in which the company operates. Principal competitive factors include
price, financial strength ratings, selection of products, quality of service,
and, with respect to variable insurance and annuity products, investment
management performance.
American General's consumer finance business competes with other consumer
finance companies and other types of financial institutions that offer similar
products and services, including industrial banks, industrial loan companies,
mortgage banks, commercial banks, sales finance companies, savings and loan
associations, federal savings banks, and credit unions. Competition in the
financial services industry is intense due to the large number of companies
offering financial products and services, the sophistication of those products,
technological improvements, and more rapid communication.
REGULATION
INSURANCE. American General's insurance subsidiaries are subject to state
regulation in the jurisdictions in which they do business. Information
concerning regulatory compliance is incorporated herein by reference to the
sections "Capital Resources - Retirement Services and Life Insurance" and
"Regulation and Other - Regulation" of MD&A in American General's 1998 ARS.
Information regarding statutory accounting practices is incorporated herein by
reference to Note 16 of Notes to Financial Statements in American General's 1998
ARS.
Most states also regulate affiliated groups such as American General and its
subsidiaries under insurance holding company laws. Additional information
regarding dividend restrictions is incorporated herein by reference to Note 17.1
of Notes to Financial Statements in American General's 1998 ARS.
All 50 states have laws requiring life insurance companies to pay assessments
to state guaranty associations to protect the interests of policyholders of
insolvent life insurance companies. A portion of these assessments can be
recovered against the payment of future premium taxes; however, changes in state
laws could decrease the amount available for recovery. The company's probable
costs related to state guaranty associations are immaterial.
The Insurance Marketplace Standards Association (IMSA) was created in 1997 by
the American Council of Life Insurers, the industry's largest trade association,
to provide a framework by which participating life insurers design and implement
sales and marketing policies of high ethical content to benefit and protect
consumers. Certification by IMSA signifies that a company has committed to
maintain the standards set forth in IMSA's principles of ethical market conduct.
As of December 31, 1998, the company's principal retirement services and life
insurance subsidiaries were certified by IMSA.
REGISTERED PRODUCTS. Certain of American General's subsidiaries are subject
to various federal securities laws and regulations related to investment
companies. Separate Accounts, which are maintained to fund variable life and
annuity products, function as investment companies and, therefore, are subject
to such laws and regulations, in particular the Investment Company Act of 1940.
Variable life and annuity products are marketed by licensed insurance agents who
are registered representatives of the company's wholly owned broker-dealer
subsidiaries. These broker-dealers are member firms of the National Association
of Securities Dealers and subject to its rules and regulations.
CONSUMER FINANCE. American General's consumer finance subsidiaries are
subject to various types of federal
AMERICAN GENERAL
4
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regulation including the Federal Consumer Credit Protection Act, the Equal
Credit Opportunity Act, the Fair Credit Reporting Act, certain Federal Trade
Commission rules, and state laws that regulate the consumer loan and retail
sales finance businesses. In addition, American General's thrift subsidiary,
which engages in the consumer finance business and accepts insured deposits, is
subject to regulation by and reporting requirements of the Federal Deposit
Insurance Corporation and is subject to regulatory codes in Utah.
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.
ENVIRONMENTAL. The company's principal exposure to environmental regulation
arises from its ownership of investment real estate. Probable costs related to
environmental cleanup are immaterial.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information as of March 5, 1999 regarding the company's executive officers
who currently make disclosure filings pursuant to Section 16 of the Securities
and Exchange Act of 1934 is as follows:
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Present Principal Position with the Company and
Name and Age Other Material Positions Held during Last Five Years
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<S> <C>
ROBERT M. DEVLIN (58) Chairman (since 1997), President (1995-97 and since 1998),
and Chief Executive Officer (since 1996), Director (since
1993), and Vice Chairman (1993-95), American General
Corporation. Director, Cooper Industries, Inc.
JON P. NEWTON (57) Vice Chairman and Director (since 1995), Vice Chairman and
General Counsel (1995-97), and Senior Vice President and
General Counsel (1993-95), American General Corporation.
Director, Newmark Homes Corp.
MARK S. BERG (40) Executive Vice President and General Counsel (since 1998)
and Senior Vice President and General Counsel (1997-98),
American General Corporation. Partner (1991-97), Vinson &
Elkins L.L.P.
JAMES S. D'AGOSTINO JR. (52) Vice Chairman and Group Executive - Consumer Finance (since
1998), President (1997-98), and Director (1996-98), American
General Corporation; Chairman (1995-97), Chief Executive
Officer (1993-97), and President (1993-95), American General
Life and Accident Insurance Company, a subsidiary.
DAVID W. ENTREKIN (37) Senior Vice President - Investor Relations (since 1998),
Vice President - Investor Relations (1997-98), Director,
Investor Relations (1996-97), Senior Investment Manager,
Investment Research (1994-96), and Investment Manager,
Investment Research (1991-94), American General Corporation.
FREDERICK W. GEISSINGER (53) President and Chief Executive Officer (since 1995), American
General Finance, Inc., a subsidiary; President and Chief
Executive Officer (1994-95), American General Land
Development, Inc., a former subsidiary. Independent
Consultant (1992-94).
STEVEN GUTERMAN (45) Senior Vice President (since 1998), American General
Corporation; Executive Vice President (since 1998), American
General Investment Management, L.P., a subsidiary. Managing
Director (1983-98), Salomon Brothers.
SUSAN A. JACOBS (52) Senior Vice President (since 1998), Deputy General Counsel,
and Corporate Secretary (since 1997) and Associate General
Counsel (1986-97), American General Corporation.
ALICE T. KANE (51) Senior Vice President (since 1998), American General
Corporation; Executive Vice President (since 1998), American
General Investment Management, L.P., a subsidiary. Executive
Vice President (1994-98) and General Counsel (1986-95), New
York Life Insurance Company. Chairman (1994-98), MainStay
Mutual Funds.
JOE KELLEY (51) Chairman (since 1999) and Chief Executive Officer (since
1997), and President (1995-99), American General Life and
Accident Insurance Company, a subsidiary; Senior Vice
President and Chief Marketing Officer (1994-95), American
General Life Insurance Company, a subsidiary. Senior Vice
President (1992-94), Prudential Preferred Financial
Services.
RODNEY O. MARTIN JR. (46) Vice Chairman and Group Executive - Life Insurance (since
1998), American General Corporation; Chairman (since 1998),
and President and Chief Executive Officer (since 1997),
American General Life Companies, a subsidiary; President and
Chief Executive Officer (1996-98), American General Life
Insurance Company, a subsidiary; President and Chief
Executive Officer (1995-96), American General Life Insurance
Company of New York, a subsidiary. President (1993-95),
Connecticut Mutual Insurance Services.
ROBERT D. MRLIK (40) Senior Vice President - Corporate Relations (since 1998),
Vice President - Investor Relations (1994-98), and Director,
Investor Relations (1989-94), American General Corporation.
NICHOLAS R. RASMUSSEN (52) Senior Vice President (since 1983) and Senior Vice
President - Corporate Development (since 1993), American
General Corporation.
</TABLE>
1998 FORM 10-K
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PART I (Continued)
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Present Principal Position with the Company and
Name and Age Other Material Positions Held during Last Five Years
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RICHARD W. SCOTT (45) Executive Vice President and Chief Investment Officer (since
1998), American General Corporation; President and Chief
Executive Officer (since 1998), American General Investment
Management, L.P., a subsidiary. Executive Vice President,
General Counsel, and Chief Investment Officer (1994-98),
Western National Corporation.
JULIA S. TUCKER (50) Senior Vice President - Investments (since 1997) and Vice
President - Investments (1984-97), American General
Corporation; Executive Vice President (since 1998), American
General Investment Management, L.P., a subsidiary.
PETER V. TUTERS (46) Senior Vice President - Investments (since 1992) and Chief
Investment Officer (1993-98), American General Corporation;
Executive Vice President (since 1998), American General
Investment Management, L.P., a subsidiary.
THOMAS L. WEST JR. (61) Vice Chairman and Group Executive - Retirement Services
(since 1998), American General Corporation; Chairman (since
1998) and Chief Executive Officer (since 1997) and President
(1994-98), The Variable Annuity Life Insurance Company, a
subsidiary; Chairman and Chief Executive Officer (since
1998), American General Annuity Insurance Company, a
subsidiary. Senior Vice President, Annuity Operations
(1991-94), Aetna Life & Casualty Company.
THOMAS M. ZUREK (50) Senior Vice President and Deputy General Counsel (since
1998), American General Corporation; Senior Vice President
(since 1999) and General Counsel (since 1998), American
General Life Companies, a subsidiary. Partner (1992-98),
Nyemaster, Goode, McLaughlin, Voigts, Hansel & O'Brien, PC.
</TABLE>
ITEM 2. PROPERTIES
The company's corporate headquarters is located in the American General
Center, a complex of office buildings with 2.2 million square feet on a 46-acre
tract near downtown Houston. American General and certain subsidiaries own all
of the buildings and underlying land in the complex. The company occupies
approximately 50% of the total office space available in the American General
Center.
American General's subsidiaries also own various other properties, including
properties held for investment, branch office buildings, and the home office
buildings of: (1) American General Finance, Inc. in Evansville, Indiana; (2)
American General Life and Accident Insurance Company in Nashville, Tennessee;
(3) The Franklin Life Insurance Company in Springfield, Illinois; and (4) The
Old Line Life Insurance Company of America in Milwaukee, Wisconsin.
ITEM 3. LEGAL PROCEEDINGS
MARKET CONDUCT. In recent years, various life insurance companies have been
named as defendants in class action lawsuits relating to life insurance pricing
and sales practices, and a number of these lawsuits have resulted in substantial
settlements. Certain of American General's subsidiaries are defendants in
similar purported class action lawsuits. On December 16, 1998, American General
announced that certain of its life insurance subsidiaries had entered into
agreements to resolve substantially all of the material pending market conduct
class action lawsuits. The settlements are not final until approved by the
courts and any appeals are resolved. If court approvals are obtained
and appeals are not taken, it is expected the settlements will be final in third
quarter 1999.
In conjunction with the proposed settlements, the company recorded a charge
of $378 million ($246 million aftertax) in fourth quarter 1998. The charge
covers the cost of additional policyholder benefits and other anticipated
expenses resulting from the proposed settlements, as well as other
administrative and legal costs.
ENVIRONMENTAL. In accordance with Item 103 of Regulation S-K, environmental
lawsuits involving a governmental authority with potential exposure equal to or
greater than $100,000 are required to be disclosed. The company currently has
two such pending lawsuits.
Ochoa. In March 1994, two subsidiaries of American General were named as
defendants in a lawsuit, The People of the State of California (California) v.
Luis Ochoa, Skeeters Automotive, Morris Plan, Creditway of America, Inc. and
American General Finance, filed in the Superior Court of California, County of
San Joaquin, Case No. 271130. California is seeking injunctive relief, a civil
penalty of not less than $5,000 per day or not less than $250,000 for violation
of its Health and Safety Code in connection with the failure to register and
remove underground storage tanks on property acquired through a foreclosure
proceeding by a subsidiary of American General, and a civil penalty of $2,500
for each act of unfair competition prohibited by its Business and Professions
Code, but not less than $250,000, plus costs.
Pebble Creek. Various violations of operating permits held by Pebble Creek
Service Corporation (Pebble Creek), an indirect wholly owned subsidiary of
American General,
AMERICAN GENERAL
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are being addressed by Pebble Creek with the United States Environmental
Protection Agency (EPA). These violations include inaccurate reporting of test
results by a former plant operator and violations of effluent parameters in
connection with its wastewater treatment plant. In 1994, representatives of
Pebble Creek attended a meeting to show cause why the EPA should not initiate
enforcement proceedings against Pebble Creek. To date, Pebble Creek has not been
made aware of the EPA's decision. The company believes that penalties in excess
of $100,000 could be assessed against Pebble Creek.
OTHER. In addition to those lawsuits or proceedings disclosed herein, the
company is party to various other lawsuits and proceedings arising in the
ordinary course of business. Many of these lawsuits and proceedings arise in
jurisdictions, such as Alabama and Mississippi, 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 not
have a 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 and Mississippi continues to create the potential for
an unpredictable judgment in any given suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during fourth quarter
1998.
1998 FORM 10-K
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The quarterly high and low market prices of American General's common stock
as quoted by the New York Stock Exchange and restrictions on retained earnings
for the payment of dividends are incorporated herein by reference to Notes 20
and 17.1, respectively, of Notes to Financial Statements in American General's
1998 ARS.
Common stock was owned by 35,658 shareholders of record and approximately
80,000 beneficial owners at February 28, 1999. The quarterly cash dividends paid
on common stock are incorporated herein by reference to Note 20 of Notes to
Financial Statements in American General's 1998 ARS.
The common stock of American General is traded in the United States on the
New York Stock Exchange and the Pacific Exchange. The common stock is also
traded on the London Stock Exchange and the Swiss Stock Exchanges of Basel,
Geneva, and Zurich.
ITEM 6. 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 1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Revenues $ 10,251 $ 8,927 $ 8,714 $ 8,236 $ 6,492
Net income 764(a) 542(b) 653(c) 650(d) 609(e)
Net income per common share
Basic 3.02 2.21 2.67 2.68 2.47
Diluted 2.96(a) 2.19(b) 2.63(c) 2.66(d) 2.46(e)
Assets(f) 105,107 80,620 74,134 69,083 53,300
Debt
Corporate 2,743 1,916 2,102 2,295 2,381
Consumer Finance 8,863 7,266 7,630 7,470 7,090
Redeemable equity 1,728 1,726 1,227 729 47
Shareholders' equity(f) 8,871 7,583 6,844 7,109 4,334
Cash dividends per common share(g) 1.50 1.40 1.30 1.24 1.16
</TABLE>
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(a) Includes $246 million ($.94 per share) aftertax litigation settlements and
$42 million ($.16 per share) aftertax Year 2000 costs.
(b) Includes $247 million ($.99 per share) aftertax merger-related costs, $73
million ($.29 per share) aftertax loss on sale of non-strategic assets, and
$33 million ($.13 per share) aftertax litigation settlement.
(c) Includes $111 million ($.44 per share) aftertax loss on sale of
non-strategic assets and $32 million ($.13 per share) aftertax write-down of
USLIFE group insurance business.
(d) Includes $140 million ($.57 per share) aftertax adjustment to the allowance
for finance receivable losses.
(e) Includes aftertax net realized investment losses of $115 million ($.47 per
share). Net realized investment gains for 1995-1998 were immaterial.
(f) Includes fair value adjustment related to securities. Additional information
is incorporated herein by reference to the section "Investments - Fair Value
of Securities" of MD&A in American General's 1998 ARS.
(g) Excludes dividends paid by USLIFE.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference to "Management's Discussion and
Analysis" on pages 23-33 in American General's 1998 ARS.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
American General's exposure to market risk is primarily related to changes in
interest rates. Quantitative and qualitative disclosures about market risk
resulting from changes in interest rates are incorporated herein by reference to
"Asset/Liability Management" of MD&A in American General's 1998 ARS. American
General has elected to present the quantitative information using a sensitivity
analysis, as this is the most widely-used method in the financial services
industry.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Financial statements and supplementary data are incorporated herein by
reference to pages 34-54 in American General's 1998 ARS.
The ratios of earnings to fixed charges are incorporated herein by reference
to Exhibit 12 of Item 14 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
AMERICAN GENERAL
8
<PAGE> 9
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing in the section "Election of Directors" in American
General's definitive Proxy Statement filed March 19, 1999 (1999 Proxy Statement)
is incorporated herein by reference. Information regarding the company's
executive officers is included in Part I, Item 1A of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the sections "The Board of Directors" and
"Executive Compensation" in American General's 1999 Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the section "Security Ownership" in American
General's 1999 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the section "Certain Relationships and
Transactions" in American General's 1999 Proxy Statement is incorporated herein
by reference.
1998 FORM 10-K
9
<PAGE> 10
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
<TABLE>
<CAPTION>
Page Reference
----------------------------------
1998
Form 10-K Annual Report
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Financial Statements
Report of Ernst & Young LLP, Independent Auditors - 55
Consolidated Financial Statements
Statement of Income - 34
Balance Sheet - 35
Statements of Shareholders' Equity and
Comprehensive Income - 36
Statement of Cash Flows - 37
Notes to Financial Statements - 38-54
2. Financial Statement Schedules
Schedule I - Summary of Investments - Other than
Investments in Affiliates 14 -
Schedule II - Condensed Financial Information of
Registrant 15-17 -
Schedule III - Supplementary Insurance Information 18 -
Schedule IV - Reinsurance 19 -
Schedule V - Valuation and Qualifying Accounts 20 -
</TABLE>
All other financial statement schedules have been omitted
because they are inapplicable.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
- ------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Articles of Incorporation of American General
Corporation (including Statement of Resolution Establishing
Series
of Shares of Series A Junior Participating Preferred Stock)
3.2 Articles of Amendment to the Restated Articles of Incorporation
of American General
3.3 Statement of Resolution Establishing Series of Shares of Series A
Cumulative Convertible Preferred Stock
3.4 Statement of Resolution Establishing Series of Shares of 7%
Convertible Preferred Stock
3.5 Resolutions Establishing American General's 6% Series A
Convertible Junior Subordinated Debentures
3.6 Amended and Restated Bylaws of American General Corporation
4.1 There have not been filed as exhibits to this Form 10-K certain
long-term debt instruments, none of which relates to authorized
indebtedness that exceeds 10% of the consolidated assets of the
company. The company hereby agrees to furnish a copy of any such
instrument to the Commission upon request.
4.2 Rights Agreement, dated as of July 27, 1989, between American
General and Chase Bank of Texas (formerly known as Texas Commerce
Bank), as Rights Agent (Rights Agreement)
4.3 First Amendment to Rights Agreement, dated as of October 26,
1992, between American General and First Chicago Trust Company of
New York, as Rights Agent
<CAPTION>
Filed Herewith(*), Nonapplicable (NA),
or
Incorporated by Reference to
----------------------------------------
American General
Exhibit Registration No. or
Number Exhibit Report
- ------------------------ ----------------------------------------
<S> <C> <C>
3.1 4.1 33-33115
3.2 4 Form 10-Q for First
Quarter 1998
3.3 4(o) 33-58317
3.4 4(d) 333-00513
3.5 4(k) 333-00513
3.6 3.6* NA
4.1 NA NA
4.2 4 Form 10-Q
for Second
Quarter 1989
4.3 19 Form 10-Q
for Third
Quarter 1992
</TABLE>
<TABLE>
<S> <C> <C> <C>
(continued on next page)
</TABLE>
AMERICAN GENERAL
10
<PAGE> 11
<TABLE>
<CAPTION>
Exhibit
Number
- ------------------------------------------------------------------------------------------
<C> <S>
4.4 Junior Subordinated Indenture, dated as of May 15, 1995, between
American General and The Chase Manhattan Bank (formerly known as
Chemical Bank), as Trustee, relating to American General's 6%
Series A Convertible Junior Subordinated Debentures
4.5 Terms of the 6% Convertible Monthly Income Preferred Securities,
Series A, of American General Delaware, L.L.C.
4.6 Guarantee of American General with respect to the 6% Convertible
Monthly Income Preferred Securities, Series A, of American
General Delaware, L.L.C.
10.1 1984 Stock and Incentive Plan (As Amended and Restated)
10.2 1994 Stock and Incentive Plan (As Amended and Restated)
10.3 American General Corporation 1997 Stock and Incentive Plan (As
Amended and Restated)
10.4 American General Corporation 1999 Stock and Incentive Plan
10.5 American General Corporation Deferred Compensation Plan
10.6 First Amendment to American General Corporation Deferred
Compensation Plan
10.7 Form of Change in Control Severance Agreement
10.8 American General Corporation Supplemental Executive Retirement
Plan
10.9 Restoration of Retirement Income Plan for Certain Employees
Participating in the Restated American General Retirement Plan
(Restoration of Retirement Income Plan)
10.10 First Amendment to Restoration of Retirement Income Plan
10.11 Second Amendment to Restoration of Retirement Income Plan
10.12 Third Amendment to Restoration of Retirement Income Plan
10.13 American General Supplemental Thrift Plan
10.14 First Amendment to American General Supplemental Thrift Plan
10.15 Second Amendment to American General Supplemental Thrift Plan
10.16 Third Amendment to American General Supplemental Thrift Plan
10.17 Employment Agreement, dated as of February 1, 1998, between
American General and Robert M. Devlin
10.18 Employment Agreement, dated as of February 1, 1998, between
American General and Jon P. Newton
(continued on next page)
<CAPTION>
Filed Herewith(*), Nonapplicable (NA),
or
Incorporated by Reference to
----------------------------------------
American General
Exhibit Registration No. or
Number Exhibit Report
- ------------------------ ----------------------------------------
<C> <C> <C>
4.4 4(g) 333-00513
4.5 4(i) 333-00513
4.6 4(j) 333-00513
10.1 10.1 Form 10-Q for
Second Quarter 1998
10.2 10.2 Form 10-Q for
Second Quarter 1998
10.3 10.3 Form 10-Q for
Second Quarter 1998
10.4 10.4* NA
10.5 4.4 333-52103
10.6 4.4(a) 333-52103
10.7 10.1 Form 10-Q for First
Quarter 1998
10.8 10.1 Form 10-Q for Third
Quarter 1998
10.9 10.3 Form 10-K
for 1993
10.10 10.4 Form 10-K
for 1993
10.11 10.5 Form 10-K
for 1993
10.12 10.7 Form 10-K for 1996
10.13 10.6 Form 10-K
for 1993
10.14 10.7 Form 10-K
for 1993
10.15 10.8 Form 10-K
for 1993
10.16 10.9 Form 10-K
for 1993
10.17 10.12 Form 10-K
for 1997
10.18 10.13 Form 10-K
for 1997
</TABLE>
1998 FORM 10-K
11
<PAGE> 12
PART IV (Continued)
<TABLE>
<CAPTION>
Exhibit
Number
- ------------------------------------------------------------------------------------------
<C> <S>
10.19 Employment Agreement, dated as of February 1, 1998, between
American General and James S. D'Agostino Jr.
10.20 Supplemental Executive Retirement Agreement, dated as of February
1, 1998, between American General and Robert M. Devlin
10.21 Supplemental Executive Retirement Agreement, dated as of February
1, 1998, between American General and Jon P. Newton
10.22 Supplemental Executive Retirement Agreement, dated as of February
1, 1998, between American General and James S. D'Agostino Jr.
10.23 First Amendment to Employment Agreement, dated as of February 1,
1998, between American General and Robert M. Devlin
10.24 First Amendment to Employment Agreement, dated as of February 1,
1998, between American General and Jon P. Newton
10.25 First Amendment to Employment Agreement, dated as of February 1,
1998, between American General and James S. D'Agostino Jr.
10.26 First Amendment to Supplemental Executive Retirement Agreement,
dated as of February 1, 1998, between American General and Robert
M. Devlin
10.27 First Amendment to Supplemental Executive Retirement Agreement,
dated as of February 1, 1998, between American General and Jon P.
Newton
10.28 First Amendment to Supplemental Executive Retirement Agreement,
dated as of February 1, 1998, between American General and James
S. D'Agostino Jr.
10.29 Forms of Split-Dollar Agreement and Assignment of Life Insurance
Policy as Collateral Agreement
10.30 American General Corporation Retirement Plan for Directors (as
amended and restated)
10.31 American General Corporation Performance-Based Plan for Executive
Officers, Amended and Restated Effective January 1, 1995
10.32 Letter Agreement dated September 11, 1997 between American
General and Michael J. Poulos
10.33 Supplemental Retirement Agreement between American General and
Michael J. Poulos
10.34 Western National Corporation (WNC) Supplemental Plan
10.35 Western National Corporation Supplemental Plan Trust Agreement
(continued on next page)
<CAPTION>
Filed Herewith(*), Nonapplicable (NA),
or
Incorporated by Reference to
----------------------------------------
American General
Exhibit Registration No. or
Number Exhibit Report
- ------------------------ ----------------------------------------
<C> <C> <C>
10.19 10.14 Form 10-K
for 1997
10.20 10.15 Form 10-K
for 1997
10.21 10.16 Form 10-K
for 1997
10.22 10.17 Form 10-K
for 1997
10.23 10.3 Form 10-Q for First
Quarter 1998
10.24 10.4 Form 10-Q for First
Quarter 1998
10.25 10.5 Form 10-Q for First
Quarter 1998
10.26 10.6 Form 10-Q for First
Quarter 1998
10.27 10.7 Form 10-Q for First
Quarter 1998
10.28 10.8 Form 10-Q for First
Quarter 1998
10.29 10.9 Form 10-Q for First
Quarter 1998
10.30 10.18 Form 10-K
for 1997
10.31 10.19 Form 10-K
for 1994
10.32 10.20 Form 10-K
for 1997
10.33 10.13 Form 10-Q for Third
Quarter 1990
10.34 10.37 to WNC NA
annual report on
Form 10-K for
1994
10.35 10.17 to WNC NA
annual report on
Form 10-K for
1995
</TABLE>
AMERICAN GENERAL
12
<PAGE> 13
<TABLE>
<CAPTION>
Exhibit
Number
- ------------------------------------------------------------------------------------------
<C> <S>
10.36 Western National Corporation 1993 Stock and Incentive Plan, as
amended
11 Computation of Earnings per Share (included in Note 19 of Notes
to Financial Statements in American General's 1998 ARS)
12 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividends
13 Portions of American General's 1998 Annual Report to Shareholders
that are expressly incorporated herein by reference in this Form
10-K. Other sections of the Annual Report furnished for the
information of the Commission are not deemed "filed" as part of
this Form 10-K.
21 Subsidiaries of American General
23 Consent of Ernst & Young LLP, Independent Auditors
24 Powers of attorney for the directors signing this Form 10-K
27 Financial Data Schedule
<CAPTION>
Filed Herewith(*), Nonapplicable (NA),
or
Incorporated by Reference to
----------------------------------------
American General
Exhibit Registration No. or
Number Exhibit Report
- ------------------------ ----------------------------------------
<C> <C> <C>
10.36 10.18 to WNC NA
annual report on
Form 10-K for
1995
11 NA NA
12 12* NA
13 13* NA
21 21* NA
23 23* NA
24 24* NA
27 27* NA
</TABLE>
Any Exhibit not included with this Form 10-K will be
furnished to any shareholder of record on written
request and payment of up to $.25 per page plus postage.
Such requests should be directed to American General
Corporation, Investor Relations, P.O. Box 3247, Houston,
Texas 77253-3247.
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed after September 30, 1998:
1. Current Report on Form 8-K dated December 16, 1998, with respect to
issuance of press release announcing that certain of American General's
life insurance subsidiaries had entered into agreements to resolve
market conduct class action lawsuits.
2. Current Report on Form 8-K dated February 11, 1999, with respect to
authorization for issuance of $150 million of American General's 6 5/8%
Notes Due 2029.
1998 FORM 10-K
13
<PAGE> 14
- --------------------------------------------------------------------------------
PART IV (Continued)
AMERICAN GENERAL CORPORATION
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
In millions
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------------------------
Amount
Cost Shown in
or Consolidated
Amortized Fair Balance
Type of Investment Cost Value Sheet
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Fixed maturity securities
Bonds and notes
U.S. government obligations $ 899 $ 1,019 $ 1,019
States and political subdivisions 627 671 671
Foreign governments 843 940 940
Mortgage-backed securities 12,422 13,019 13,019
Public utilities 5,086 5,521 5,521
All other corporate 39,219 41,443 41,443
Redeemable preferred stocks 116 118 118
- -------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities 59,212 62,731 62,731
- -------------------------------------------------------------------------------------------------------------------
Equity securities
Common stocks 192 215 215
Perpetual preferred stocks 96 110 110
- -------------------------------------------------------------------------------------------------------------------
Total equity securities 288 325 325
- -------------------------------------------------------------------------------------------------------------------
Mortgage loans on real estate* 3,368 3,368
Investment real estate*
Investment properties 157 157
Acquired in satisfaction of debt 69 69
Policy loans 2,329 2,329
Other long-term investments 230 230
Short-term investments 654 654
- -------------------------------------------------------------------------------------------------------------------
Total investments $66,307 $ 69,863
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Net of applicable allowance for losses. See Schedule V of this Form 10-K.
AMERICAN GENERAL
14
<PAGE> 15
- --------------------------------------------------------------------------------
AMERICAN GENERAL CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF INCOME OF AMERICAN GENERAL CORPORATION (PARENT ONLY)
<TABLE>
<CAPTION>
For the Years Ended December 31,
In millions 1998 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Revenues
Dividends - affiliated $ 793 $ 827 $ 464
Interest income - affiliated 198 138 120
Net realized investment gains 67 16 21
Other income
Affiliated 42 57 39
Other 3 1 2
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 1,103 1,039 646
- ----------------------------------------------------------------------------------------------------------------------
Expenses
Operating costs and expenses
Affiliated 6 20 10
Other 120 118 69
Interest expense
Affiliated(a) 181 165 84
Other 179 140 123
Other charges
Litigation settlements(b) 56 - -
Merger-related costs - 102 -
Loss on sale of non-strategic assets - 13 20
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 542 558 306
- ----------------------------------------------------------------------------------------------------------------------
Income before income tax benefit and equity in undistributed
net income of subsidiaries 561 481 340
Income tax benefit 81 107 34
Equity in undistributed net income of subsidiaries (net of
dividends paid to parent) 122 (46) 279
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 764 $ 542 $ 653
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $150 million in 1998, $141 million in 1997, and $74 million in 1996
related to subordinated debentures issued in conjunction with the issuances
of preferred securities of subsidiaries. Additional information is
incorporated herein by reference to Note 13 of Notes to Financial Statements
in American General's 1998 ARS.
(b) Represents a portion of administrative and legal costs related to proposed
settlements of market conduct class action lawsuits involving American
General's life insurance subsidiaries. Additional information is
incorporated herein by reference to Notes 3.1 and 17.2 of Notes to Financial
Statements in American General's 1998 ARS.
1998 FORM 10-K
15
<PAGE> 16
- --------------------------------------------------------------------------------
PART IV (Continued)
AMERICAN GENERAL CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
BALANCE SHEET OF AMERICAN GENERAL CORPORATION (PARENT ONLY)
<TABLE>
<CAPTION>
At December 31,
In millions 1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Assets
Investments
Subsidiaries, at equity $11,507 $10,251 $8,181
Other 7 9 8
Cash - - -
Receivables from subsidiaries 337 33 23
Indebtedness from subsidiaries 2,604 1,585 1,555
Other 129 195 67
- ------------------------------------------------------------------------------------------------
Total assets $14,584 $12,073 $9,834
- ------------------------------------------------------------------------------------------------
Liabilities
Short-term debt $ 1,607 $ 575 $ 153
Long-term debt(a)
Senior(b) 1,147 1,351 1,182
Subordinated, held by subsidiaries(c) 2,018 2,021 1,505
Indebtedness to subsidiaries 426 360 21
Liability for litigation settlements(d) 366 - -
Federal income taxes 8 (10) 39
Other 141 193 90
- ------------------------------------------------------------------------------------------------
Total liabilities 5,713 4,490 2,990
- ------------------------------------------------------------------------------------------------
Shareholders' equity
Convertible preferred stock 85 85 85
Common stock 939 326 572
Cost of treasury stock(e) (759) (621) (860)
Retained earnings 7,007 6,624 6,420
Accumulated other comprehensive income(f) 1,599 1,169 627
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 8,871 7,583 6,844
- ------------------------------------------------------------------------------------------------
Total liabilities and equity $14,584 $12,073 $9,834
- ------------------------------------------------------------------------------------------------
</TABLE>
(a) The five-year schedule of maturities of debt is as follows: 1999, $103
million; 2000, $353 million; 2001, $3 million; 2002, $35 million; and 2003,
$100 million.
(b) The principal amount of American General senior notes held by subsidiaries
was $10 million at December 31, 1998, 1997, and 1996.
(c) Includes $1.97 billion in 1998 and 1997, and $1.46 billion in 1996 of
subordinated debentures issued in conjunction with the issuances of
preferred securities of subsidiaries. Additional information is incorporated
herein by reference to Note 13 of Notes to Financial Statements in American
General's 1998 ARS.
(d) Represents liability for proposed settlements of market conduct class action
lawsuits. This liability includes $310 million assumed from American
General's life insurance subsidiaries; the parent company has a
corresponding receivable from subsidiaries. Additional information is
incorporated herein by reference to Notes 3.1 and 17.2 of Notes to Financial
Statements in American General's 1998 ARS.
(e) Includes 699,614 shares at a cost of $8 million in 1998, 1997, and 1996
which are held by a subsidiary. The 1996 amount includes 25,536,200 shares
at a cost of $346 million which were held by a subsidiary and retired in
1997.
(f) Includes fair value adjustment related to securities. Additional information
is incorporated herein by reference to the section "Investments - Fair Value
of Securities" of MD&A in American General's 1998 ARS.
AMERICAN GENERAL
16
<PAGE> 17
- --------------------------------------------------------------------------------
AMERICAN GENERAL CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STATEMENT OF CASH FLOWS OF AMERICAN GENERAL CORPORATION (PARENT ONLY)
<TABLE>
<CAPTION>
For the Years Ended December 31,
In millions 1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 764 $ 542 $ 653
Reconciling adjustments
Equity in undistributed net income of subsidiaries (net
of dividends paid to parent) (122) 46 (279)
Other, net 93 (64) 54
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 735 524 428
- --------------------------------------------------------------------------------------------------------------
Investing activities
Net increase in indebtedness from subsidiaries (870) (30) (82)
Net increase (decrease) in indebtedness to subsidiaries 66 339 (2)
Capital contributions to subsidiaries (152) (667) (311)
Return of capital from subsidiaries 10 10 53
Acquisitions - (283) (106)
Net decrease in other investments 75 16 48
Other, net 9 46 (11)
- --------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (862) (569) (411)
- --------------------------------------------------------------------------------------------------------------
Financing activities
Net increase (decrease) in short-term debt 1,032 421 (90)
Long-term debt issuances - 515 516
Long-term debt redemptions (357) (133) -
Common stock repurchases (195) (467) (191)
Dividends on common and preferred stock (381) (335) (304)
Other, net 28 44 51
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 127 45 (18)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash - - (1)
Cash at beginning of year - - 1
- --------------------------------------------------------------------------------------------------------------
Cash at end of year $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------
</TABLE>
1998 FORM 10-K
17
<PAGE> 18
- --------------------------------------------------------------------------------
PART IV (Continued)
AMERICAN GENERAL CORPORATION
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
In millions
<TABLE>
<CAPTION>
At December 31, For the Years Ended December 31,
---------------------- ----------------------------------------------------------------
Amorti-
zation
Premiums of
Deferred Insurance and Insurance Deferred
Policy and Other Net and Policy Other
Acquisition Annuity Consider- Investment Annuity Acquisition Operating
Division Costs(a)(b) Liabilities(c) ations Income(d) Benefits Costs(b)(e) Expenses
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
1998
Retirement Services $1,328 $36,792 $ 320 $2,753 $2,114 $113 $ 169
Life Insurance 2,871 25,680 3,113 2,240 2,959 558 968
Consumer Finance 10 441 172 76 86 8 10
Other(f) - (69) - 26 - 1 871
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated $4,209 $62,844 $3,605 $5,095 $5,159 $680 $2,018
- -------------------------------------------------------------------------------------------------------------------------------
1997
Retirement Services $ 392 $21,995 $ 113 $1,706 $1,286 $ 42 $ 133
Life Insurance 2,995 25,283 3,065 2,099 2,949 494 965
Consumer Finance 10 443 184 69 93 9 10
Other(f) 1 (62) - 146 4 1 814
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated $3,398 $47,659 $3,362 $4,020 $4,332 $546 $1,922
- -------------------------------------------------------------------------------------------------------------------------------
1996
Retirement Services $ 558 $21,067 $ 78 $1,652 $1,244 $ 31 $ 126
Life Insurance 3,140 24,550 2,964 2,016 2,880(g) 490(g) 929
Consumer Finance 11 463 202 66 103 9 11
Other(f) - (58) - 39 4 1 986
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated $3,709 $46,022 $3,244 $3,773 $4,231 $531 $2,052
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes fair value adjustment related to securities. Additional information
is incorporated herein by reference to the section "Investments - Fair Value
of Securities" of MD&A in American General's 1998 ARS.
(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 each division's business operations.
(e) Net of accretion of interest.
(f) Represents Consumer Finance non-insurance operations, Corporate operations,
and interdivision eliminations.
(g) Insurance and annuity benefits and amortization of deferred policy
acquisition costs include $13 million and $37 million, respectively, for
write-down of USLIFE group insurance business.
AMERICAN GENERAL
18
<PAGE> 19
- --------------------------------------------------------------------------------
AMERICAN GENERAL CORPORATION
SCHEDULE IV - REINSURANCE
In millions
<TABLE>
<CAPTION>
Percentage
of
Ceded to Assumed Amount
Gross Other from Other Net Assumed
Description Amount Companies Companies Amount to Net
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Life insurance in force at year end $344,857 $65,643 $ 2,474 $281,688 .9%
Premiums and other considerations
for the year
Life insurance and annuities $ 2,832 $ 205 $ 116 $ 2,743 4.2%
Accident and health insurance 778 277 225 726 31.0
Property-liability insurance 107 3 32 136 23.3
- ---------------------------------------------------------------------------------------------------------------
Total premiums and other
considerations $ 3,717 $ 485 $ 373 $ 3,605 10.3%
- ---------------------------------------------------------------------------------------------------------------
1997
Life insurance in force at year end $310,162 $57,261* $21,514 $274,415 7.8%
Premiums and other considerations
for the year
Life insurance and annuities $ 2,640 $ 178 $ 67 $ 2,529 2.7%
Accident and health insurance 782 113 11 680 1.7
Property-liability insurance 120 8 41 153 26.7
- ---------------------------------------------------------------------------------------------------------------
Total premiums and other
considerations $ 3,542 $ 299 $ 119 $ 3,362 3.5%
- ---------------------------------------------------------------------------------------------------------------
1996
Life insurance in force at year end $297,219 $42,155 $19,805 $274,869 7.2%
Premiums and other considerations
for the year
Life insurance and annuities $ 2,535 $ 144 $ 67 $ 2,458 2.7%
Accident and health insurance 786 146 18 658 2.7
Property-liability insurance 106 18 40 128 31.0
- ---------------------------------------------------------------------------------------------------------------
Total premiums and other
considerations $ 3,427 $ 308 $ 125 $ 3,244 3.9%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* Restated to reflect revised financial information.
1998 FORM 10-K
19
<PAGE> 20
- --------------------------------------------------------------------------------
PART IV (Continued)
AMERICAN GENERAL CORPORATION
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
In millions
<TABLE>
<CAPTION>
Additions
------------------------------------------------
Charged to Charged to
Balance at Provision for Realized Charged to Balance at
Beginning Finance Receivable Investment Other Deduc- End of
Description of Year Losses (Gains)/Losses Accounts tions(a) Year
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
1998
Allowance for losses on:
Finance receivables $373 $212 $ - $17(b) $220 $382
Mortgage loans on real
estate 54 - (15) - 5 34
Investment real estate 18 - 3 - 7 14
Restructuring liability 62 - - - 32(c) 30
Valuation allowance on
deferred
tax asset 68 - - 1(d) - 69
- -----------------------------------------------------------------------------------------------------------------------
Total $575 $212 $(12) $18 $264 $529
- -----------------------------------------------------------------------------------------------------------------------
1997
Allowance for losses on:
Finance receivables $395 $248 $ - $ - $270 $373
Mortgage loans on real
estate 84 - (20) - 10 54
Investment real estate 34 - 8 - 24 18
Other long-term investments 1 - - - 1 -
Restructuring liability - - - 71(e) 9(f) 62
Valuation allowance on
deferred tax asset 46 - - 22(d) - 68
- -----------------------------------------------------------------------------------------------------------------------
Total $560 $248 $(12) $93 $314 $575
- -----------------------------------------------------------------------------------------------------------------------
1996
Allowance for losses on:
Finance receivables $492 $417 $ - $ - $514(g) $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(d) - 46
- -----------------------------------------------------------------------------------------------------------------------
Total $733 $417 $ 5 $ 5 $600 $560
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Resulting from write-offs of uncollectible receivables, mortgage loan
payoffs, sales of real estate, and foreclosures of real estate.
(b) Related to allowance for acquired receivables.
(c) Includes $9 million of personnel-related costs and $23 million for write-off
of computer equipment and software and elimination of redundant facilities.
(d) Relates to operating loss carryovers not expected to be utilized, charged to
deferred tax expense.
(e) Restructuring costs related to the integration of USLIFE into the company's
operations and the concurrent realignment of the Life Insurance division.
Additional information is incorporated herein by reference to Note 3.2 of
Notes to Financial Statements in American General's 1998 ARS.
(f) Includes $7 million of personnel-related costs and $2 million to eliminate
redundant facilities.
(g) Includes $70 million reclassified to assets held for sale.
AMERICAN GENERAL
20
<PAGE> 21
- --------------------------------------------------------------------------------
AMERICAN GENERAL CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 19, 1999.
AMERICAN GENERAL CORPORATION
By: /s/ Pamela J. Penny
----------------------------------------
Pamela J. Penny
(Vice President and Controller)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 19, 1999.
Robert M. Devlin*
- -----------------------------------------------------------------
Robert M. Devlin
(Chairman, President, and Chief Executive Officer -
Principal Executive Officer)
/s/ Pamela J. Penny
- -----------------------------------------------------------------
Pamela J. Penny
(Vice President and Controller -
Principal Accounting Officer)
J. Evans Attwell*
- -----------------------------------------------------------------
J. Evans Attwell
(Director)
Brady F. Carruth*
- -----------------------------------------------------------------
Brady F. Carruth
(Director)
W. Lipscomb Davis Jr.*
- -----------------------------------------------------------------
W. Lipscomb Davis Jr.
(Director)
J. Edward Easler II*
- -----------------------------------------------------------------
J. Edward Easler II
(Director)
Larry D. Horner*
- -----------------------------------------------------------------
Larry D. Horner
(Director)
Richard J.V. Johnson*
- -----------------------------------------------------------------
Richard J.V. Johnson
(Director)
Michael E. Murphy*
- -----------------------------------------------------------------
Michael E. Murphy
(Director)
Jon P. Newton*
- -----------------------------------------------------------------
Jon P. Newton
(Director)
Michael J. Poulos*
- -----------------------------------------------------------------
Michael J. Poulos
(Director)
Robert E. Smittcamp*
- -----------------------------------------------------------------
Robert E. Smittcamp
(Director)
Anne M. Tatlock*
- -----------------------------------------------------------------
Anne M. Tatlock
(Director)
*By: /s/ Mark S. Berg
- -----------------------------------------------------------------
Mark S. Berg
(Attorney-in-fact)
1998 FORM 10-K
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Filed Herewith(*), Nonapplicable (NA),
or
Incorporated by Reference to
---------------------------------------
American General
Exhibit Registration No. or
Number Exhibit Report
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
3.1 Restated Articles of Incorporation of American General 4.1 33-33115
Corporation (including Statement of Resolution Establishing Series
of Shares of Series A Junior Participating Preferred Stock)
3.2 Articles of Amendment to the Restated Articles of Incorporation 4 Form 10-Q for First
of American General Quarter 1998
3.3 Statement of Resolution Establishing Series of Shares of Series A 4(o) 33-58317
Cumulative Convertible Preferred Stock
3.4 Statement of Resolution Establishing Series of Shares of 7% 4(d) 333-00513
Convertible Preferred Stock
3.5 Resolutions Establishing American General's 6% Series A 4(k) 333-00513
Convertible Junior Subordinated Debentures
3.6 Amended and Restated Bylaws of American General Corporation 3.6* NA
4.1 There have not been filed as exhibits to this Form 10-K certain NA NA
long-term debt instruments, none of which relates to authorized
indebtedness that exceeds 10% of the consolidated assets of the
company. The company hereby agrees to furnish a copy of any such
instrument to the Commission upon request.
4.2 Rights Agreement, dated as of July 27, 1989, between American 4 Form 10-Q
General and Chase Bank of Texas (formerly known as Texas Commerce for Second
Bank), as Rights Agent (Rights Agreement) Quarter 1989
4.3 First Amendment to Rights Agreement, dated as of October 26, 19 Form 10-Q
1992, between American General and First Chicago Trust Company of for Third
New York, as Rights Agent Quarter 1992
4.4 Junior Subordinated Indenture, dated as of May 15, 1995, between 4(g) 333-00513
American General and The Chase Manhattan Bank (formerly known as
Chemical Bank), as Trustee, relating to American General's 6%
Series A Convertible Junior Subordinated Debentures
4.5 Terms of the 6% Convertible Monthly Income Preferred Securities, 4(i) 333-00513
Series A, of American General Delaware, L.L.C.
4.6 Guarantee of American General with respect to the 6% Convertible 4(j) 333-00513
Monthly Income Preferred Securities, Series A, of American
General Delaware, L.L.C.
10.1 1984 Stock and Incentive Plan (As Amended and Restated) 10.1 Form 10-Q for Second
Quarter 1998
10.2 1994 Stock and Incentive Plan (As Amended and Restated) 10.2 Form 10-Q for Second
Quarter 1998
10.3 American General Corporation 1997 Stock and Incentive Plan (As 10.3 Form 10-Q for Second
Amended and Restated) Quarter 1998
10.4 American General Corporation 1999 Stock and Incentive Plan 10.4* NA
10.5 American General Corporation Deferred Compensation Plan 4.4 333-52103
10.6 First Amendment to American General Corporation Deferred 4.4(a) 333-52103
Compensation Plan
10.7 Form of Change in Control Severance Agreement 10.1 Form 10-Q for First
Quarter 1998
10.8 American General Corporation Supplemental Executive Retirement 10.1 Form 10-Q for Third
Plan Quarter 1998
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
Filed Herewith(*), Nonapplicable (NA),
or
Incorporated by Reference to
---------------------------------------
American General
Exhibit Registration No. or
Number Exhibit Report
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
10.9 Restoration of Retirement Income Plan for Certain Employees 10.3 Form 10-K
Participating in the Restated American General Retirement Plan for 1993
(Restoration of Retirement Income Plan)
10.10 First Amendment to Restoration of Retirement Income Plan 10.4 Form 10-K
for 1993
10.11 Second Amendment to Restoration of Retirement Income Plan 10.5 Form 10-K
for 1993
10.12 Third Amendment to Restoration of Retirement Income Plan 10.7 Form 10-K
for 1996
10.13 American General Supplemental Thrift Plan 10.6 Form 10-K
for 1993
10.14 First Amendment to American General Supplemental Thrift Plan 10.7 Form 10-K
for 1993
10.15 Second Amendment to American General Supplemental Thrift Plan 10.8 Form 10-K
for 1993
10.16 Third Amendment to American General Supplemental Thrift Plan 10.9 Form 10-K
for 1993
10.17 Employment Agreement, dated as of February 1, 1998, between 10.12 Form 10-K
American General and Robert M. Devlin for 1997
10.18 Employment Agreement, dated as of February 1, 1998, between 10.13 Form 10-K
American General and Jon P. Newton for 1997
10.19 Employment Agreement, dated as of February 1, 1998, between 10.14 Form 10-K
American General and James S. D'Agostino Jr. for 1997
10.20 Supplemental Executive Retirement Agreement, dated as of February 10.15 Form 10-K
1, 1998, between American General and Robert M. Devlin for 1997
10.21 Supplemental Executive Retirement Agreement, dated as of February 10.16 Form 10-K
1, 1998, between American General and Jon P. Newton for 1997
10.22 Supplemental Executive Retirement Agreement, dated as of February 10.17 Form 10-K
1, 1998, between American General and James S. D'Agostino Jr. for 1997
10.23 First Amendment to Employment Agreement, dated as of February 1, 10.3 Form 10-Q for First
1998, between American General and Robert M. Devlin Quarter 1998
10.24 First Amendment to Employment Agreement, dated as of February 1, 10.4 Form 10-Q for First
1998, between American General and Jon P. Newton Quarter 1998
10.25 First Amendment to Employment Agreement, dated as of February 1, 10.5 Form 10-Q for First
1998, between American General and James S. D'Agostino Jr. Quarter 1998
10.26 First Amendment to Supplemental Executive Retirement Agreement, 10.6 Form 10-Q for First
dated as of February 1, 1998, between American General and Robert Quarter 1998
M. Devlin
10.27 First Amendment to Supplemental Executive Retirement Agreement, 10.7 Form 10-Q for First
dated as of February 1, 1998, between American General and Jon P. Quarter 1998
Newton
10.28 First Amendment to Supplemental Executive Retirement Agreement, 10.8 Form 10-Q for First
dated as of February 1, 1998, between American General and James Quarter 1998
S. D'Agostino Jr.
10.29 Forms of Split-Dollar Agreement and Assignment of Life Insurance 10.9 Form 10-Q for First
Policy as Collateral Agreement Quarter 1998
10.30 American General Corporation Retirement Plan for Directors (as 10.18 Form 10-K
amended and restated) for 1997
10.31 American General Corporation Performance-Based Plan for Executive 10.19 Form 10-K
Officers, Amended and Restated Effective January 1, 1995 for 1994
</TABLE>
<PAGE> 24
<TABLE>
<CAPTION>
Filed Herewith(*), Nonapplicable (NA),
or
Incorporated by Reference to
---------------------------------------
American General
Exhibit Registration No. or
Number Exhibit Report
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
10.32 Letter Agreement dated September 11, 1997 between American 10.20 Form 10-K
General and Michael J. Poulos for 1997
10.33 Supplemental Retirement Agreement between American General and 10.13 Form 10-Q for Third
Michael J. Poulos Quarter 1990
10.34 Western National Corporation (WNC) Supplemental Plan 10.37 to WNC NA
annual report
on Form 10-K
for 1994
10.35 Western National Corporation Supplemental Plan Trust Agreement 10.17 to WNC NA
annual report
on Form 10-K
for 1995
10.36 Western National Corporation 1993 Stock and Incentive Plan, as 10.18 to WNC NA
amended annual report
on Form 10-K
for 1995
11 Computation of Earnings per Share (included in Note 19 of Notes NA NA
to Financial Statements in American General's 1998 ARS)
12 Computation of Ratio of Earnings to Fixed Charges and Ratio of 12* NA
Earnings to Combined Fixed Charges and Preferred Stock Dividends
13 Portions of American General's 1998 Annual Report to Shareholders 13* NA
that are expressly incorporated herein by reference in this Form
10-K. Other sections of the Annual Report furnished for the
information of the Commission are not deemed "filed" as part of
this Form 10-K.
21 Subsidiaries of American General 21* NA
23 Consent of Ernst & Young LLP, Independent Auditors 23* NA
24 Powers of attorney for the directors signing this Form 10-K 24* NA
27 Financial Data Schedule 27* NA
</TABLE>
Any Exhibit not included with this Form 10-K will be
furnished to any shareholder of record on written
request and payment of up to $.25 per page plus postage.
Such requests should be directed to American General
Corporation, Investor Relations, P.O. Box 3247, Houston,
Texas 77253-3247.
<PAGE> 1
Exhibit 3.6
AMENDED AND RESTATED BYLAWS
(AS OF MARCH 4, 1999)
OF
AMERICAN GENERAL CORPORATION
HOUSTON, TEXAS
[AMERICAN GENERAL FINANCIAL GROUP LOGO]
<PAGE> 2
AMENDED AND RESTATED BYLAWS
OF
AMERICAN GENERAL CORPORATION
ARTICLE I.
CAPITAL STOCK
SECTION 1. Certificates for Shares. The certificates for shares of the
capital stock of the company shall be in such form as shall be approved by the
board of directors. The certificates shall be signed by the chairman of the
board or president, and also by the secretary, and may be sealed with the seal
of the company or a facsimile thereof. Where any such certificate is
countersigned by a transfer agent, or registered by a registrar, either of which
is other than the company itself or an employee of the company, the signatures
of the chairman of the board or president and of the secretary may be
facsimiles. The certificates shall be consecutively numbered and shall be
entered on the stock records of the company as they are issued, and each shall
exhibit the holder's name and the number of shares.
SECTION 2. Transfer of Shares. The shares of stock of the company shall be
transferable only on the stock records of the company by the registered holders
thereof in person or by their duly authorized attorneys or legal
representatives, upon surrender of certificates representing such shares duly
endorsed or in proper form for transfer, with appropriate evidence of authority
to transfer, and cancellation thereof.
SECTION 3. Fixing of Record Date; Closing of Transfer Books. For the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders, or any adjournment thereof, or entitled to receive
payment of any dividend, or for any other proper purpose, the board of directors
may fix in advance a date as the record date for any such determination of
shareholders, such date in any case to be not more than fifty (50) days and, in
case of a meeting of shareholders, not less than ten (10) days prior to the date
on which the particular action requiring such determination of shareholders is
to be taken. In lieu of fixing a record date, the board of directors may provide
that the stock transfer books of the company shall be closed for a stated period
not to exceed, in any case, fifty (50) days. If the stock transfer books shall
be closed for the purpose of determining shareholders entitled to notice of or
to vote at a meeting of shareholders, such books shall be closed for at least
ten (10) days immediately preceding such meeting. If the stock transfer books
are not closed and no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive payment of a dividend, the date on which the notice of the
meeting is mailed or the date on which the resolution of the board of directors
declaring such dividend is adopted, as the case may be, shall be the record date
for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided herein, such determination shall apply to
any adjournment of the meeting except where the determination has been made
through the closing of stock transfer books and the stated period of closing has
expired.
SECTION 4. Registered Shareholders. The company shall be entitled to treat
the holder of record of any share or shares of stock as the holder in fact
thereof, and accordingly shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other
<PAGE> 3
person or entity, whether or not it shall have express or other notice thereof,
except as expressly provided by the laws of the State of Texas.
SECTION 5. Lost, Destroyed, or Stolen Stock Certificates. No certificate
for shares of stock in the company shall be issued in place of any certificate
alleged to have been lost, destroyed, or stolen except on production of evidence
satisfactory to the board of directors, or such person or persons as it may
designate, of such loss, destruction, or theft, and, if the board of directors
so requires, upon the furnishing of an indemnity bond in such amount (but not to
exceed twice the then-market value of the shares represented by the certificate)
and with such terms and such surety or sureties as the board of directors may,
in its discretion, require.
SECTION 6. Regulations. The board of directors shall have the power and
authority to make all such rules and regulations to the extent permitted by law,
the articles of incorporation, and these bylaws, as it may deem expedient
concerning the issue, transfer, registration, or replacement of certificates for
shares of the capital stock of the company.
ARTICLE II.
SHAREHOLDERS
SECTION 1. Annual Meeting. The annual meeting of the shareholders shall be
held at such hour as shall be designated by the board of directors either (i) on
the last business day of April of each year, or (ii) on such other date, not
more than thirteen (13) months after the last preceding annual meeting, as the
board of directors shall designate, for the purpose of electing directors and
for the transaction of such other business as may properly be brought before the
meeting.
SECTION 2. Special Meetings. A special meeting of shareholders for any
purpose or purposes may be called at any time by the chairman of the board, the
president, or a majority of the board of directors, and shall be called by the
chairman of the board, the president, or the secretary upon the written request
therefor, stating the purpose or purposes of the meeting, delivered to such
officer, signed by the holders of at least ten percent (10%) of the issued and
outstanding shares entitled to vote at such meeting. Only such business as shall
be stated or indicated in the notice of the meeting shall be transacted at any
such special meeting of shareholders.
SECTION 3. Place. The annual meeting of shareholders may be held at any
place as may be designated in the call of the meeting. Meetings of shareholders
shall be held at the principal office of the company unless another place is
designated for a meeting in the manner provided herein.
SECTION 4. Notice. Written or printed notice stating the place, day, and
hour of each meeting of shareholders, and in case of a special meeting the
purpose or purposes for which the meeting is called, shall be delivered not less
than ten (10) nor more than fifty (50) days before the date of the meeting,
either personally or by mail, by or at the direction of the officer calling the
meeting, to each shareholder of record entitled to vote at such meeting.
SECTION 5. Quorum. Except as may be otherwise provided by law or the
articles of incorporation, no meeting of shareholders shall elect directors, or
transact other business of the company, unless there shall be present, in person
or by proxy, a quorum, which is defined as the holders of a majority of the
issued and outstanding shares of capital stock of the company entitled to vote
at the meeting, and the act of a majority of the shares represented at any
meeting at which a
<PAGE> 4
quorum is present shall be the act of the meeting. The shareholders present at
any meeting, though less than a quorum, may adjourn the meeting, and any
business may be transacted at the adjourned meeting that could have been
transacted at the original meeting. No notice of adjournment, other than the
announcement at the meeting, need be given.
SECTION 6. Proxies. At any meeting of shareholders, a shareholder may vote
either in person or by proxy executed in writing by the shareholder or by his
duly authorized attorney-in-fact. Such proxies shall be filed with the secretary
of the company before or at the time of the meeting. No proxy shall be valid
after eleven (11) months from the date of its execution unless otherwise
provided in the proxy. Each proxy shall be revocable unless it is expressly
provided therein that the proxy shall be irrevocable or unless it is otherwise
made irrevocable by law.
SECTION 7. Voting of Shares. Each outstanding share of a class of stock
entitled to vote upon a matter submitted to a vote at a meeting of shareholders
shall be entitled to one vote on such matter. Votes for directors, and upon
demand of any shareholder votes upon any question before a meeting, shall be by
ballot.
SECTION 8. Presiding Officer and Secretary. The chairman of the board, or
in his absence the president, shall preside at each meeting of shareholders, and
in the absence of both such officers, a vice chairman of the board shall
preside. Should none be present, the meeting shall appoint one of the vice
presidents, or in the absence of all vice presidents, one of the shareholders,
to preside at the meeting. The records of each meeting shall be kept by the
secretary, or in his absence an assistant secretary, or in the absence of both,
a person appointed by the chairman of the meeting.
SECTION 9. List of Shareholders. A complete list of shareholders entitled
to vote at each shareholders' meeting, arranged in alphabetical order, with the
address of each and number of shares of each class and series of stock held by
each, shall be prepared by the secretary and filed at the registered office of
the company, and shall be subject to inspection by any shareholder during usual
business hours for a period of ten (10) days prior to such meeting. It shall be
produced at such meeting and shall at all times during such meeting be subject
to inspection by any shareholder.
SECTION 10. Inspectors of Election. The chairman of each meeting of
shareholders shall appoint a committee to act as inspectors of election. Such
committee shall report to the meeting the number of shares of each class and
series of stock, and of all classes, represented by proxy and shall prepare a
list showing the total number of shares of each class and series of stock, and
of all classes, represented either in person or by proxy. The inspectors of
election shall oversee the vote of the shareholders for the election of
directors and for any other matters that are put to a vote of shareholders at
the meeting; receive a ballot evidencing votes cast by the proxy committee;
judge the qualifications of shareholders voting; collect, count, and report the
results of ballots cast by any shareholders voting in person; and perform such
other duties as may be required by the chairman of the meeting or the
shareholders.
SECTION 11. Nature of Business at Meetings of Shareholders. No business may
be transacted at an annual meeting of shareholders, other than business that is
either (a) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the board of directors (or any duly authorized
committee thereof), (b) otherwise properly brought before the annual meeting by
or at the direction of the board of directors (or any duly authorized committee
thereof) or (c) otherwise properly brought before the annual meeting by an
shareholder of the company (i) who is a shareholder of record on the date of the
giving of the notice provided for in this Section 11 and on the record date for
the
<PAGE> 5
determination of shareholders entitled to vote at such annual meeting and (ii)
who complies with the notice procedures set forth in this Section 11.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a shareholder, such shareholder
must have given timely notice thereof in proper written form to the Secretary of
the company.
To be timely, a shareholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the company not
less than one hundred and twenty (120) days nor more than one hundred and fifty
(150) days prior to the anniversary date of the immediately preceding annual
meeting of shareholders; provided, however, that in the event that the annual
meeting is called for a date that is not within thirty (30) days before or after
such anniversary date, notice by the shareholder in order to be timely must be
so received not later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs.
To be in proper written form, a shareholder's notice to the Secretary must
set forth as to each matter such shareholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of such shareholder, (iii) the class
or series and number of shares of capital stock of the company which are owned
beneficially or of record by such shareholder, (iv) a description of all
arrangements or understandings between such shareholder and any other person or
persons (including their names) in connection with the proposal of such business
by such shareholder and any material interest of such shareholder in such
business and (v) a representation that such shareholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
meeting.
No business shall be conducted at the annual meeting of shareholders except
business brought before the annual meeting in accordance with the procedures set
forth in this Section 11; provided, however, that, once business has been
properly brought before the annual meeting in accordance with such procedures,
nothing in this Section 11 shall be deemed to preclude discussion by any
shareholder of any such business. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
ARTICLE III.
BOARD OF DIRECTORS
SECTION 1. Number, Term of Office, Nomination, Vacancy and Removal. The
business affairs and property of the company shall be managed and controlled by
the board of directors, and, subject to the restrictions imposed by law, by the
articles of incorporation, or by these bylaws, the board of directors may
exercise all of the powers of the company.
(a) Number. Subject to the rights of holders of any class or
series of stock having a preference over the Common Stock of
the company as to dividends or upon liquidation to elect
additional directors under specified circumstances, the number
of the directors of the company shall be fixed from time to
time by the board of directors but shall not be fewer than
three (3) nor more than twenty-five (25). Within these limits,
the
<PAGE> 6
number of directors may be increased or decreased (provided
that any decrease does not shorten the term of any incumbent
director) from time to time by resolution of the board of
directors. Directors must be shareholders, but they need not
be residents of the State of Texas.
(b) Election and Terms. Subject to the rights of holders of any
class or series of stock having a preference over the Common
Stock of the company as to dividends or upon liquidation to
elect additional directors under specified circumstances,
directors shall be elected at the annual meeting of the
shareholders. Each director shall serve until the next annual
meeting and until his successor shall have been elected and
qualified, or until his earlier death, resignation, or
removal; provided, however, that the term of any director who
is also an officer of the company or of any subsidiary of the
company shall simultaneously terminate when that director
ceases, for whatever reason, to be an officer of the company
or of any subsidiary of the company, unless the board of
directors, in its discretion and upon resolution adopted by a
majority of the remaining directors then in office, waives the
applicability hereof.
(c) Nomination of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for
election as directors of the company, except as may be
otherwise provided in the Certificate of Incorporation with
respect to the right of holders of preferred stock of the
company to nominate and elect a specified number of directors
in certain circumstances. Nominations of persons for election
to the board of directors may be made at any annual meeting of
shareholders, or at any special meeting of shareholders called
for the purpose of electing directors, (a) by or at the
direction of the board of directors (or any duly authorized
committee thereof) or (b) by any shareholder of the company
(i) who is a shareholder of record on the date of the giving
of the notice provided for in this Section 1(c) and on the
record date for the determination of shareholders entitled to
vote at such meeting and (ii) who complies with the notice
procedures set forth in this Section 1(c).
In addition to any other applicable requirements, for a
nomination to be made by a shareholder, such shareholder must
have given timely notice thereof in proper written form to the
Secretary of the company.
To be timely, a shareholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive
offices of the company (a) in the case of an annual meeting,
not less than one hundred and twenty (120) days nor more than
one hundred fifty (150) days prior to the anniversary date of
the immediately preceding annual meeting of shareholders;
provided, however, that in the event that the annual meeting
is called for a date that is not within thirty (30) days
before or after such anniversary date, notice by the
shareholder in order to be timely must be so received not
later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the
annual meeting was mailed or such public disclosure of the
date of the annual meeting was made, whichever first occurs;
and (b) in the case of a special meeting of shareholders
called for the purpose of electing directors, not later than
the close of business on the tenth (10th) day following the
day on which notice of the date of the special meeting was
mailed or public disclosure of the date of the special meeting
was made, whichever first occurs.
<PAGE> 7
To be in proper written form, a shareholder's notice to the
Secretary must set forth (a) as to each person whom the
shareholder proposes to nominate for election as a director
(i) the name, age, business address and residence address of
the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of
capital stock of the company which are owned beneficially or
of record by the person and (iv) any other information
relating to the person that would be required to be disclosed
in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of
directors pursuant to Section 14 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder; and (b) as to the
shareholder giving the notice (i) the name and record address
of such shareholder, (ii) the class or series and number of
shares of capital stock of the company which are owned
beneficially or of record by such shareholder, (iii) a
description of all arrangements or understandings between such
shareholder and each proposed nominee and any other person or
persons (including their names) pursuant to which the
nomination(s) are to be made by such shareholder, (iv) a
representation that such shareholder intends to appear in
person or by proxy at the meeting to nominate the persons
named in its notice and (v) any other information relating to
such shareholder that would be required to be disclosed in a
proxy statement or other filings required to be made in
connection with solicitations of proxies for election of
directors pursuant to Section 14 of the Exchange Act and the
rules and regulations promulgated thereunder. Such notice must
be accompanied by a written consent of each proposed nominee
to being named as a nominee and to serve as a director if
elected.
No person shall be eligible for election as a director of the
company unless nominated in accordance with the procedures set
forth in this Section 1(c). If the Chairman of the meeting
determines that a nomination was not made in accordance with
the foregoing procedures, the Chairman shall declare to the
meeting that the nomination was defective and such defective
nomination shall be disregarded.
(d) Vacancies. Subject to the rights of the holders of any class
or series of stock having a preference over the Common Stock
of the company as to dividends or upon liquidation to elect
directors under specified circumstances, any vacancies on the
board of directors resulting from death, resignation,
retirement, disqualification, removal from office or other
cause shall be filled by the affirmative vote of a majority of
the remaining directors then in office, even though less than
a quorum of the board of directors. Any director so elected by
the board of directors to fill a vacancy shall hold office for
the remainder of the full term of the director whose departure
from the board created the vacancy. A directorship to be
filled by reason of an increase in the number of directors by
action of the board of directors (within the limits set forth
in paragraph (a) of Section 1 of this article) may be filled
by the board of directors for a term of office continuing only
until the next election at an annual meeting or at a special
meeting of shareholders called for that purpose; provided,
however, that the board of directors shall not fill more than
two such directorships during the period between two
successive annual meetings of shareholders.
<PAGE> 8
(e) Removal. Subject to the rights of any class or series of stock
having a preference over the Common Stock of the company as to
dividends or upon liquidation to elect directors under
specified circumstances, any director may be removed from
office, with or without cause, only by the affirmative vote of
the holders of at least seventy-five percent (75%) of the
combined voting power of the then outstanding shares of all
classes of stock of the company entitled to vote generally in
the election of directors, voting together as a single class.
SECTION 2. Annual Meeting. Each newly elected board of directors shall
hold its first meeting immediately following the annual meeting of shareholders
each year, for the purposes of organization, the election of officers of the
company, and the transaction of such other business as may properly come before
such meeting, and no notice of such meeting shall be necessary.
SECTION 3. Regular Meetings. In addition to the annual meeting of the
board of directors, four (4) regular meetings shall be held in each year at the
time and place designated by the chairman of the board, for the purpose of
transacting any business within the powers of the board. Notice of such regular
meetings shall be given as provided herein.
SECTION 4. Special Meetings. A special meeting of the board of
directors shall be held whenever called by the chief executive officer or by the
secretary on the written request of any five (5) of the directors, and at such
time and place as may be specified in the notice thereof. Such notice, or any
waiver pursuant to Article VII, Section 6 hereof, need not state the purpose or
purposes of such meeting.
SECTION 5. Notice. The secretary shall give notice to each director of
each regular and special meeting in person or by mail or by any form of
telecommunication, at least twenty-four (24) hours before the meeting. The
attendance of a director at any meeting shall constitute a waiver of notice of
such meeting, except where a director attends a meeting for the express purpose
of objecting to the transaction of any business on the grounds that the meeting
has not been lawfully called or convened.
SECTION 6. Quorum. A majority of the directors in office shall
constitute a quorum for the transaction of business, but if at any meeting of
the board of directors there is less than a quorum present, a majority of those
present or any director solely present may adjourn the meeting from time to time
without further notice. The act of a majority of the directors present at a
meeting at which a quorum is in attendance shall be the act of the board of
directors, unless the act of a greater number is required by law, the articles
of incorporation, or these bylaws.
SECTION 7. Order of Business and Officers at Meetings. At meetings of
the board of directors, business shall be transacted in such order as the board
may determine from time to time. At all meetings of the board of directors, the
chairman of the board shall preside, and in the absence of the chairman of the
board the president shall preside, and in the absence of both, a vice chairman
shall preside. Should all three be absent, a chairman shall be chosen by the
board of directors from among the directors present. The secretary of the
company shall act as secretary of all meetings of the board of directors, or in
the absence of the secretary an assistant secretary shall so act; or in the
absence of both, the presiding officer shall appoint any person to act as
secretary of the meeting.
SECTION 8. Compensation. Directors shall not receive any stated salary
for their service as directors, but by resolution of the board of directors an
annual retainer may be paid and a fixed sum and expenses of attendance, if any,
may be allowed for attendance at any meeting of the board of
<PAGE> 9
directors; provided that nothing contained herein shall be construed to preclude
any director from serving the company in any other capacity and receiving
compensation therefor.
SECTION 9. Presumption of Assent. A director of the company who is
present at a meeting of the board of directors at which action on any company
matter is taken shall be presumed to have assented to the action unless his
dissent shall be entered in the minutes of the meeting or unless he shall file
his written dissent to such action with the person acting as secretary of the
meeting before the adjournment thereof or shall forward such dissent by
registered mail to the secretary of the company immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
SECTION 10. Retirement. No director of the company shall stand for
reelection as a director following his seventieth birthday with the exception of
any person who shall serve, or has served, as chief executive officer of the
company at any time, who shall not be prevented by this provision from standing
for reelection as a director for five years after retirement from the position
of chief executive officer, or until the annual meeting following the attainment
of age seventy-five, whichever shall first occur. Any director who is also an
officer, other than the chief executive officer, of the company or an officer of
any subsidiary of the company shall retire as provided in Section 1 of this
article.
ARTICLE IV.
COMMITTEES OF THE BOARD OF DIRECTORS
SECTION 1. Executive Committee. The board of directors, acting by
resolution adopted by a majority of the full board of directors, may elect from
among its members an executive committee of not fewer than three (3) nor more
than ten (10) members, which committee shall have and may exercise all of the
authority of the board of directors in the business and affairs of the company
except where action of the full board of directors is specified by law. The
chief executive officer shall be a member of the executive committee and shall
be chairman of such committee. The executive committee shall meet at such times
and places as may be fixed by the committee, or on the call of the chief
executive officer, at such times and places as may be designated in the call of
such meetings. The executive committee shall maintain a record of its
proceedings and shall report to each regular meeting of the board of directors a
summary of the actions taken by such committee since the last regular meeting of
the board of directors.
The executive committee shall function as the company's nominating
committee. In its capacity as nominating committee, it has the power and duty to
recommend candidates for election to the board of directors, to the committees
of the board, and for the chairmanship of each committee except the executive
committee.
SECTION 2. Audit Committee. The board of directors, acting by
resolution adopted by a majority of the full board of directors, may elect from
among its members an audit committee of not fewer than three (3) nor more than
ten (10) members, none of whom shall be an officer of the company or of any of
its subsidiaries during the time of service on such committee. The chairman of
the committee shall be elected by a majority of the full board of directors at
the time the committee is elected or at such time as it becomes necessary to
elect a new chairman because of the chairman's death or resignation. The audit
committee shall meet at such times and places as may be fixed by the committee,
or on the call of its chairman, at such times and places as may be designated in
the call of such meetings. The committee shall also meet promptly upon the
request of the company's principal
<PAGE> 10
independent auditors. The audit committee shall maintain a record of its
proceedings and shall report to the board of directors a summary of its
activities not less frequently than twice each fiscal year.
The audit committee shall have the following powers and duties:
(a) to recommend to the board of directors each year the
engagement of a firm of certified public accountants to act as
principal independent auditors for the company and its
subsidiaries;
(b) to review at regular intervals audit arrangements for the
company and its subsidiaries and the reports to be rendered;
(c) to review in advance the plan and scope of the audit of the
company and its subsidiaries to be performed by the principal
independent auditors and the related detailed estimate of
fees, and to recommend such audit plan, scope, and fee
estimate for board approval;
(d) to review and approve non-audit services and fees of the
company's principal independent auditors, giving appropriate
consideration to the possible effect on the auditors'
independence of each non-audit service provided;
(e) to review periodically with the company's principal
independent auditors the accounting principles and policies of
the company and such matters relating to the internal auditing
systems and procedures and the internal accounting controls of
the company and its subsidiaries as the committee or the board
of directors may determine to be necessary or desirable;
(f) to review periodically the coordination between the company's
principal independent auditors and the company's internal
audit staff, and to review with the company's principal
independent auditors, upon completion of their audit, their
findings and recommendations and the responses of the
company's management to such findings and recommendations;
(g) to review the annual financial statements issued by the
company to its security holders;
to periodically review the company's corporate responsibility
program and receive information and assurances from management
as to its effectiveness;
(h) to conduct from time to time, or cause to be conducted, such
investigations or inquiries relating to the committee's
responsibilities, including accounting or audit matters, as
the facts presented to the committee warrant and as the
committee may deem necessary or appropriate in the interest of
the company and its shareholders;
(i) to confer with and direct the officers of the company to the
extent necessary to exercise the committee's powers and to
carry out its duties;
(j) to meet with representatives of any independent auditors of
the company and/or its internal audit staff in the absence of
management, whenever the committee deems such to be
appropriate; and
<PAGE> 11
(k) to perform such additional duties as may be assigned to the
committee by the board of directors.
SECTION 3. Personnel Committee. The board of directors, acting by
resolution adopted by a majority of the full board of directors, may elect from
among its members a personnel committee of not fewer than three (3) nor more
than ten (10) members, none of whom shall be an officer of the company or of any
of its subsidiaries during the time of service on this committee. The chairman
of the committee shall be elected by a majority of the full board of directors
at the time the committee is elected or at such time as it becomes necessary to
elect a new chairman because of the chairman's death or resignation. The
committee shall meet at such times and places as may be fixed by the committee,
or on the call of its chairman, at such times and places as may be designated in
the call of such meetings. The committee shall maintain a record of its
proceedings and shall report to each regular meeting of the board of directors a
summary of the actions taken by the committee since the last regular meeting of
the board of directors.
The personnel committee shall have the following powers and duties:
(a) to review the relationship of the contribution of key officers
and employees to the company's performance and prospects;
(b) to review and approve and recommend to the board of directors
for approval or ratification the annual salary of any officer
of the company or of a subsidiary of the company whose annual
salary is or will be of an amount which will place him or her
among the twenty-five most highly salaried officers in the
group;
(c) to review and approve or ratify the annual salary of any
officer or employee of the company or of a subsidiary of the
company whose annual salary is or will be of an amount which
will place him or her among the second twenty-five most highly
salaried officers in the group;
(d) to review and approve incentive compensation and other
employee benefit programs;
(e) to review key personnel issues; and
(f) to perform such additional duties as may be assigned to the
committee by the board of directors.
SECTION 4. Other Committees. In addition to the executive, audit, and
personnel committees, the board of directors may, by resolution adopted by a
majority of the full board of directors, elect from among its own members such
other committees as it shall deem to be appropriate, each of which shall have
and may exercise that authority of the board of directors which shall have been
delegated to it in the resolution creating such committee, except as may be
prohibited by law.
SECTION 5. Term of Office and Committee Size. The term of office of
each member of any committee shall be the period designated by the board of
directors, but shall not be longer than one year and until his successor shall
be elected, unless such member shall be removed by the board of directors, as
provided in this section, or the committee is dissolved by the board of
directors. A member of any committee may be removed during the period between
annual meetings by action of the majority of the full board of directors at any
regular or special meeting. The membership of any
<PAGE> 12
committee elected by the board of directors may be increased or decreased during
the period between annual meetings, subject to any limitations of this article,
by action of the majority of the full board of directors at any regular or
special meeting.
SECTION 6. Quorum. A majority of the members of any committee shall
constitute a quorum for the transaction of business. The act of the majority of
the members present at a meeting at which a quorum is present shall be the act
of the committee.
SECTION 7. Responsibility. The designation of any committee and the
delegation thereto of authority shall not operate to relieve the board of
directors, or any member thereof, of any responsibility imposed upon it or him
by law.
SECTION 8. Vacancies. The board of directors may fill all vacancies
in any committee.
ARTICLE V.
OFFICERS
SECTION 1. Titles and Term of Office. The board of directors at its
annual meeting shall elect officers of the company as follows: a chairman of the
board, a president and a secretary. The board of directors may also elect one or
more vice chairmen. The board of directors or the executive committee may elect
other officers, including one or more executive vice presidents, senior vice
presidents, vice presidents, a general counsel, a controller, a general auditor,
and other officers and assistant officers as the board of directors or the
executive committee deems necessary. Each officer shall hold office for the term
for which he is elected and until his successor shall have been duly elected and
qualified, or until his death, resignation, or removal in the manner hereinafter
provided. One person may hold more than one office except that the president
shall not also hold the office of secretary. The chairman of the board, each
vice chairman of the board, if any, and the president shall be directors of the
company, but no other officer need be a director.
SECTION 2. Removal. Any officer who may be elected only by the board of
directors may be removed only by the board of directors. Any officer who may be
elected by either the board of directors or the executive committee may be
removed by either the board of directors or the executive committee. Removal of
any officer may occur whenever in the judgment of the board of directors or the
executive committee, as the case may be, the best interests of the company will
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election of an officer shall not of
itself create contract rights.
SECTION 3. Vacancies. A vacancy in the office of any officer may be
filled for the unexpired portion of the term by the board of directors.
SECTION 4. Chief Executive Officer. The board of directors shall
designate either the chairman of the board or the president to be the chief
executive officer of the company. All other officers of the company shall be
subordinate to the chief executive officer and shall report to him as he may
direct. The chief executive officer shall have responsibility for the general
management and direction of the business of the company and for the execution of
all orders and resolutions of the board of directors. In addition to the powers
prescribed in these bylaws, he shall have all of the powers usually vested in
the chief executive officer of a corporation and such other powers as may
<PAGE> 13
be prescribed from time to time by the board of directors. He may delegate any
of his powers and duties to any other officer with such limitations as he may
deem proper.
SECTION 5. Chairman of the Board. The chairman of the board shall
preside at all meetings of the shareholders and of the board of directors; shall
have authority to execute all legal instruments necessary for the transaction of
the company's business; may sign certificates for shares of capital stock of the
company; and may be designated as chief executive officer, as provided in these
bylaws. He shall be a member of all standing committees of the board of
directors except those the membership of which is restricted to non-officer
directors, and shall have such other responsibilities and powers as may be
prescribed in these bylaws or from time to time by the board of directors. If he
is not designated as chief executive officer, the chairman of the board shall
have such powers and perform such duties as maybe delegated to him by the chief
executive officer, and shall be vested with all the powers and authorized to
perform all the duties of the chief executive officer in his absence or
inability to act.
SECTION 6. Vice Chairman of the Board. In the absence of the chairman
of the board and the president, a vice chairman of the board shall preside at
all meetings of the shareholders and the board of directors; shall have
authority to execute all legal instruments necessary for the transaction of the
company's business; and shall have such other powers and duties as may be
delegated to him by the board of directors or the chief executive officer.
SECTION 7. President. In the absence of the chairman of the board, the
president shall preside at all meetings of the shareholders and of the board of
directors; shall have authority to execute all legal instruments necessary for
the transaction of the company's business; may sign certificates for shares of
capital stock of the company; and may be designated as chief executive officer,
as provided in these bylaws. He may delegate such of his powers and duties to
other officers with such limitations as he may deem proper. The president shall
have such other powers and duties as may be prescribed in these bylaws or from
time to time by the board of directors. If he is not designated as chief
executive officer, the president shall have such powers and perform such duties
as may be delegated to him by the chief executive officer, and shall be vested
with all the powers and authorized to perform all the duties of the chief
executive officer in his absence or inability to act.
SECTION 8. Vice President. Each vice president shall have such powers
and duties as may be delegated to him by the board of directors or the chief
executive officer, or any authorized officers senior to the vice president, and
may exercise the powers of the president during his absence or inability to act.
Any action taken by a vice president in the performance of the duties of the
president shall be conclusive evidence of the absence or inability to act of the
president at the time such action was taken.
SECTION 9. Secretary. The secretary shall keep the minutes of all
meetings of the board of directors, of the shareholders, and of the executive
committee; shall issue all notices; may sign with the chairman of the board, a
vice chairman of the board, or the president in the name of the company all
legal instruments necessary for the transaction of the company's business and
affix the seal of the company thereto; shall sign with the chairman of the board
or president all certificates for shares of the capital stock of the company;
and shall have such other powers and duties as may be prescribed by the board of
directors or the chief executive officer.
SECTION 10. Treasurer. The treasurer shall have responsibility for the
safekeeping and custody of all the funds and securities of the company; shall
establish and execute programs for the provision of the capital required by the
company, including negotiating the procurement of capital and
<PAGE> 14
maintaining the required financial arrangements; shall establish and maintain
adequate sources for the company's short-term borrowings; shall establish and
maintain liaison with investment bankers and financial analysts; shall establish
and maintain banking arrangements; and shall have such other powers and duties
as may be prescribed by the board of directors or the chief executive officer.
SECTION 11. Powers and Duties of Assistant Secretaries. Each assistant
secretary shall have the usual powers and duties pertaining to his office,
together with such other powers and duties as may be assigned to him by the
secretary, and may exercise the powers of the secretary during that officer's
absence or inability to act. Any action taken by an assistant secretary in the
performance of the duties of the secretary shall be conclusive evidence of the
absence or inability to act of the secretary at the time such action was taken.
SECTION 12. Powers and Duties of Assistant Treasurers. Each assistant
treasurer shall have the usual powers and duties pertaining to his office,
together with such other powers and duties as may be assigned to him by the
treasurer, and may exercise the powers of the treasurer during that officer's
absence or inability to act. Any action taken by an assistant treasurer in the
performance of the duties of the treasurer shall be conclusive evidence of the
absence or inability to act of the treasurer at the time such action was taken.
ARTICLE VI.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 1. Actions. The company shall indemnify any person who was or
is a named defendant or respondent or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative, or investigative (including any action by
or in the right of the company), or any appeal of such action, suit or
proceeding and any inquiry or investigation that could lead to such an action,
suit or proceeding, by reason of the fact that he is or was a director, officer
or employee of the company, or is or was serving at the request of the company
as a director, officer, partner, venturer, proprietor, trustee, employee, or
similar functionary of another foreign or domestic corporation or non-profit
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise (any such person acting in any such capacity
being hereinafter referred to as "potential indemnitee"), against judgments,
penalties (including excise and similar taxes), fines, amounts paid in
settlement, and reasonable expenses (including court costs and attorneys' fees)
actually incurred by him in connection with such action, suit or proceeding, if
he acted in good faith and in a manner he reasonably believed, (i) in the case
of conduct in his official capacity as a director of the company, to be in the
best interests of the company and (ii) in all other cases, to be not opposed to
the best interests of the company; and, with respect to any criminal action or
proceeding, if he had no reasonable cause to believe his conduct was unlawful;
provided, however, that in connection with any action, suit or proceeding in
which the person shall have been adjudged to be liable to the company or liable
on the basis that personal benefit was improperly received by him, whether or
not the benefit resulted from an action taken in the person's official capacity
as a director or officer, (i) indemnification shall be limited to reasonable
expenses (including court costs or attorneys' fees) actually incurred in
connection with such proceeding, and (ii) indemnification shall be prohibited,
if the person is found liable for willful or intentional misconduct in the
performance of his duty to the company. The termination of any action, suit or
proceeding by judgment, order, settlement, or conviction, or on a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in the best interests of the company; and,
<PAGE> 15
with respect to any criminal action or proceeding, shall not create a
presumption that the person had reasonable cause to believe that his conduct was
unlawful.
SECTION 2. Success on Merits or 0therwise. Where a potential indemnitee
has been wholly successful, on the merits or otherwise, in defense of any such
action, suit or proceeding, he shall be indemnified against reasonable expenses
(including court costs and attorneys' fees) actually incurred by him in
connection therewith.
SECTION 3. Determination that Indemnification is Proper. Any
indemnification under Section 1 of this article (unless otherwise ordered by a
court of competent jurisdiction) shall be made by the company only as authorized
in a specific case upon a determination that the applicable standard of conduct
has been met. Such determination shall be made (i) by the board of directors by
a majority vote of a quorum consisting of directors who at the time of the vote
have not been named as defendants or respondents in such action, suit or
proceeding, or (ii) if such a quorum cannot be obtained, by a majority vote of a
committee of the board of directors, designated to act in the matter by a
majority vote of all directors, consisting solely of two or more directors who
at the time of the vote are not named defendants or respondents in such action,
suit or proceeding, or (iii) by special legal counsel selected by the board of
directors (or a committee thereof) by vote in the manner set forth in
subparagraphs (i) and (ii) of this Section 3, or if such a quorum cannot be
obtained and such a committee cannot be established, by a majority vote of all
directors, or (iv) by the shareholders in a vote that excludes the shares held
by any director who is named as a defendant or respondent in such action, suit
or proceeding.
SECTION 4. Expenses Prior to Final Disposition. Reasonable expenses
incurred by a director, officer, or employee of the company or other person
entitled to indemnity hereunder, who was, is or is threatened to be made a named
defendant or respondent in any such action, suit or proceeding described in
Section 1 shall be paid by the company in advance of the final disposition
thereof upon receipt of a written affirmation by the director, officer, employee
or other person of his good faith belief that he has met the standard of conduct
necessary for indemnification under this article and a written undertaking by or
on behalf of the director, officer, employee or other person to repay such
amount if it is ultimately determined that the person has not met such necessary
standard of conduct or that indemnification is prohibited by Section 1 of this
article. Determinations with respect to payments under this Section 4 shall be
made in the manner specified by Section 3 for determining that indemnification
is permissible, except as otherwise provided by law.
SECTION 5. Nonexclusive Rights-Continuance Beyond Tenure. The
indemnification provided by this article shall not be deemed (i) to be exclusive
of any other rights consistent with law to which the person indemnified may be
entitled under the articles of incorporation of the company, bylaws, any general
or specific action of the board of directors, agreement, authorization of
shareholders, or otherwise, or as may be permitted or required by law, both as
to action in his official capacity as a director and as to action in another
capacity while holding such office, or (ii) to be a limitation upon the power of
the company to indemnify and to advance expenses, consistent with law. The
indemnification provided by this article shall continue as to a person who has
ceased to be a director, officer, or employee of the company or other person
entitled to indemnity hereunder or to serve in such other capacity in which he
was entitled to indemnification hereunder, and shall inure to the benefit of his
heirs and legal representatives.
SECTION 6. Insurance Authorized. Subject to any restrictions now or
hereafter established by applicable law, the company shall have power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, or employee of the company or who is or was serving at the
<PAGE> 16
request of the company as a director, officer, partner, venturer, proprietor,
trustee, employee, agent, or similar functionary of another foreign or domestic
corporation or non-profit corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise, against any
liability asserted against him and incurred by him in such a capacity or arising
out of his status as such a person, whether or not the company would have the
power to indemnify him against that liability under the provisions of this
article or the Texas Business Corporation Act.
SECTION 7. Definitions. For purposes of this article, references to
"the company" include any domestic or foreign predecessor entity of the company
in a merger, consolidation, or other transaction in which the liabilities of the
predecessor are transferred to the company by operation of law and in any other
transaction in which the company assumes the liabilities of the predecessor but
does not specifically exclude liabilities that are the subject matter of this
article. For purposes of this article, references to "serving at the request of
the company" shall include any service as a director, officer or employee of the
company which imposes duties on, or involves services by, such director, officer
or employee with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the company" as referred to in this article.
SECTION 8. Expenses as Witness. Notwithstanding any other provision of
this article, the company may pay or reimburse expenses incurred by any
director, officer, or employee of the company or any other potential indemnitee
hereunder in connection with his appearance as a witness or other participation
in any action, suit or a proceeding described in Section 1 at a time when he is
not a named defendant or respondent in such action, suit or proceeding.
SECTION 9. Notice to Shareholders. Any indemnification of or advance of
expenses to a director in accordance with this article shall be reported in
writing to the shareholders of the company with or before the notice or waiver
of notice of the next shareholders' meeting or with or before the next
submission to shareholders of a consent to action without a meeting and, in any
case, within the twelve-month period immediately following the date of the
indemnification or advance.
ARTICLE VII.
MISCELLANEOUS PROVISIONS
SECTION 1. Registered Office. Unless the board of directors otherwise
determines, the registered office of the company, required by the Texas Business
Corporation Act to be maintained in the State of Texas, shall be the principal
place of business of the company, but such registered office may be changed from
time to time by the board of directors in the manner provided by law and need
not be identical to the principal place of business of the company.
SECTION 2. Books and Records. Correct and complete books and records of
account of the company and the minutes of the proceedings of its shareholders,
board of directors, and each committee of its board of directors shall be kept
at the registered office of the company. Records of the original issuance of
shares issued by the company and of each transfer of those shares that have been
presented for registration of transfer shall be kept at the registered office of
the company or at the office of its principal transfer agent or registrar. A
record of the past and present shareholders of the company, giving the names and
addresses of all such shareholders and the number of shares of each class and
series of stock held by each, shall also be kept at the registered office of the
company
<PAGE> 17
or at the office of its principal transfer agent or registrar. Any books,
records, and minutes may be in written form or in any other form capable of
being converted into written form within a reasonable time. Any person who shall
have been a holder of record of shares for at least six (6) months immediately
preceding his demand, or who shall be the holder of record of at least five
percent (5%) of all the outstanding shares of the company, upon written demand
stating the purpose thereof, or any director of the company shall have the right
to examine, in person or by agent, accountant, or attorney, at any reasonable
time or times, for any proper purpose, its relevant books and records of
account, minutes, and share transfer records, and to make extracts therefrom.
SECTION 3. Action Without Meeting and Telephone Meetings. Any action
permitted, or required by law, these bylaws, or the articles of incorporation of
the company, to be taken at a meeting of the board of directors or of any
committee thereof may be taken without a meeting if a consent in writing,
setting forth the action so taken, is signed by all the members of the board of
directors or of such committee, as the case may be. Such consent shall have the
same force and effect as a unanimous vote at a meeting.
Subject to the notice requirements of these bylaws, members of the
board of directors or of any committee created by the board of directors may
participate in and hold a meeting of such board or committee by means of
conference telephone or similar communications equipment, including
teleconferencing via a satellite communications system, provided all persons
participating in the meeting can hear each other.
SECTION 4. Fiscal Year. The fiscal year of the company shall be the
calendar year.
SECTION 5. Seal. The seal of the company shall be such as from time to
time may be approved by the board of directors.
SECTION 6. Notice and Waiver of Notice. Whenever any notice is required
to be given under the provisions of these bylaws, said notice shall be deemed to
be sufficient if given by depositing the same in a post office box in a sealed
postpaid wrapper addressed to the person entitled thereto at his post office
address, as it appears on the records of the company, and such notice shall be
deemed to have been given on the day of such mailing. A waiver of notice, signed
by the person or persons entitled to said notice, whether before or after the
date and time stated therein, shall be deemed equivalent thereto.
SECTION 7. Resignations. Any director or officer may resign at any
time. Such resignation shall be made in writing and shall take effect at the
time specified therein, or if no time be specified, at the time of its receipt
by the chairman of the board, the president, or the secretary. The acceptance of
a resignation shall not be necessary to make it effective, unless expressly so
provided in the resignation.
SECTION 8. Securities of Other Corporations. The board of directors
shall by resolution designate the officers of the company who shall have power
and authority to transfer, endorse for transfer, vote, or consent to or take any
other action with respect to any securities of another issuer which may be held
or owned by the company and to make, execute, and deliver any waiver, proxy, or
consent with respect to any such securities.
SECTION 9. Investments and Loans. Investments and loans of the company
shall be made pursuant and subject to the provisions of the law.
<PAGE> 18
SECTION 10. Execution of Contracts and Other Instruments. All
contractual or obligatory undertakings, including but not limited to deeds,
conveyances, transfers, and releases, shall be signed by, (a) the chairman of
the board, a vice chairman of the board, the president, or a vice president, or
(b) any attorney-in-fact or agent of the company who has been, or at any time in
the future may be, appointed by the chairman of the board, a vice chairman of
the board, the president, or a vice president, and by the company secretary or
an assistant secretary. When necessary, such instruments may have the corporate
seal affixed and may be attested by the secretary or an assistant secretary.
Checks may be signed by the chairman of the board, a vice chairman of the board,
the president, a vice president, the secretary, the treasurer, or any other
person who may be authorized by the board of directors or the chief executive
officer.
SECTION 11. Rules and Regulations. Rules and regulations for the
conduct of the company's business not in conflict with these bylaws may be
adopted by the executive committee by resolution duly recorded in the minutes of
the committee; provided, however, that such action may be modified or abrogated
by the board of directors.
ARTICLE VIII.
AMENDMENTS
Unless otherwise provided in the Articles of Incorporation, the power
to alter, amend, or repeal these bylaws or adopt new bylaws shall be vested in
the full board of directors subject, however, to repeal or change by action of
the affirmative vote of the holders of at least seventy-five percent (75%) of
the then outstanding shares of all classes of stock of the company entitled to
vote generally in election of directors, voting together as a single class.
<PAGE> 19
CERTIFICATION
I HEREBY CERTIFY that the foregoing is a true and full copy of the
bylaws of AMERICAN GENERAL CORPORATION as the same are now in effect.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
corporate seal of AMERICAN GENERAL CORPORATION this ______day of
__________________, 19__.
--------------------------------
Secretary
<PAGE> 1
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EXHIBIT 10.4
AMERICAN GENERAL CORPORATION
1999 STOCK AND INCENTIVE PLAN
1. PURPOSE
The purpose of the American General Corporation 1999 Stock and Incentive
Plan (the "Plan") is to provide a means through which American General Corpo-
ration, a Texas corporation, and its subsidiaries (collectively, the "Compa-
ny") may attract able persons to enter the employ or become directors of the
Company and to provide a means whereby those persons upon whom the responsi-
bilities of the successful administration and management of the Company rest,
and whose present and potential contributions to the welfare of the Company
are of importance, can acquire and maintain stock ownership, thereby strength-
ening their concern for the welfare of the Company and their desire to remain
in its employ or as directors. A further purpose of the Plan is to provide
such persons with additional incentive and reward opportunities designed to
enhance the profitable growth of the Company. So that the maximum incentive
can be provided, the Plan provides for granting Incentive Stock Options, Non-
Qualified Options, Restricted Stock Awards, Performance Awards, and Incentive
Awards, or any combination of the foregoing, as is best suited to the circum-
stances of the particular person.
2. DEFINITIONS
The following definitions shall be applicable throughout the Plan:
(a) "Award" means, individually or collectively, any Option, Restricted
Stock Award, Performance Award, or Incentive Award.
(b) "Board" means the Board of Directors of American General Corporation.
(c) "Code" means the Internal Revenue Code of 1986, as amended from time
to time. Reference in the Plan to any section of the Code shall be deemed
to include any amendments or successor provisions to such section and any
regulations under such section.
(d) "Committee" means a committee of the Board that is selected by the
Board as provided in Section 4(a).
(e) "Common Stock" means the common stock of American General
Corporation.
(f) "Company" means, collectively, American General Corporation and its
subsidiaries.
(g) "Director" means an individual elected to the Board by the
shareholders of American General Corporation or by the Board under
applicable corporate law.
(h) "Employee" means any person (including a Director) in an employment
relationship with the Company or any parent or subsidiary corporation (as
defined in section 424 of the Code).
(i) "Fair Market Value" means, as of any specified date, the average of
the highest and lowest quoted selling prices of the Common Stock as
reported on the Composite Tape for issues listed on the New York Stock
Exchange on the specified date, or, if no sales were reported on the
Composite Tape on such specified date, the average of the highest and
lowest quoted selling prices of the Common Stock on the nearest dates
before and after such specified date on which sales of the Common Stock
were so reported.
(j) "Grant Document" means the document or documents evidencing an Award
under the Plan, which may be either an agreement between the Company and
the Holder as to the Award (with any amendments thereto) or a notice of
grant of the Award from the Company to the Holder (including any
<PAGE> 2
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attached statement of the terms and conditions of the Award and any
modifications thereto made in accordance with the Plan).
(k) "Holder" means an employee or a non-employee Director who has been
granted an Option, a Restricted Stock Award, a Performance Award, or an
Incentive Award.
(l) "Incentive Award" means an Award granted under Section 10 of the
Plan.
(m) "Incentive Stock Option" means an incentive stock option within the
meaning of section 422(b) of the Code.
(n) "Immediate Family" means, with respect to a Holder, the Holder's
spouse, children or grandchildren (including adopted children, step
children and grandchildren).
(o) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(p) "Non-Qualified Option" means an Option that is not an Incentive Stock
Option.
(q) "Option" means an Award under Section 7 of the Plan and includes both
Non-Qualified Options and Incentive Stock Options to purchase Common Stock.
(r) "Performance Award" means an Award granted under Section 9 of the
Plan.
(s) "Plan" means the American General Corporation 1999 Stock and
Incentive Plan, as amended from time to time.
(t) "Restricted Stock Award" means an Award granted under Section 8 of
the Plan.
(u) "Rule 16b-3" means Securities and Exchange Commission Rule 16b-3
promulgated under the 1934 Act, as such may be amended from time to time,
and any successor rule, regulation, or statute fulfilling the same or
similar function.
3. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective on January 21, 1999, following adoption by
the Board, provided the Plan is approved by the shareholders of American Gen-
eral Corporation within twelve months thereafter. Notwithstanding any provi-
sion in the Plan or in any Grant Document under the Plan, no Option shall be
exercisable and no Award shall vest prior to such shareholder approval. No
further Awards may be granted under the Plan after ten years from the date the
Plan becomes effective. The Plan shall remain in effect (at least for the pur-
pose of governing outstanding Awards) until all Option Awards granted under
the Plan have been exercised or expired by reason of lapse of time, all re-
strictions imposed upon Restricted Stock Awards have been eliminated or the
Restricted Stock Awards have been forfeited, and all Performance Awards and
Incentive Awards have been satisfied or have terminated.
4. ADMINISTRATION
(a) Composition of Committee. The Plan shall be administered by a committee
of, and appointed by, the Board, and such Committee shall be comprised solely
of two or more outside Directors of American General Corporation (within the
meaning of section 162(m) of the Code and applicable interpretive authority
thereunder) who are also non-employee Directors (within the meaning of Rule
16b-3). A majority of the Committee shall constitute a quorum. The Committee
shall act by majority action at a meeting, except that action permitted to be
taken at a meeting may be taken without a meeting if written consent thereto
is given by all members of the Committee.
<PAGE> 3
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(b) Powers. Subject to the express provisions of the Plan and except as oth-
erwise provided below with respect to non-employee Directors, the Committee
shall have authority, in its discretion, to determine which Employees or Di-
rectors of the Company shall receive an Award, the time or times when such
Award shall be made, whether an Incentive Stock Option or Non-Qualified Option
shall be granted, the number of shares to be subject to each Option and Re-
stricted Stock Award, and the value of each Performance Award and Incentive
Award. In making such determinations, the Committee shall take into account
the nature of the services rendered by the respective Employees or Directors,
their present and potential contribution to the Company's success, and such
other factors as the Committee shall deem relevant. Notwithstanding the fore-
going, the Board shall have authority, in its discretion, to make the determi-
nations set forth above with respect to non-employee Directors.
(c) Additional Powers. The Committee shall have such additional powers as
are delegated to it by the other provisions of the Plan. Subject to the ex-
press provisions of the Plan and except as otherwise provided below with re-
spect to non-employee Directors, this shall include the power to construe the
Plan and the respective Grant Documents thereunder, to prescribe rules and
regulations relating to the Plan and to determine the terms, restrictions, and
provisions of the Grant Document for each Award, including such terms, re-
strictions, and provisions as shall be requisite in the judgment of the Com-
mittee to cause designated Options to qualify as Incentive Stock Options, to
ensure that the grants of Awards are exempt under Rule 16b-3, and to make all
other determinations necessary or advisable for administering the Plan. With-
out limiting the generality of the foregoing, Grant Documents providing for
Awards under the Plan may contain such provisions covering a "change in con-
trol" of American General Corporation, as defined by the Committee in its sole
discretion, as the Committee may approve, not inconsistent with the terms of
this Plan, including without limitation provisions for the acceleration of,
vesting of, or the payment of cash in lieu of, any Award. The Committee may
correct any defect or supply any omission or reconcile any inconsistency in
the Plan or in any Grant Document relating to an Award in the manner and to
the extent it shall deem expedient to carry it into effect. The Committee may
delegate to other persons the responsibility of performing ministerial acts in
furtherance of the Plan's purposes. The determinations of the Committee on the
matters referred to in this Section 4 shall be conclusive. Notwithstanding the
foregoing, the Board, in its discretion, shall have the power to determine the
terms, restrictions, and provisions of the Grant Document for each Award with
respect to non-employee Directors.
5. GRANT OF OPTIONS, RESTRICTED STOCK AWARDS, PERFORMANCE AWARDS, AND
INCENTIVE AWARDS; SHARES SUBJECT TO THE PLAN
(a) Stock Grant Limit. The Committee may from time to time grant Awards to
one or more Employees or Directors determined by it to be eligible for partic-
ipation in the Plan in accordance with the provisions of Section 6. Subject to
adjustment in the same manner as provided in Section 11 with respect to shares
of Common Stock subject to Awards then outstanding, the aggregate number of
shares of Common Stock that may be issued under the Plan shall not exceed
12,000,000. Shares shall be deemed to have been issued under the Plan only to
the extent actually issued and delivered pursuant to an Award. To the extent
that an Award lapses, the rights of its Holder terminate, an Award is paid in
cash or is settled in a manner such that all or some of the shares of Common
Stock covered by the Award are not issued to the Holder, any shares of Common
Stock subject to such Award shall again be available for the grant of an
Award. The maximum limitation contained herein shall be applied in a manner
which will permit compensation generated under the Plan which is intended to
constitute "performance-based" compensation for purposes of section 162(m) of
the Code to be treated as such "performance-based" compensation.
(b) Special Grant Limit. The maximum number of shares of Common Stock that,
in the aggregate, may be subject to Awards, other than Options, under the Plan
shall not exceed 50% of the maximum number of shares of Common Stock that may
be issued under the Plan, as provided in Section 5(a).
<PAGE> 4
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(c) Individual Holder Limit. Notwithstanding any provision of the Plan to
the contrary, the maximum number of shares of Common Stock that may be subject
to Awards granted under the Plan to any individual Holder during the term of
the Plan shall not exceed the maximum number of shares of Common Stock that
may be issued under the Plan, as provided in Section 5(a).
(d) Stock Offered. The stock to be offered pursuant to the grant of an Award
may be authorized but unissued Common Stock or Common Stock previously issued
and outstanding and reacquired by the Company.
6. ELIGIBILITY
Awards may be granted only to persons who, at the time of grant, are Employ-
ees of the Company or Directors. Awards may not be granted to any person who
immediately after such grant is the owner, directly or indirectly, of more
than 10% of the total combined voting power of all classes of stock of the
Company. An Award may be granted on more than one occasion to the same person,
and such Award may include an Incentive Stock Option, Non-Qualified Option,
Restricted Stock Award, Performance Award, Incentive Award, or any combination
thereof.
7. STOCK OPTIONS
(a) Option Period. The term of each Option shall be as specified by the Com-
mittee at the date of grant but shall not exceed ten years.
(b) Limitations on Exercise of Option. An Option shall be exercisable in
whole or in such installments and at such times as determined by the Commit-
tee.
(c) Stock Option Grant Document. Each Option shall be evidenced by an Option
Grant Document in such form and containing such provisions not inconsistent
with the provisions of the Plan as the Committee from time to time shall ap-
prove, including, without limitation, provisions to qualify as an Incentive
Stock Option under section 422 of the Code.
(d) Option Price and Payment. The price at which a share of Common Stock may
be purchased upon exercise of an Option shall be determined by the Committee,
but, subject to adjustment in the same manner as provided in Section 11, shall
not be less than the Fair Market Value of a share of Common Stock at the date
such Option is granted. The Option or portion thereof may be exercised by de-
livery of an irrevocable notice of exercise to the Company. The purchase price
of the Option or portion thereof shall be paid in full in the manner pre-
scribed by the Committee.
(e) Shareholder Rights and Privileges. The Holder shall be entitled to all
the privileges and rights of a shareholder only with respect to such shares of
Common Stock as have been purchased under the Option, for which certificates
of stock have been registered in the Holder's name, and as to which the Grant
Document for the respective Option requires no further restrictions.
(f) Special Limitations on Incentive Stock Options. An Incentive Stock Op-
tion may be granted only to an individual who is an Employee at the time the
Option is granted. In the case of Incentive Stock Options, the value of shares
of stock for which such Options are exercisable for the first time in any one
calendar year
<PAGE> 5
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cannot exceed $100,000 based on the Fair Market Value of the stock at the date
of grant according to section 422(d)(1) of the Code (or such other individual
limit as may be in effect under the Code on the date of grant). An Incentive
Stock Option shall not be transferable or assignable otherwise than by will or
the laws of descent and distribution.
(g) Stock Appreciation Rights. The Committee (concurrently with the grant of
an Option or subsequent to such grant) may, in its sole discretion, grant
stock appreciation rights ("SARs") to any Holder of an Option. SARs may give
the Holder of an Option the right, upon written request, to surrender any ex-
ercisable Option or portion thereof in exchange for cash, whole shares of Com-
mon Stock, or a combination thereof, as determined by the Committee, with a
value equal to the excess of the Fair Market Value, as of the date of such re-
quest, of one share of Common Stock over the Option price for such share mul-
tiplied by the number of shares covered by the Option or portion thereof to be
surrendered. In the case of any SAR which is granted in connection with an In-
centive Stock Option, such SAR shall be exercisable only when the Fair Market
Value of the Common Stock exceeds the price specified therefor in the Option
or portion thereof to be surrendered. In the event of the exercise of any SAR
granted hereunder, the number of shares reserved for issuance under the Plan
shall be reduced only to the extent that shares of Common Stock are actually
issued in connection with the exercise of such SAR. Additional terms and con-
ditions governing any such SARs may from time to time be prescribed by the
Committee in its sole discretion.
(h) Reload Options. The Committee (concurrently with the grant of an Option
or subsequent to such grant) may, in its sole discretion, provide in an Option
Grant Document respecting an Option that, if the Holder pays the costs associ-
ated with exercising such Option in shares of Common Stock, upon the date of
such payment a new option shall be granted under this Plan or under another
available plan. The number of shares of Common Stock subject to such new op-
tion shall be equal to the number of shares of Common Stock tendered in pay-
ment. The new option shall not be exercisable after the original term of the
exercised Option.
8. RESTRICTED STOCK AWARDS
(a) Restriction Period to be Established by the Committee. At the time a Re-
stricted Stock Award is made, the Committee shall establish a period of time
(the "Restriction Period") applicable to such Award. Each Restricted Stock
Award may have a different Restriction Period, in the discretion of the Com-
mittee.
(b) Forfeiture Restrictions to be Established by the Committee. Shares of
Common Stock that are the subject of a Restricted Stock Award shall be subject
to restrictions on disposition by the Holder and an obligation of the Holder
to forfeit and surrender the shares to the Company under certain circumstances
(the "Forfeiture Restrictions"). The Forfeiture Restrictions shall be deter-
mined by the Committee in its sole discretion, and the Committee may provide
that the Forfeiture Restrictions shall lapse upon (i) the attainment of one or
more performance measures established by the Committee that are based on (1)
the price of a share of Common Stock, (2) net income, (3) market share, (4)
return on shareholders' equity, (5) the payment of cash dividends, (6) operat-
ing income, (7) operating return on shareholders' equity, (8) finance receiv-
ables, (9) premium growth, or (10) total shareholder return, (ii) the Holder's
continued employment with the Company or continued service as a Director for a
specified period of time, (iii) the occurrence of any event or the satisfac-
tion of any other condition specified by the Committee in its sole discretion,
or (iv) a combination of any of the foregoing. The performance measures may be
subject to adjustment for specified significant extraordinary items or events,
and may be absolute, relative to one or more other companies, or relative to
one or more indexes, and may be contingent upon future performance of the Com-
pany or any subsidiary, division, or
<PAGE> 6
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department thereof by or in which the Holder is employed during the perfor-
mance period. Each Restricted Stock Award may have different Forfeiture Re-
strictions, in the discretion of the Committee.
(c) Other Terms and Conditions. Common Stock awarded pursuant to a Re-
stricted Stock Award shall be represented by a stock certificate registered in
the name of the Holder of such Restricted Stock Award. The Holder shall have
the right to receive dividends during the Restriction Period, to vote Common
Stock subject thereto, and to enjoy all other shareholder rights, except that
(i) the Holder shall not be entitled to delivery of the stock certificate un-
til the Restriction Period shall have expired, (ii) the Company shall retain
custody of the stock during the Restriction Period, (iii) the Holder may not
sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of the
stock during the Restriction Period, and (iv) a breach of the terms and condi-
tions established by the Committee pursuant to the Restricted Stock Award
shall cause a forfeiture of the Restricted Stock Award.
(d) Payment for Restricted Stock. A Holder shall not be required to make any
payment for Common Stock received pursuant to a Restricted Stock Award, except
to the extent otherwise required by law or the Committee.
9. PERFORMANCE AWARDS
(a) Performance Period. The Committee shall establish, with respect to and
at the time of each Performance Award, a performance period over which the
performance applicable to the Performance Award shall be measured.
(b) Performance Measures. A Performance Award shall be awarded to a Holder
contingent upon future performance of the Company or any subsidiary, division,
or department thereof by or in which such Holder is employed during the per-
formance period. The Committee shall establish the performance measures appli-
cable to such performance prior to the beginning of the performance period;
provided such measures may be made subject to adjustment for specified signif-
icant extraordinary items or events. The performance measures may be absolute,
relative to one or more other companies, or relative to one or more indexes.
The performance measures established by the Committee may be based upon (i)
the price of a share of Common Stock, (ii) net income, (iii) market share,
(iv) return on shareholders' equity, (v) the payment of cash dividends, (vi)
operating income, (vii) operating return on shareholders' equity, (viii) fi-
nance receivables, (ix) premium growth, (x) total shareholder return, or (xi)
a combination of any of the foregoing. The Committee, in its sole discretion,
may provide for an adjustable Performance Award value based upon the level of
achievement of performance measures.
(c) Awards Criteria. In determining the value of Performance Awards, the
Committee may take into account a Holder's responsibility level, performance,
potential, other Awards, and such other considerations as it deems appropri-
ate. The Committee, in its sole discretion, may provide for a reduction in the
value of a Holder's Performance Award during the performance period.
(d) Payment. Following the end of the performance period, the Holder of a
Performance Award shall be entitled to receive payment of an amount not ex-
ceeding the maximum value of the Performance Award, based on the achievement
of the performance measures for such performance period, as determined by the
Committee. Payment of a Performance Award may be made in cash, Common Stock,
or a combination thereof, as determined by the Committee. Payment shall be
made in a lump sum or in installments as prescribed by the Committee. Any pay-
ment to be made in cash shall be based on the Fair Market Value of the Common
Stock on the payment date.
<PAGE> 7
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(e) Termination of Employment. A Performance Award shall terminate if the
Holder does not remain continuously in the employ (or in service as a Direc-
tor) of the Company at all times during the applicable performance period, ex-
cept as may be determined by the Committee.
10. INCENTIVE AWARDS
(a) Incentive Awards. Incentive Awards are rights to receive shares of Com-
mon Stock (or the Fair Market Value thereof), or rights to receive an amount
equal to any appreciation or increase in the Fair Market Value of Common Stock
over a specified period of time, which vest over a period of time as estab-
lished by the Committee, without satisfaction of any performance criteria or
objectives. The Committee may, in its discretion, require payment or other
conditions of the Holder respecting any Incentive Award.
(b) Award Period. The Committee shall establish, with respect to and at the
time of each Incentive Award, a period over which the Award shall vest with
respect to the Holder.
(c) Awards Criteria. In determining the value of Incentive Awards, the Com-
mittee may take into account a Holder's responsibility level, performance, po-
tential, other Awards, and such other considerations as it deems appropriate.
(d) Payment. Following the end of the vesting period for an Incentive Award
(or at such other time as the applicable Grant Document may provide), the
Holder of an Incentive Award shall be entitled to receive payment of an
amount, not exceeding the maximum value of the Incentive Award, based on the
then vested value of the Award. Payment of an Incentive Award may be made in
cash, Common Stock, or a combination thereof as determined by the Committee.
Payment shall be made in a lump sum or in installments as prescribed by the
Committee. Any payment to be made in cash shall be based on the Fair Market
Value of the Common Stock on the payment date. Cash dividend equivalents may
be paid during or after the vesting period with respect to an Incentive Award,
as determined by the Committee.
(e) Termination of Employment. An Incentive Award shall terminate if the
Holder does not remain continuously in the employ (or in service as a Direc-
tor) of the Company at all times during the applicable vesting period, except
as may be otherwise determined by the Committee.
11. EQUITABLE ADJUSTMENTS
Subject to any required action by the Company's shareholders, upon the oc-
currence of any event which affects the shares of Common Stock in such a way
that an adjustment of outstanding Awards is appropriate in order to prevent
the dilution or enlargement of rights under the Awards (including, without
limitation, any extraordinary dividend or other distribution (whether in cash
or in kind), recapitalization, stock split, reverse split, reorganization,
merger, consolidation, spin-off, combination, repurchase, or share exchange,
or other similar corporate transaction or event), the Committee shall make ap-
propriate equitable adjustments, which may include, without limitation, ad-
justments to any or all of the number and kind of shares of stock (or other
securities) which may thereafter be issued in connection with such outstanding
Awards and adjustments to any exercise price specified in the outstanding
Awards and shall also make appropriate equitable adjustments to the number and
kind of shares of stock (or other securities) authorized by or to be granted
under the Plan. Further, the Committee, in its sole discretion, may make ap-
propriate equitable adjustments, including, without limitation, those de-
scribed in the immediately preceding sentence, in any other circumstances un-
der which the Committee deems such adjustments to be desirable. Any adjustment
made to an Incentive Stock Option hereunder, with respect to either (i) the
number or price of shares of stock subject to Incentive Stock Options or (ii)
the aggregate number of shares which may be issued pursuant to Incentive Stock
Options,
<PAGE> 8
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shall be made in a manner which will permit such option to continue to consti-
tute an Incentive Stock Option within the meaning of section 422 of the Code.
12. AMENDMENT AND TERMINATION OF THE PLAN
The Board may amend the Plan at any time and the Committee may amend any
Award (and its related Grant Document) at any time, except as otherwise spe-
cifically provided in such Grant Document; provided that no change in any
Award theretofore granted may be made that would impair the rights of the
Holder of any Award under the Plan without the consent of the Holder, and pro-
vided, further, that the Board may not, without approval of the shareholders,
amend the Plan (a) to increase the maximum aggregate number of shares which
may be issued under the Plan or (b) to change the class of individuals eligi-
ble to receive Awards under the Plan. Subject to the last sentence of Section
3 hereof, the Board, in its discretion, may terminate the Plan at any time.
13. EFFECT OF THE PLAN
(a) No Right to an Award. Neither the adoption of the Plan nor any action of
the Board or of the Committee shall be deemed to give an Employee or Director
any right to an Award except as may be evidenced by a written instrument from
the Company reflecting a grant by the Company of an Award and setting forth
the terms and conditions thereof. The Plan shall be unfunded. The Company
shall not be required to establish any special or separate fund or to make any
other segregation of funds or assets to assure the payment of any Award.
(b) No Employment/Membership Rights Conferred. Nothing contained in the Plan
shall (i) confer upon any employee any right with respect to continuation of
employment with the Company or (ii) interfere in any way with the right of the
Company to terminate his or her employment at any time. Nothing contained in
the Plan shall confer upon any Director any right with respect to continuation
of membership on the Board.
(c) Other Laws; Withholding. The Company shall not be obligated to issue any
shares of Common Stock until there has been compliance with such laws and reg-
ulations as the Company may deem applicable. No fractional shares of Common
Stock shall be delivered. The Company shall have the right to deduct in con-
nection with all Awards any taxes required by law to be withheld and to re-
quire any payments required to enable it to satisfy its withholding obliga-
tions.
(d) No Restriction on Corporate Action. Nothing contained in the Plan shall
be construed to prevent the Company from taking any corporate action which is
deemed by the Company to be appropriate or in its best interests, whether or
not such action would have an adverse effect on the Plan or any Award made un-
der the Plan. No Employee, Director, beneficiary, or other person shall have
any claim against the Company as a result of any such action.
(e) Restrictions on Transfer. An Award (other than an Incentive Stock Op-
tion, which shall be subject to the transfer restrictions set forth in Section
7(g)) shall not be transferable or assignable otherwise than (i) by will or
the laws of descent and distribution, (ii) pursuant to a "qualified domestic
relations order" (as defined by the Code), (iii) with respect to Awards of
Non-Qualified Options, if such transfer is permitted in the sole discretion of
the Committee, by transfer by a Holder to a member of the Holder's Immediate
Family, to a trust solely for the benefit of the Holder and the Holder's Imme-
diate Family, or to a partnership or limited liability company whose only
partners or shareholders are the Holder and members of the Holder's Immediate
Family, or (iv) with the consent of the Committee.
<PAGE> 9
- -------------------------------------------------------------------------------
(f) Section 162(m). It is intended that the Plan comply fully with and meet
all the requirements of section 162(m) of the Code so that Options and Perfor-
mance Awards granted hereunder and, if determined by the Committee, Restricted
Stock Awards shall constitute "performance-based" compensation within the
meaning of such section. If any provision of the Plan would disqualify the
Plan or would not otherwise permit the Plan to comply with section 162(m) as
so intended, such provision shall be construed or deemed amended to conform to
the requirements or provisions of section 162(m); provided that no such con-
struction or amendment shall have an adverse effect on the economic value to a
Holder of any Award previously granted hereunder.
(g) Governing Law. This Plan shall be construed in accordance with the laws
of the State of Texas.
<PAGE> 1
AMERICAN GENERAL CORPORATION
EXHIBIT 12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
For the Years Ended December 31,
In millions, except ratios 1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
Consolidated operations:
Income before income tax expense and net dividends on
preferred
securities of subsidiaries $1,323 $1,073 $1,080
Undistributed income of equity investee - (49) (35)
Fixed charges deducted from income
Interest expense 693 643 661
Implicit interest in rents 19 20 21
- --------------------------------------------------------------------------------------------
Total fixed charges deducted from income 712 663 682
- --------------------------------------------------------------------------------------------
Earnings available for fixed charges $2,035 $1,687 $1,727
- --------------------------------------------------------------------------------------------
Fixed charges per above $ 712 $ 663 $ 682
Capitalized interest - 5 12
- --------------------------------------------------------------------------------------------
Total fixed charges 712 668 694
Dividends on preferred stock and securities 146 138 68
- --------------------------------------------------------------------------------------------
Combined fixed charges and preferred stock
dividends $ 858 $ 806 $ 762
- --------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 2.86 2.52 2.49
- --------------------------------------------------------------------------------------------
Ratio of earnings to combined fixed charges and
preferred
stock dividends 2.37 2.09 2.26
- --------------------------------------------------------------------------------------------
Consolidated operations, corporate fixed charges and
preferred stock dividends only:
Income before income tax expense and net dividends on
preferred securities of subsidiaries $1,323 $1,073 $1,080
Undistributed income of equity investee - (49) (35)
Corporate fixed charges deducted from
income - corporate
interest expense 211 183 179
- --------------------------------------------------------------------------------------------
Earnings available for fixed charges $1,534 $1,207 $1,224
- --------------------------------------------------------------------------------------------
Total corporate fixed charges per above $ 211 $ 183 $ 179
Capitalized interest related to real estate operations - 5 11
- --------------------------------------------------------------------------------------------
Total corporate fixed charges 211 188 190
Dividends on preferred stock and securities 146 138 68
- --------------------------------------------------------------------------------------------
Combined corporate fixed charges and preferred
stock dividends $ 357 $ 326 $ 258
- --------------------------------------------------------------------------------------------
Ratio of earnings to corporate fixed charges 7.28 6.41 6.45
- --------------------------------------------------------------------------------------------
Ratio of earnings to combined corporate fixed
charges and preferred stock dividends 4.30 3.70 4.74
- --------------------------------------------------------------------------------------------
American General Finance, Inc.:
Income before income tax expense $ 296 $ 204 $ 54
Fixed charges deducted from income
Interest expense 512 484 493
Implicit interest in rents 12 11 12
- --------------------------------------------------------------------------------------------
Total fixed charges deducted from income 524 495 505
- --------------------------------------------------------------------------------------------
Earnings available for fixed charges $ 820 $ 699 $ 559
- --------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.57 1.41 1.11
- --------------------------------------------------------------------------------------------
</TABLE>
AMERICAN GENERAL
22
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
AMERICAN GENERAL CORPORATION
For the three years ended December 31, 1998
Management's Discussion and Analysis should be read in conjunction with
the Consolidated Financial Statements and related Notes beginning on page 34.
Overview
American General Corporation (American General) is a diversified financial
services organization with assets of $105 billion, shareholders' equity of $8.9
billion, and market capitalization of $20.5 billion at December 31, 1998.
Operating divisions deliver a wide range of retirement services, life
insurance, and consumer finance products and services to diverse markets
through focused distribution channels.
[Bar Graph]
<TABLE>
<CAPTION>
Assets ($ in billions)
----------------------
<S> <C>
96 74.1
97 80.6
98 105.1
-----
</TABLE>
Over the last four years, American General has completed six acquisitions
with total consideration of approximately $6 billion. These acquisitions,
combined with internal growth, have doubled the company's asset base since
1994.
Financial highlights for American General and its subsidiaries
(collectively, the company) for the three years ended December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Net income $ 764 $ 542 $ 653
Net income per share (diluted) 2.96 2.19 2.63
Revenues and deposits 18,461 13,973 13,129
Assets 105,107 80,620 74,134
Shareholders' equity 8,871 7,583 6,844
-------- -------- --------
</TABLE>
Business Divisions
The company manages its business operations through three divisions, based
on products and services offered. Results of each business division include
earnings from its business operations and earnings on that amount of equity
considered necessary to support its business, and exclude goodwill
amortization, net realized investment gains, and non-recurring items. This
methodology is consistent with the manner in which management reviews division
results. Division earnings were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Retirement Services $ 466 $ 246 $ 225
Life Insurance 674 589 547
Consumer Finance 201 165 137
------ ------ ------
Division earnings $1,341 $1,000 $ 909
------ ------ ------
</TABLE>
[Pie Chart]
<TABLE>
<CAPTION>
1998 Division Earnings
----------------------
<S> <C>
Retirement Services 35%
Life Insurance 50
Consumer Finance 15
--
</TABLE>
RETIREMENT SERVICES
The Retirement Services division provides tax-deferred retirement
annuities and employer-sponsored retirement plans marketed nationwide through
more than 1,000 exclusive sales representatives to employees of educational,
health care, public sector, and other not-for-profit organizations. The
division also offers non-qualified annuities sold through a nationwide
distribution network of 18,000 financial institution representatives serving
250 banks and other financial institutions, as well as specialty brokers,
general agents, and direct marketers.
The division's earnings are a function of asset growth through sales and
deposits, investment spread, Separate Account fees, and operating expenses.
Division results were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Earnings $ 466 $ 246 $ 225
Assets
Investments 39,381 23,545 22,146
Separate Accounts 14,794 10,564 7,134
Deposits
Fixed
Tax-qualified 1,400 1,592 1,587
Non-qualified 2,509 -- --
Variable
Tax-qualified 2,356 1,728 1,249
Non-qualified 95 67 61
Operating expenses 247 160 145
------- ------- -------
</TABLE>
Acquisitions. On February 25, 1998, the company acquired the remaining 54%
equity interest of Western National Corporation. Western National is the parent
of Western National Life Insurance Company, whose name was changed to American
General Annuity. The operations of American General Annuity are included in the
Retirement Services division results effective January 1, 1998. Earnings
attributable to minority interests through February 25, 1998 are reflected as a
reduction of corporate operations.
23
<PAGE> 2
In second quarter 1998, the division acquired a block of individual
annuity business in a coinsurance transaction that increased insurance and
annuity liabilities by $2.4 billion.
Earnings. Division earnings increased 90% in 1998 and 9% in 1997. The 1998
increase of $220 million included $133 million attributable to American General
Annuity. Earnings growth was driven by acquisitions, continued asset growth,
higher investment income from prepayment of investments, and management of the
fixed investment spread. Asset growth excluding acquisitions was 17% in 1998
and 16% in 1997. This growth was due to fixed and variable deposits, interest
credited to fixed account deposits, and stock market appreciation on assets
held in Separate Accounts.
[Bar Graph]
<TABLE>
<CAPTION>
Retirement Services Earnings ($ in millions)
- --------------------------------------------
<S> <C>
96 225
97 246
98 466
---
</TABLE>
Deposits. Total deposits were $6.4 billion in 1998, compared to $3.4
billion in 1997. American General Annuity, which markets non-qualified single
premium fixed annuities primarily through financial institutions, contributed
$2.6 billion to deposits in 1998. Variable deposit growth was 37% in 1998 and
1997 and 57% in 1996, reflecting continued participant interest in equity
investments.
[Bar Graph]
<TABLE>
<CAPTION>
Deposits ($ in billions)
- ------------------------
Fixed Variable Total
----- -------- -----
<S> <C> <C> <C>
96 1.6 1.3 2.9
97 1.6 1.8 3.4
98 3.9 2.5 6.4
----- ----- -----
</TABLE>
Fixed Investment Spread. Fixed investment spread represents the difference
between the yield on invested assets and the average interest rate credited to
policyholders' fixed accounts. Investment results and crediting rates on fixed
accounts were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Net investment income $ 2,753 $ 1,706 $ 1,652
Investment yield 7.96% 7.91% 8.03%
Average crediting rate 5.87 6.16 6.23
Fixed investment spread 2.09 1.75 1.80
--------- --------- ---------
</TABLE>
Net investment income increased 61% in 1998 as a result of growth in
invested assets, including acquisitions. The increase in yield of five basis
points in 1998 relates to more active management of the division's investment
portfolio and higher income from investments called or tendered before their
maturity dates, partially offset by lower yields on new investments. The higher
yields and lower average crediting rates increased the investment spread on
fixed accounts by 34 basis points in 1998, following a decrease in 1997.
Separate Account Fees. Separate Account fees include mortality and expense
risk fees and mutual fund investment advisory fees. The increase in these fees
of $47 million, or 42%, in 1998 and $40 million, or 53%, in 1997 was largely
driven by growth in Separate Account assets of 40% in 1998 and 48% in 1997.
Variable deposit growth, market appreciation, and transfers from fixed to
variable investment options contributed to this increase in assets.
Surrenders. Policyholder surrenders are influenced by both competition and
market performance. The division's rate of policyholder surrenders for
tax-qualified accounts was 5.2% of average policyholder account balances in
1998, compared to 4.7% in 1997 and 4.4% in 1996. Factors contributing to higher
surrenders included lower average interest crediting rates on fixed accounts
and increased competition from other variable investment products. These
surrender rates were among the lowest in the industry. Traditionally,
non-qualified accounts have higher surrender rates than qualified accounts. The
policyholder surrender rate for non-qualified accounts was 10.6% in 1998, which
was lower than the preacquisition rate of 14.8% reported in 1997.
Operating Expenses. Operating expenses increased in 1998 due to the
addition of American General Annuity's operating expenses, growth in expenses
related to the division's growth in deposits, and initiatives to improve
customer service. The ratio of operating expenses to average assets improved to
.47% in 1998 from .49% in 1997 and .52% in 1996, reflecting the increase in
managed assets in excess of the increase in operating expenses.
Outlook. In 1999, the division will continue to expand its distribution
capabilities through its core retirement planning specialists and financial
institution field forces. Products and services such as mutual funds, trust
services, and retirement planning services are being expanded to respond to
individuals' retirement planning needs.
LIFE INSURANCE
The Life Insurance division provides traditional and interest-sensitive
life insurance and annuities to a broad spectrum of customers through multiple
distribution channels focused on specific market segments. The division reaches
customers through more than 33,000 independent and career agents, as well as
producer groups, independent marketing organizations, independent
broker-dealers, financial planners, and brokerage houses. In 1998, the division
continued to strengthen its distribution
24
<PAGE> 3
systems, enhance customer service, improve product offerings, and achieve
operating efficiencies.
Division earnings are a function of new premiums and deposits, investment
spread, mortality, persistency, and operating expenses. Division results were
as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Earnings $ 674 $ 589 $ 547
Assets
Investments 29,167 28,635 26,664
Separate Accounts 1,364 918 728
Insurance and annuity
liabilities 25,680 25,283 24,550
Premiums and other
considerations 3,113 3,066 2,964
Net investment income 2,240 2,099 2,016
Insurance and annuity
benefits 2,959 2,949 2,867
Operating expenses 720 730 688
------- ------- -------
</TABLE>
Acquisitions. On June 17, 1997, the company acquired USLIFE Corporation in
a merger transaction. The acquisition of USLIFE was accounted for using the
pooling of interests method. Accordingly, division results include the
operations of USLIFE for all periods presented.
The company acquired Independent Life and Home Beneficial Life on February
29, 1996 and April 16, 1997, respectively. The operations of these companies
are reported in the division from the dates of acquisition.
Earnings. Division earnings increased in 1998 and 1997 primarily due to
higher investment income and the acquisition of Home Beneficial Life, as well
as operating efficiencies.
[Bar Graph]
<TABLE>
<CAPTION>
Life Insurance Earnings ($ in millions)
---------------------------------------
<S> <C>
96 547
97 589
98 674
---
</TABLE>
Premiums and Deposits. The division's primary focus is the sale of life
insurance and annuity products to individuals. Sales and deposits of individual
life insurance and annuities were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Individual life insurance
Sales $ 612 $ 521 $ 473
Deposits 1,268 1,154 1,057
Annuities
Sales 523 429 388
Deposits 582 505 461
------ ------ ------
</TABLE>
Premiums and other considerations increased in both 1998 and 1997
primarily due to growth in sales and acquisitions. Individual life insurance
sales and deposits increased in 1998 primarily due to sales of recently
introduced variable and indexed universal life products, as well as the
division's recent entry into the corporate executive benefits market. The
increase in 1997 was due to the introduction of new products, the expansion of
producer relationships, and the addition of Home Beneficial Life.
The increase in annuity sales and deposits in 1998 and 1997 primarily
related to variable annuity sales, which increased $221 million in 1998 due to
the introduction of new products and expanded distribution efforts. This
increase was partially offset by the transfer of the structured settlement
business to the Retirement Services division and the continued decrease in
fixed annuity sales resulting from the shift in customers' preference to
equity-based products.
[Bar Graph]
<TABLE>
<CAPTION>
Life Insurance In Force ($ in billions)
---------------------------------------
<S> <C>
96 310
97 325
98 341
---
</TABLE>
Investment Spread. Investment results and interest crediting rates were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Investment yield 8.50% 8.14% 8.16%
Average crediting rate 5.96 6.05 6.07
Investment spread 2.54 2.09 2.09
---- ---- ----
</TABLE>
Net investment income and investment yield increased in 1998, primarily
due to more active management of the division's investment portfolio, higher
income on investments called or tendered before their maturity date, and lower
allocated investment expenses. The spread between investment yield and the
average rate credited to policyholders improved in 1998 due to increased yields
combined with management of crediting rates. At December 31, 1998, 59% of the
division's insurance and annuity liabilities were subject to interest crediting
rate adjustments.
Mortality and Persistency. Death claims and premium termination rates were
as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Death claims $ 991 $ 912 $ 849
Death claims per $1,000
in force 3.60 3.36 3.23
Premium termination rate 12.58% 13.55% 14.05%
-------- -------- --------
</TABLE>
The increase in death claims, included in insurance and annuity benefits,
reflected the acquisition of Home Beneficial Life and less favorable mortality
experience in 1998. Premium termination rates improved in 1998 due to
discontinuing sales of ancillary products with higher termination rates.
Overall, mortality and persistency experience was within pricing assumptions.
Operating Expenses. The ratio of operating expenses to direct premiums and
deposits was 16.1%, 17.0%, and
25
<PAGE> 4
16.8% in 1998, 1997, and 1996, respectively. The lower ratio in 1998 was
primarily due to a decrease in operating expenses and an increase in premiums
and deposits. The expense decrease was due to the ongoing consolidation and
integration of acquired companies, as well as centralization of common
functions. These cost savings were partially offset by startup costs to
introduce new products. The 1997 expense ratio reflected lower annuity deposits
and higher overall expense ratios of recently acquired companies.
Outlook. In 1999, management expects to take full advantage of the
division realignment and initiatives completed in 1997 and 1998 to focus on
providing quality products through multiple distribution channels. The existing
product portfolio will also be enhanced through the introduction of new
products designed to meet the changing needs of the division's customers and
sales professionals.
CONSUMER FINANCE
The Consumer Finance division provides a variety of consumer finance
products, including home equity and consumer loans and retail sales financing,
marketed through a nationwide network of 1,300 branch offices. Division
earnings are influenced by the amount and mix of finance receivables, credit
quality, interest spread, and operating expenses. Division results were as
follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Earnings $ 201 $ 165 $ 137
Average finance receivables 8,519 7,523 8,124
Yield on finance receivables 15.90% 16.81% 17.85%
Borrowing cost 6.55 6.80 6.88
Interest spread 9.35 10.01 10.97
Operating expenses $ 465 $ 452 $ 492
--------- --------- ---------
</TABLE>
Earnings. Division earnings increased 22% in 1998 and 20% in 1997,
primarily due to an increase in average finance receivables in 1998 and
improved credit quality in both years.
[Bar Graph]
<TABLE>
<CAPTION>
Consumer Finance Earnings ($ in millions)
-----------------------------------------
<S> <C>
96 137
97 165
98 201
---
</TABLE>
Finance Receivables. Finance receivables at December 31, 1998 were $1.6
billion higher than at year-end 1997. Average finance receivables increased 13%
during 1998 due to higher loan production in the division's branch offices and
acquisitions of real estate loan portfolios. Average finance receivables
decreased 7% during 1997 primarily due to the sale of non-strategic assets,
partially offset by growth in finance receivables.
[Bar Graph]
<TABLE>
<CAPTION>
Finance Receivables Volume ($ in billions)
------------------------------------------
Purchased Originated Total
--------- ---------- -----
<S> <C> <C> <C>
96 .9 5.5 6.4
97 .6 5.5 6.1
98 1.9 5.8 7.7
----- ----- -----
</TABLE>
Credit Quality. Since 1996, the division has focused on improving credit
quality, including using stricter underwriting standards and increasing the
proportion of real estate loans. At December 31, 1998, real estate loans
represented 60% of total finance receivables, compared to 52% at year-end 1997
and 49% at year-end 1996.
Net charge-off and delinquency ratios reflect the quality of receivables,
the success of collection efforts, and general economic conditions. Charge
offs, delinquencies, and the allowance for finance receivable losses were as
follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Charge offs $ 220 $ 270 $ 444
% of average receivables 2.60% 3.60% 5.47%
Delinquencies $ 384 $ 310 $ 317
% of finance receivables 3.75% 3.60% 3.83%
Allowance for finance
receivable losses $ 382 $ 373 $ 395
% of finance receivables 3.96% 4.65% 5.18%
-------- -------- --------
</TABLE>
The decrease in charge offs for 1998 and 1997 reflected the division's
focus on improving credit quality. The 1996 charge offs included activity
related to the portfolios sold in 1997. The 1998 increase in the delinquency
ratio was due to general economic conditions and the maturing of acquired real
estate portfolios that were primarily new originations when purchased.
In 1998 and 1997, the division reduced the allowance as a percentage of
finance receivables, based on the lower charge offs and improved credit
quality. The division maintains the allowance for finance receivable losses at
an amount that management believes is adequate to absorb anticipated losses in
the existing portfolio.
Interest Spread. The interest spread between yield and borrowing cost
decreased 66 basis points during 1998 due to declining yields, partially offset
by lower borrowing costs. Yield on finance receivables declined 91 basis points
in 1998 and 104 basis points in 1997. These decreases reflected the increased
proportion of real estate loans, which generally have lower yields due to their
higher credit quality. Although interest spread decreased, risk adjusted spread
(interest spread less charge-off ratio) increased to 6.8% in 1998, compared to
6.4% in 1997 and 5.5% in 1996, due to lower charge offs.
Operating Expenses. Operating expenses as a percentage of average finance
receivables were 5.5% in 1998 and 6.0% in 1997 and 1996. The 1998 percentage
26
<PAGE> 5
improved due to productivity improvements and the increase in average
receivables. Operating expenses increased 3% in 1998, compared to an 8%
decrease in 1997. The 1997 decrease was primarily due to the exclusion of
operating expenses associated with servicing the portfolios sold and decreased
collection expenses.
Outlook. In 1999, management anticipates that the division will grow
internally from increased marketing initiatives and will be an active acquirer
of portfolios. In addition, the division will continue its focus on credit
quality by using stringent underwriting guidelines and risk management systems
and by maintaining or increasing the proportion of real estate loans.
Investments
Investment activities are an integral part of the Retirement Services and
Life Insurance divisions' operations. The company's strategy is to maintain a
predominantly investment-grade fixed income portfolio to provide adequate
liquidity to meet cash flow requirements and to optimize investment return
through active investment management. The company's $105 billion of assets at
year-end 1998 included $69.9 billion of investments, principally supporting
insurance and annuity liabilities. Fixed maturity securities and mortgage loans
accounted for 95% of total investments.
Investment results were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Average invested assets $66,023 $52,343 $49,754
Average invested assets
excluding SFAS 115 62,587 50,708 48,272
Net investment income 5,095 4,020 3,773
Investment yield 8.00% 7.90% 7.80%
Investment yield excluding
SFAS 115 8.45% 8.16% 8.04%
------- ------- --------
</TABLE>
[Bar Graph]
<TABLE>
<CAPTION>
Average Invested Assets ($ in billions)
---------------------------------------
<S> <C>
96 49.8
97 52.3
98 66.0
----
</TABLE>
FAIR VALUE OF SECURITIES
The company's fixed maturity and equity securities are reported at fair
value in accordance with Statement of Financial Accounting Standards 115.
Accounting rules do not permit an offsetting adjustment to record at fair value
the insurance liabilities supported by these securities, thereby creating
volatility in shareholders' equity as interest rates change. Care should be
exercised in drawing conclusions based on balance sheets that are only
partially adjusted to fair value.
A decrease in interest rates and resulting increases in bond values in
1998 caused a $675 million increase in the fair value adjustment to fixed
maturity securities and a related $421 million positive adjustment to
shareholders' equity. The components of the fair value adjustment at December
31, and the 1998 change, were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 Change
- ----------- ---- ---- ------
<S> <C> <C> <C>
Fair value adjustment to
fixed maturity securities $ 3,519 $ 2,844 $ 675
Decrease in deferred policy
acquisition costs and cost
of insurance purchased (1,083) (1,062) (21)
Increase in deferred income
taxes (861) (628) (233)
Net unrealized gains ------- ------- -----
Fixed maturity securities 1,575 1,154 421
Equity securities 24 15 9
Net unrealized gains ------- ------- -----
on securities $ 1,599 $ 1,169 $ 430
------- ------- -----
</TABLE>
Decreases in interest rates in 1997 resulted in a $1.3 billion increase in
the fair value adjustment to fixed maturity securities and a $544 million
positive adjustment to shareholders' equity from year-end 1996.
FIXED MATURITY SECURITIES
At year-end 1998, fixed maturity securities primarily included $47.0
billion of corporate bonds and $13.0 billion of mortgage-backed securities
(MBSs). The average credit rating of the fixed maturity securities was A+ at
year-end 1998, 1997, and 1996. Average ratings by category at December 31, 1998
were as follows:
<TABLE>
<CAPTION>
Average
In millions 1998 Rating
- ----------- ---- ------
<S> <C> <C> <C>
Investment grade $46,418 74% A
Mortgage-backed 13,019 21 AAA
Below investment grade 3,294 5 BB-
------- ----
Total fixed maturity
securities $62,731 100% A+
------- ----
</TABLE>
Mortgage-Backed Securities. MBSs at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
CMOs $ 9,398 $8,354 $ 9,330
Pass-through securities 3,013 673 1,053
Commercial MBSs 608 401 259
------- ------ -------
Total MBSs $13,019 $9,428 $10,642
------- ------ -------
</TABLE>
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 Federal agencies. These CMOs are highly liquid and
offer higher yields than corporate debt securities of similar credit quality
and expected average lives.
27
<PAGE> 6
The principal risks inherent in holding MBSs are prepayment and extension
risks arising from changes in market interest rates. In declining interest rate
environments, the mortgages underlying CMOs are prepaid more rapidly than
anticipated, causing early repayment of CMOs. In rising interest rate
environments, 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 the company's MBSs increased to $1.2 billion in 1998 from $496
million in 1997. At current interest rate levels, repayments are expected to
increase slightly in 1999.
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:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Planned Amortization Class $4,622 $4,520 $5,172
Sequential 3,948 2,685 2,967
Other 828 1,149 1,191
------ ------ ------
Total CMOs $9,398 $8,354 $9,330
------ ------ ------
</TABLE>
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.
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.
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.
During 1998, the company entered into dollar roll agreements as part of
its strategy to increase investment yields, resulting in increased holdings of
pass-through securities. Dollar rolls are agreements to sell MBSs and
repurchase substantially the same securities at a specified price and date in
the future. At December 31, 1998, the company did not have any dollar roll
agreements outstanding.
[Pie Chart]
<TABLE>
<CAPTION>
1998 Fixed Maturity Securities by Rating
----------------------------------------
<S> <C>
AAA 26%
AA 10
A 34
BBB 24
Below investment grade 6
--
</TABLE>
Below Investment Grade Securities. Below investment grade securities have
credit ratings below BBB-. Below investment grade securities were 5% of
invested assets at year-end 1998, 4% at year-end 1997, and 3% at year-end 1996.
The company invests in below investment grade securities to enhance the overall
yield of the portfolio. The risks associated with below investment grade
securities are minimized by limiting the company's exposure to any one issuer
and by closely monitoring the credit worthiness of such issuers. Investment
income from below investment grade securities was $287 million (10.8% yield) in
1998, $178 million (9.6% yield) in 1997, and $161 million (9.5% yield) in 1996.
Realized investment gains (losses) were immaterial.
Non-Performing Securities. 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 1998, 1997, and 1996.
MORTGAGE LOANS
Mortgage loans on real estate, consisting primarily of loans on office and
retail properties, represented 5% of invested assets at year-end 1998. Mortgage
loan statistics at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Mortgage loans $ 3,402 $ 3,326 $ 3,312
Allowance for losses (34) (54) (84)
------- ------- -------
Mortgage loans, net $ 3,368 $ 3,272 $ 3,228
------- ------- -------
Allowance for losses
% of mortgage loans 1.0% 1.6% 2.5%
Restructured $ 71 $ 115 $ 146
% of mortgage loans 2.1% 3.5% 4.4%
Yield on restructured loans 7.9% 8.6% 8.3%
Delinquent (60+ days) $ 21 $ 20 $ 23
% of mortgage loans .6% .6% .7%
Watch list loans $ 83 $ 128 $ 286
% of mortgage loans 2.4% 3.8% 8.6%
------- ------- -------
</TABLE>
Restructured and Delinquent Loans. The company's percentage of
restructured loans to total mortgage loans was lower than the life insurance
industry average of 3.5%. The company's percentage of delinquent mortgage loans
was comparable to the industry average of 0.6%. These industry averages are as
of September 30, 1998, the latest date for which information is available.
Watch List Loans. Mortgage loans are placed on the
28
<PAGE> 7
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. The
decreases in watch list loans in 1998 and 1997 were due to improvements in the
real estate market. While the watch list loans may be predictive of future
non-performing loans, the company does not anticipate a significant effect on
operations, liquidity, or capital from these loans.
CAPITAL RESOURCES
To facilitate analysis of capital resources, corporate capital and capital
of the business divisions are discussed separately below.
Corporate Capital
Total capital of the parent company is referred to as "corporate capital."
Since American General Corporation is a holding company, the level of corporate
capital is determined primarily by the required equity of its business
divisions, while the mix of corporate capital between debt and equity is
influenced by overall corporate strategy and structure.
[Pie Chart]
<TABLE>
<CAPTION>
1998 Corporate Capital
----------------------
<S> <C>
Corporate Debt 23%
Redeemable Equity 15
Shareholders' Equity 62
--
</TABLE>
American General's target capital structure consists of 25% corporate
debt, 15% redeemable equity, and 60% shareholders' equity. At year-end 1998,
corporate capital totaling $11.7 billion, excluding the fair value adjustment
on securities, consisted of $2.7 billion corporate debt (23%), $1.7 billion
redeemable equity (15%), and $7.3 billion shareholders' equity (62%).
Corporate Debt. American General's target debt structure consists of
40%-50% variable rate debt. At December 31, 1998, variable rate debt as a
percentage of total corporate debt was 44%, including the effect of interest
rate swap agreements that converted floating-rate debt to a fixed rate.
American General's corporate debt ratings at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Standard Duff &
& Poor's Phelps Moody's
-------- ------ -------
<S> <C> <C> <C>
Commercial paper A-1+ D-1+ P-1
(Highest) (Highest) (Highest)
Long-term debt AA- AA- A2
(Strong) (Strong) (Strong)
-------- -------- --------
</TABLE>
Redeemable Equity. During the last three years, the company issued
redeemable equity totaling $1.0 billion through two subsidiary trusts. These
securities are recorded on the consolidated balance sheet as preferred
securities within redeemable equity. The proceeds were used primarily to reduce
short-term debt issued in connection with corporate development activities.
Shareholders' Equity. During the last three years, the company issued $988
million of common stock and $85 million of convertible preferred stock in
connection with acquisitions. Since 1987, American General has repurchased
116.7 million common shares for an aggregate cost of $2.8 billion. Future
repurchase activity will be based on the company's corporate development
activities, capital management strategy, and fluctuations in its common stock
price.
RETIREMENT SERVICES AND LIFE INSURANCE
Risk-Based Capital. The amount of statutory equity required to support the
business of American General's retirement services and 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 retirement
services and life insurance companies is 2.5 times the Company Action Level RBC
(or 5.0 times the Authorized Control Level RBC). At December 31, 1998, all of
American General's principal retirement services and life insurance companies
had statutory equity equal to or in excess of the target.
Financial Strength Ratings. Rating agencies use the NAIC approach as a
factor in assigning an insurance company its financial strength rating. This
rating serves as an indicator of the insurance company's ability to meet its
future obligations to policyholders. At December 31, 1998, each of the
company's principal retirement services and life insurance subsidiaries was
rated AA+ (Very Strong) by Standard & Poor's; AA+ (Very High) by Duff & Phelps;
Aa3 (Excellent) by Moody's (except for VALIC, which was rated Aa2); and A+
(Superior) by A.M. Best.
29
<PAGE> 8
CONSUMER FINANCE
The Consumer Finance division's capital varies directly with the amount of
finance receivables. Consumer Finance capital of $10.1 billion at year-end 1998
included $8.9 billion of Consumer Finance debt, which was not guaranteed by the
parent company, and $1.2 billion of equity.
The capital mix of Consumer Finance debt and equity is based primarily
upon maintaining leverage at a level that supports cost-effective funding. The
Consumer Finance division's target ratio of debt to tangible net worth, a
standard measure of financial risk in the consumer finance industry, is 7.5 to
1. The ratio equaled the target at year-end 1998 and 1997.
Debt Ratings. Consumer Finance debt ratings at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Standard Duff &
& Poor's Phelps Moody's
-------- ------ -------
<S> <C> <C> <C>
Commercial paper A-1 D-1+ P-1
(Strong) (Highest) (Highest)
Long-term debt A+ A+ A2
(Strong) (Strong) (Strong)
-------- -------- --------
</TABLE>
Asset/Liability Management
The company manages its exposure to fluctuations in interest rates through
its asset/liability management program, which is designed to achieve liquidity
and profitability objectives by maintaining a reasonable balance in the
durations of assets and liabilities. Asset/liability management is performed on
an ongoing basis for each subsidiary as well as on an aggregate basis.
RETIREMENT SERVICES AND LIFE INSURANCE
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. As a result, the company has maintained
overall margins on interest-sensitive products, despite declining market
interest rates.
The company's ability to manage interest crediting rates and durations is
largely due to the nature of its insurance and annuity products. The company
had the ability, subject to certain minimum rate guarantees, to adjust interest
crediting rates on approximately 83% of its insurance and annuity liabilities
at December 31, 1998. Additionally, the company uses swaptions (options to
enter into swap agreements) to limit its exposure to reduced spreads between
interest crediting rates and investment yields during prolonged periods of
significant increases or decreases in market interest rates.
[Bar Graph]
<TABLE>
<CAPTION>
Insurance Liabilities with Adjustable Crediting Rates
-----------------------------------------------------
<S> <C>
96 79%
97 72
98 83
--
</TABLE>
Insurance and annuity liabilities at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Retirement annuities $36,792 $21,995 $21,067
Interest-sensitive life 6,787 6,250 5,646
Traditional life 6,662 6,655 6,339
Participating life 3,515 3,541 3,485
Other annuities 6,576 7,061 7,391
Other 2,512 2,157 2,094
------- ------- -------
Total insurance and
annuity liabilities $62,844 $47,659 $46,022
------- ------- -------
</TABLE>
The company establishes investment portfolio objectives that generally
reflect the duration and cash flow characteristics of the insurance and annuity
liabilities being supported. The company manages its investment portfolio by
aligning characteristics of investment purchases with specific portfolio
objectives and, to a lesser extent, through portfolio restructuring actions and
the use of derivative financial instruments. The estimated duration of the
company's insurance and annuity liabilities is in the range of 4.9 to 5.9
years, while the estimated duration of the assets supporting these liabilities
is 5.4 years.
Cash flow testing of assets and liabilities is performed under multiple
interest rate scenarios to evaluate the appropriateness of the company's
investment portfolios relative to its insurance reserves. This cash flow
testing performed as of December 31, 1998 indicated that the company's
insurance subsidiaries would have sufficient cash flows to meet their insurance
obligations under the broad range of selected scenarios.
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.
SENSITIVITY ANALYSIS
The fair values of certain of the company's assets and liabilities are
sensitive to changes in market interest rates. The impact of changes in
interest rates would be reduced by the fact that increases (decreases) in fair
values of assets would be partially offset by corresponding changes in fair
values of liabilities. In aggregate, the estimated impact
30
<PAGE> 9
of an immediate and sustained 100 basis point increase or decrease in interest
rates on the fair values of the company's interest-rate sensitive financial
instruments would not be material to the company's financial position. The
estimated increases (decreases) in fair values of interest-rate sensitive
financial instruments at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
In millions +100 bp -100 bp +100 bp -100 bp
- ----------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Assets
Fixed maturity
securities $(3,358) $3,550 $(2,382) $3,047
Mortgage loans (117) 55 (114) 53
Policy loans (87) 99 (73) 83
Finance receivables (253) 275 (199) 208
Liabilities
Insurance investment
contracts (1,508) 1,916 (1,158) 1,262
Long-term debt
Corporate (91) 102 (78) 81
Consumer Finance (189) 199 (151) 163
-------- ------- -------- -------
</TABLE>
The changes in fair values were derived by modeling estimated cash flows
of certain of the company's assets and liabilities. These cash flows do not
consider new investment purchases, loan originations, product sales, or debt
issuances. The cash flows were adjusted to reflect changes in prepayments,
calls, surrenders, and interest crediting rates in response to the changes in
interest rates, as well as the effects of derivative financial instruments used
as hedges.
Care should be exercised in drawing conclusions based on the above
analysis. While these changes in fair values provide a measure of interest rate
sensitivity, they are not representative of management's expectations about the
impact of interest rate changes. A meaningful assessment of the company's net
interest rate exposure cannot be made without a revaluation of the company's
redeemable equity or other insurance and annuity liabilities, which are not
considered to be interest-rate sensitive financial instruments under current
accounting standards. At December 31, 1998, insurance investment contracts
represented 65% of the company's insurance and annuity liabilities. The company
has the ability to adjust interest crediting rates on a significant portion of
the remaining 35% of insurance and annuity liabilities.
This analysis is also based on the company's exposure at a particular
point in time, without regard to the impact of certain business decisions or
initiatives that management would likely undertake to mitigate or eliminate
some or all of the adverse effects of the modeled scenarios. Additionally, this
analysis does not reflect the impact of fair value fluctuations on deferred
income taxes, deferred policy acquisition costs, or cost of insurance
purchased.
Liquidity
The company's overall liquidity is based on cash flows from the business
divisions 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
The primary sources of cash for the parent company include net dividends
from subsidiaries and the proceeds from issuance of debt and redeemable equity.
During 1998, the parent company received $641 million of net dividends from
subsidiaries. While state insurance regulations and long-term debt covenants
restrict the amount of dividends subsidiaries may pay to the parent company,
these restrictions are not expected to affect American General's ability to
meet its cash obligations in 1999.
The parent primarily uses cash for acquisitions, to pay dividends to
shareholders, to pay interest on corporate debt, and to repurchase common
stock. American General repurchased 3.0 million shares of its common stock at a
cost of $195 million during 1998, 9.9 million shares at a cost of $466 million
during 1997, and 5.3 million shares at a cost of $187 million in 1996.
RETIREMENT SERVICES
Principal sources of cash for the Retirement Services division were as
follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Operating activities $1,625 $1,058 $ 1,202
Fixed policyholder account
deposits, net of withdrawals 626 6 (181)
Variable account deposits, net
of withdrawals 2,294 1,991 1,733
------ ------ ------
</TABLE>
Net cash provided by operating activities increased by $567 million in
1998, primarily due to the acquisition of American General Annuity. The 1998
increase in net fixed policyholder account deposits was due to the acquisition
of American General Annuity, which primarily markets fixed annuities. The
increases in net variable account deposits for 1998 and 1997 related to
policyholders continuing to seek higher returns in equity-based investments,
including the company's Separate Accounts. Because the investment risk on
variable accounts lies predominantly 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 net dividends paid
to the parent. The subsidiaries in the Retirement Services division received
net capital contributions of $99 million in 1998, primarily to support
increased target capital related to the division's acquisition activities. The
subsidiaries paid
31
<PAGE> 10
net dividends of $129 million in 1997 and $36 million in 1996.
LIFE INSURANCE
Principal sources of cash for the Life Insurance division were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Operating activities $361 $453 $671
Fixed policyholder account
deposits, net of withdrawals 57 89 301
Variable account deposits, net
of withdrawals 356 103 34
---- ---- ----
</TABLE>
Net cash provided by operating activities decreased by $92 million in 1998
primarily due to payment of restructuring and litigation costs. In 1998 and
1997, 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.
The major uses of cash were the net purchase of investments necessary to
support increases in insurance and annuity liabilities and net dividends paid
to the parent. The subsidiaries in the Life Insurance division paid net
dividends of $679 million in 1998, compared to $586 million in 1997 and $373
million in 1996.
CONSUMER FINANCE
Principal sources of cash for the Consumer Finance division were as
follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Operating activities $ 439 $ 516 $ 590
Increase (decrease) in debt 1,593 (366) 155
Sale of non-strategic assets -- 733 --
------ ------ ------
</TABLE>
Net cash provided by operating activities decreased in 1998 due to the
inclusion in 1997 of operations related to non-strategic assets. Cash provided
by borrowings increased in 1998 due to the growth in finance receivables. Cash
provided by the sale of non-strategic assets resulted in a decrease in
borrowings in 1997.
[Bar Graph]
<TABLE>
<CAPTION>
Finance Receivables Outstanding ($ in billions)
-----------------------------------------------
<S> <C>
96 7.6
97 8.0
98 9.7
---
</TABLE>
The major uses of cash were to fund finance receivables growth and net
dividends paid to the parent company. Net cash used to fund finance receivables
was $1.8 billion in 1998, up from $793 million in 1997 and $453 million in
1996. Capital contributions received from the parent company, net of dividends
paid, totaled $47 million in 1998. Net dividends paid to the parent company
totaled $80 million in 1997 and $139 million in 1996.
Regulation and Other
REGULATION
Insurance regulators monitor capital adequacy and market conduct to
protect policyholders. Market conduct includes sales and advertising practices,
agent licensing and compensation, policyholder service, complaint handling,
underwriting, and claims practices. As a result of increased regulatory
scrutiny, market conduct compliance costs have increased for American General's
insurance subsidiaries. See Notes 3.1 and 17.2 to the consolidated financial
statements for discussion of the proposed settlements of purported class action
lawsuits related to market conduct.
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.
YEAR 2000
Internal Systems. American General has numerous technology systems that
are managed on a decentralized basis. The company's Year 2000 readiness efforts
are therefore being undertaken by its key business units with centralized
oversight. Each business unit has developed and is implementing a plan to
minimize the risk of a significant negative impact on its operations.
While the specifics of the plans vary, the plans include the following
activities: (1) perform an inventory of the company's information technology
and non-information technology systems; (2) assess which items in the inventory
may expose the company to business interruptions due to Year 2000 issues; (3)
reprogram or replace systems that are not Year 2000 ready; (4) test systems to
prove that they will function into the next century as they do currently; and
(5) return the systems to operations. As of December 31, 1998, these activities
have been completed for substantially all of the company's critical systems,
making them Year 2000 ready. Vendor upgrades for a small number of systems are
expected in the first half of 1999; therefore, activities (3) through (5) are
ongoing for these systems. The company will continue to test its systems
throughout 1999 to maintain Year 2000 readiness.
Third Party Relationships. The company has relationships with various
third parties who also must be Year 2000 ready. These third parties provide (or
receive) resources and services to (or from) the company and include
organizations with which the company exchanges information. Third parties
include vendors of hardware, software, and information services; providers of
infra-structure services such as voice and data communications and utilities
for office facilities; investors; customers; distribution channels; and joint
venture partners. Third parties differ from internal systems in that the
company
32
<PAGE> 11
exercises less, or no, control over their Year 2000 readiness. The company has
developed a plan to assess and attempt to mitigate the risks associated with
the potential failure of third parties to achieve Year 2000 readiness. The plan
includes the following activities: (1) identify and classify third party
dependencies; (2) research, analyze, and document Year 2000 readiness for
critical third parties; and (3) test critical hardware and software products
and electronic interfaces. As of December 31, 1998, the company had identified
and assessed approximately 800 critical third party dependencies. A more
detailed evaluation will be completed during first quarter 1999 as part of the
company's contingency planning efforts. Due to the various stages of third
parties' Year 2000 readiness, the company's testing activities will extend
throughout 1999.
Contingency Plans. The company has commenced contingency planning to
reduce the risk of Year 2000-related business failures. The contingency plans,
which address both internal systems and third party relationships, include the
following activities: (1) evaluate the consequences of failure of business
processes with significant exposure to Year 2000 risk; (2) determine the
probability of a Year 2000-related failure for those processes that have a high
consequence of failure; (3) develop an action plan to complete contingency
plans for those processes that rank high in consequence and probability of
failure; and (4) complete the applicable action plans. The company is currently
developing contingency plans and expects to substantially complete all
contingency planning activities by April 30, 1999.
Risks and Uncertainties. Based on its plans to make internal systems ready
for Year 2000, to deal with third party relationships, and to develop
contingency actions, the company believes that it will experience at most
isolated and minor disruptions of business processes following the turn of the
century. Such disruptions are not expected to have a material effect on the
company's future results of operations, liquidity, or financial condition.
However, due to the magnitude and complexity of this project, risks and
uncertainties exist and the company is not able to predict a most reasonably
likely worst case scenario. If Year 2000 readiness is not achieved due to
nonperformance by significant third party vendors, the company's failure to
maintain critical systems as Year 2000 ready, failure of critical third parties
to achieve Year 2000 readiness on a timely basis, or other unforeseen
circumstances in completing the company's plans, the Year 2000 issues could
have a material adverse impact on the company's operations following the turn
of the century.
Costs. Through December 31, 1998, the company has incurred and expensed
$80 million (pretax) related to Year 2000 readiness, including $65 million
incurred during 1998. The 1998 expense includes $21 million, $29 million, and
$6 million related to the Retirement Services, Life Insurance, and Consumer
Finance divisions, respectively. The 1998 expenses were excluded from division
earnings, consistent with the manner in which management reviewed division
results. The company currently anticipates that it will incur future costs of
approximately $15 million to $20 million (pretax) to maintain Year 2000
readiness, complete Year 2000 work on non-critical systems and third party
relationships, and complete contingency planning activities. In addition, the
company accelerated the planned replacement of certain systems as part of the
Year 2000 plans. Costs of the replacement systems were capitalized and are
being amortized over their useful lives, in accordance with the company's
normal accounting policies. The total of such capitalized costs was
approximately $5 million.
LITIGATION AND OTHER CHARGES
See Note 3 to the consolidated financial statements for information
regarding proposed litigation settlements, merger related costs, sale of
non-strategic assets, and write-down of group business. Also see Note 17.2 to
the consolidated financial statements for specific legal proceedings involving
the company.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information contained herein
relative to markets for the company's products and trends in the company's
operations or financial results, as well as other statements including words
such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and
other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
are made based upon management's current expectations and beliefs concerning
future developments and their potential effects upon the company. There can be
no assurance that future developments affecting the company will be those
anticipated by management. Actual results may differ materially from those
included in the forward-looking statements.
These forward-looking statements involve risks and uncertainties
including, but not limited to, the following: (1) changes in general economic
conditions, including the performance of financial markets and interest rates;
(2) customer responsiveness to both new products and distribution channels; (3)
competitive, regulatory, or tax changes that affect the cost of, or demand for,
the company's products; (4) the company's ability or the ability of third
parties to achieve and maintain Year 2000 readiness for significant systems and
operations; and (5) adverse litigation results or resolution of litigation,
including market conduct litigation. Investors are also directed to other risks
and uncertainties discussed in other documents filed by the company with the
Securities and Exchange Commission. The company undertakes no obligation to
update or revise any forward-looking information, whether as a result of new
information, future developments, or otherwise.
33
<PAGE> 12
CONSOLIDATED STATEMENT OF INCOME
AMERICAN GENERAL CORPORATION
<TABLE>
<CAPTION>
For the years ended December 31
In millions, except per share data 1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Revenues Premiums and other considerations $ 3,605 $ 3,362 $ 3,244
Net investment income 5,095 4,020 3,773
Finance charges 1,354 1,265 1,450
Realized investment gains 6 40 62
Equity in earnings of Western National Corporation -- 54 40
Other 191 186 145
-------- -------- --------
Total revenues 10,251 8,927 8,714
-------- -------- --------
Benefits and Insurance and annuity benefits 5,159 4,332 4,218
Expenses Operating costs and expenses 1,591 1,423 1,383
Commissions 1,063 873 848
Change in deferred policy acquisition costs and
cost of insurance purchased (213) (100) (124)
Provision for finance receivable losses 212 248 417
Goodwill amortization 45 24 22
Interest expense
Corporate 181 158 162
Consumer Finance 512 461 493
Other charges
Litigation settlements 378 50 --
Merger-related costs -- 272 --
Loss on sale of non-strategic assets -- 113 165
Write-down of group business -- -- 50
-------- -------- --------
Total benefits and expenses 8,928 7,854 7,634
-------- -------- --------
Earnings Income before income tax expense 1,323 1,073 1,080
Income tax expense 459 447 387
-------- -------- --------
Income before minority interest and net dividends
on preferred securities of subsidiaries 864 626 693
Minority interest in net income of Western
National Corporation 11 -- --
Net dividends on preferred securities of subsidiaries 89 84 40
-------- -------- --------
Net income $ 764 $ 542 $ 653
-------- -------- --------
Share Data Net income per share
Basic $ 3.02 $ 2.21 $ 2.67
Diluted 2.96 2.19 2.63
-------- -------- --------
</TABLE>
See Notes to Financial Statements.
34
<PAGE> 13
CONSOLIDATED BALANCE SHEET
AMERICAN GENERAL CORPORATION
<TABLE>
<CAPTION>
At December 31
In millions, except share data 1998 1997 1996
- ------------------------------ ---- ---- ----
<S> <C> <C> <C>
Assets Investments
Fixed maturity securities (amortized cost:
$59,212; $44,961; $42,867) $ 62,731 $ 47,747 $ 44,355
Mortgage loans on real estate 3,368 3,272 3,228
Equity securities (cost: $288; $93; $111) 325 116 137
Policy loans 2,329 2,156 2,011
Investment real estate 226 233 626
Other long-term investments 230 176 210
Short-term investments 654 306 265
--------- --------- ---------
Total investments 69,863 54,006 50,832
--------- --------- ---------
Cash 341 263 176
Assets held in Separate Accounts 16,158 11,482 7,863
Finance receivables, net 9,275 7,639 7,230
Deferred policy acquisition costs 3,253 2,718 2,954
Cost of insurance purchased 956 680 755
Goodwill 1,590 677 605
Investment in Western National Corporation -- 583 535
Other assets 3,671 2,572 3,184
--------- --------- ---------
Total assets $ 105,107 $ 80,620 $ 74,134
--------- --------- ---------
Liabilities Insurance and annuity liabilities $ 62,844 $ 47,659 $ 46,022
Liabilities related to Separate Accounts 16,158 11,482 7,863
Debt (short-term)
Corporate ($1,607; $575; $631) 2,743 1,916 2,102
Consumer Finance ($3,686; $3,255; $3,131) 8,863 7,266 7,630
Income tax liabilities 1,543 1,380 1,078
Other liabilities 2,357 1,608 1,368
--------- --------- ---------
Total liabilities 94,508 71,311 66,063
--------- --------- ---------
Redeemable Company-obligated mandatorily redeemable
Equity preferred securities of subsidiaries holding
solely company subordinated notes
Non-convertible 1,480 1,479 982
Convertible 248 247 245
--------- --------- ---------
Total redeemable equity 1,728 1,726 1,227
--------- --------- ---------
Shareholders' Convertible preferred stock (shares issued and
Equity outstanding: 2,317,701; 2,317,701; 2,323,722) 85 85 85
Common stock (shares issued: 269,298,493;
259,135,053; 283,738,546; outstanding:
251,804,294; 243,206,215; 241,170,903) 939 326 572
Cost of treasury stock (759) (621) (860)
Retained earnings 7,007 6,624 6,420
Accumulated other comprehensive income 1,599 1,169 627
--------- --------- ---------
Total shareholders' equity 8,871 7,583 6,844
--------- --------- ---------
Total liabilities and equity $ 105,107 $ 80,620 $ 74,134
--------- --------- ---------
</TABLE>
See Notes to Financial Statements.
35
<PAGE> 14
Consolidated Statement of Shareholders' Equity
- --------------------------------------------------------------------------------
AMERICAN GENERAL CORPORATION
<TABLE>
<CAPTION>
For the years ended December 31
In millions, except per share data 1998 1997 1996
- ---------------------------------- ------- ------- -------
<S> <C> <C> <C> <C>
Convertible Balance at beginning of year $ 85 $ 85 $ --
Preferred Issuance for acquisition -- -- 85
Stock ------- ------- -------
Balance at end of year 85 85 85
------- ------- -------
Common Balance at beginning of year 326 572 532
Stock Issuance of common shares for acquisition 580 -- --
Stock options issued for acquisition 37 -- --
Retirement of USLIFE treasury shares -- (346) --
Issuance of treasury shares for acquisitions and other (4) 100 40
------- ------- -------
Balance at end of year 939 326 572
------- ------- -------
Cost of Balance at beginning of year (621) (860) (790)
Treasury Share repurchases (195) (466) (187)
Stock Issuance for acquisitions -- 304 104
Retirement of USLIFE treasury shares -- 346 --
Issuance under employee benefit plans and other 57 55 13
------- ------- -------
Balance at end of year (759) (621) (860)
------- ------- -------
Retained Balance at beginning of year 6,624 6,420 6,071
Earnings Net income 764 542 653
Cash dividends (per share)
Preferred ($2.57; $2.57; $1.94) (6) (6) (5)
Common ($1.50; $1.40; $1.30) (375) (329) (299)
Other -- (3) --
------- ------- -------
Balance at end of year 7,007 6,624 6,420
------- ------- -------
Accumulated Balance at beginning of year 1,169 627 1,296
Other Change in net unrealized gains (losses) on securities 430 542 (669)
Comprehensive ------- ------- -------
Income Balance at end of year 1,599 1,169 627
------- ------- -------
Shareholders'
Equity Balance at end of year $ 8,871 $ 7,583 $ 6,844
------- ------- -------
</TABLE>
Consolidated Statement of Comprehensive Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C> <C>
Comprehensive Net income $ 764 $ 542 $ 653
Income Other comprehensive income
Gross change in unrealized gains (losses) on securities
(pretax: $591; $811; ($981)) 381 530 (638)
Less: gains (losses) realized in net income (49) (12) 31
------- ------- -------
Change in net unrealized gains (losses) on
securities (pretax: $668; $830; ($1,028)) 430 542 (669)
------- ------- -------
Comprehensive income (loss) $ 1,194 $ 1,084 $ (16)
------- ------- -------
</TABLE>
See Notes to Financial Statements
36
<PAGE> 15
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
American General Corporation
<TABLE>
<CAPTION>
For the years ended December 31
In millions 1998 1997 1996
- ------------------------------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Net income $ 764 $ 542 $ 653
Activities Reconciling adjustments
Insurance and annuity liabilities 1,619 1,082 1,351
Deferred policy acquisition costs and
cost of insurance purchased (213) (100) (124)
Provision for finance receivable losses 212 248 417
Loss on sale of non-strategic assets -- 113 165
Realized investment gains (6) (40) (62)
Other, net (165) (200) (121)
-------- -------- --------
Net cash provided by operating activities 2,211 1,645 2,279
-------- -------- --------
Investing Investment purchases (14,504) (11,010) (10,678)
Activities Investment dispositions and repayments 12,155 10,290 9,280
Finance receivable originations and purchases (6,589) (5,136) (5,339)
Finance receivable principal payments received 4,775 4,343 4,886
Net decrease (increase) in short-term investments 444 7 (90)
Acquisitions (591) (283) (232)
Sale of non-strategic assets -- 1,047 --
Other, net (252) (99) (205)
-------- -------- --------
Net cash used for investing activities (4,562) (841) (2,378)
-------- -------- --------
Financing Retirement Services and Life Insurance
Activities Policyholder account deposits 4,981 3,068 2,996
Policyholder account withdrawals (4,298) (2,973) (2,876)
-------- -------- --------
Total Retirement Services and Life Insurance 683 95 120
-------- -------- --------
Consumer Finance
Net increase in short-term debt 431 124 641
Long-term debt issuances 2,028 731 124
Long-term debt redemptions (866) (1,221) (610)
-------- -------- --------
Total Consumer Finance 1,593 (366) 155
-------- -------- --------
Corporate
Net increase (decrease) in short-term debt 937 (56) (145)
Long-term debt redemptions (354) (133) (50)
Issuances of preferred securities of subsidiaries -- 498 495
Common stock repurchases (195) (467) (191)
Dividends on common and preferred stock (381) (335) (304)
Other, net 146 47 (32)
-------- -------- --------
Total Corporate 153 (446) (227)
-------- -------- --------
Net cash provided by (used for)
financing activities 2,429 (717) 48
-------- -------- --------
Net Change Net increase (decrease) in cash 78 87 (51)
in Cash Cash at beginning of year 263 176 227
-------- -------- --------
Cash at end of year $ 341 $ 263 $ 176
-------- -------- --------
</TABLE>
See Notes to Notes to Financial Statements
37
<PAGE> 16
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 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 were classified as available-for-sale and recorded at fair value at
December 31, 1998, 1997, and 1996. After adjusting related balance sheet
accounts as if unrealized gains (losses) had been realized, the net adjustment
is recorded in accumulated other comprehensive income 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's amortized cost is reduced to its fair value, and the
reduction is recorded as a realized loss.
During 1998, the company maintained a trading portfolio of certain fixed
maturity securities. Trading securities are recorded at fair value. Unrealized
gains (losses), as well as realized gains (losses), are included in net
investment income. The company held no trading securities at December 31, 1998,
and trading securities did not have a material effect on net investment income.
Mortgage Loans. Mortgage loans are reported at amortized cost, net of an
allowance for losses. The allowance for losses covers all 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
investment or available for sale, based on management's intent. Real estate held
for investment is carried at cost, less accumulated depreciation and impairment
write-downs. Real estate available for sale is carried at the lower of cost
(less accumulated depreciation, if applicable) or fair value less cost to sell.
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.
Income on mortgage-backed securities is recognized using a constant
effective yield based on estimated prepayments of the underlying mortgages. If
actual prepayments differ from estimated prepayments, a new effective yield is
calculated and the net investment in the security is adjusted accordingly. The
adjustment is recognized in net investment income.
Realized Investment Gains. Realized investment gains (losses) are
recognized using the specific identification method.
1.3 Separate Accounts
Separate Accounts are assets and liabilities associated with certain
contracts, principally annuities, for which the investment risk lies
predominantly 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.
1.4 Finance Receivables
Finance Charges. Finance charges 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, retail sales contracts,
and revolving retail, and for six months for private label receivables.
Extension fees, late charges, and prepayment penalties are recognized as revenue
when received.
38
<PAGE> 17
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, any remaining deferral is
charged or credited to revenue.
Losses on Finance Receivables. The company's policy is to charge off
finance receivables, except real estate loans, for which minimal or no
collections have been made for six months. For real estate loans, 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.
Management periodically evaluates the portfolio on a pooled basis and considers
numerous factors including economic conditions, portfolio composition, and loss
and delinquency experience in its evaluation of the allowance.
1.5 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 accumulated other
comprehensive income 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.
1.6 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 4.0% 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.
1.7 Goodwill
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. If facts and circumstances suggest that a subsidiary's goodwill is
impaired, the company assesses the fair value of the underlying business based
on an independent appraisal and reduces goodwill to an amount that results in
the book value of the subsidiary approximating fair value.
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,
1998.
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 approximately 10% of life
insurance in force and premiums and other considerations in 1998, 1997, and
1996.
The portion of earnings allocated to participating policyholders that
cannot be expected to inure to shareholders is excluded from net income and
shareholders'
39
<PAGE> 18
equity. Dividends to be paid on participating life insurance contracts are
determined annually based on estimates of the contracts' earnings. Policyholder
dividends were $90 million, $95 million, and $94 million in 1998, 1997, and
1996, respectively.
1.11 Reinsurance
The company limits its exposure to loss on any single insured to $2.5
million by ceding additional risks through reinsurance contracts with other
insurers. The company diversifies its risk of reinsurance loss by using a number
of reinsurers that have strong financial strength ratings. If a reinsurer could
not meet its obligations, the company remains liable. The likelihood of a
material reinsurance liability not being met by a reinsurer is considered to be
remote.
A receivable is recorded for the portion of benefits paid and insurance
liabilities that have been reinsured. Reinsurance recoveries on ceded
reinsurance contracts were $251 million, $131 million, and $166 million during
1998, 1997, and 1996, 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:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ------------------------- ------- ------- -------
<S> <C> <C> <C>
Direct premiums and other
considerations $ 3,717 $ 3,542 $ 3,427
Reinsurance assumed 373 119 125
Reinsurance ceded (485) (299) (308)
------- ------- -------
Premiums and other
considerations $ 3,605 $ 3,362 $ 3,244
------- ------- -------
</TABLE>
1.12 Stock-Based Compensation
The company's long-term incentive plans provide for the award of stock
options, restricted stock awards, and performance awards to key employees and
directors. Stock options constitute the majority of awards. Generally, no
expense is recognized at the grant date since the market price equals the
exercise price.
For restricted stock and performance awards, the grant date market value is
amortized to expense over the vesting period. For those awards with performance
criteria, the expense is adjusted to reflect changes in market value of the
stock as well as anticipated performance levels.
1.13 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. State income taxes are included in income tax
expense.
A valuation allowance for deferred tax assets is provided if it is more
likely than not that some portion of the deferred tax asset will 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
accumulated other comprehensive income in shareholders' equity.
1.14 Derivative Financial Instruments
Use of Derivatives. The company's use of derivative financial instruments
is generally limited to reducing its exposure to interest rate and currency
exchange risk by utilizing interest rate and currency swap agreements, treasury
rate lock agreements, and options to enter into interest rate swap agreements.
The company accounts for these derivative financial instruments as hedges. Hedge
accounting requires a high correlation between changes in fair values or cash
flows of the derivative financial instrument and the specific item being hedged,
both at inception and throughout the life of the hedge.
Interest Rate and Currency Swap Agreements. Interest rate swap agreements
are used to convert specific investment securities from a floating-rate to a
fixed-rate basis, or vice versa, and to hedge against the risk of declining
interest rates on anticipated security purchases. Interest rate swap agreements
are also used to 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.
Currency swap agreements are used to 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.
The difference between amounts paid and received on swap agreements is
recorded on an accrual basis as an adjustment to net investment income or
interest expense, 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 accumulated other comprehensive income
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 investment purchases or debt
issuances, the net swap settlement
40
<PAGE> 19
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 investment or debt. If the underlying
investment or debt is extinguished or sold, any related gain or loss on swap
agreements is recognized in income.
Treasury Rate Lock Agreements. Treasury rate lock agreements are used to
hedge against the risk of rising interest rates on anticipated debt issuances.
These agreements provide for future cash settlements that are a function of
specified U.S. Treasury rates. Treasury rate lock agreements are accounted for
in the same manner as interest rate swap agreements that hedge anticipated debt
issuances.
Swaptions. Options to enter into interest rate swap agreements are used to
limit the company's exposure to reduced spreads between investment yields and
interest crediting rates should interest rates decrease or increase
significantly over prolonged periods.
During prolonged periods of decreasing interest rates, the spread between
investment yields and interest crediting rates may be reduced as a result of
minimum rate guarantees on certain insurance and annuity contracts, which limit
the company's ability to reduce interest crediting rates. Call swaptions, which
allow the company to enter into interest rate swap agreements to receive fixed
rates and pay lower floating rates, effectively maintain the spread between
investment yields and interest crediting rates during such periods.
During prolonged periods of increasing interest rates, the spread between
investment yields and interest crediting rates may be reduced as a result of the
company's decision to increase interest crediting rates to limit surrenders. Put
swaptions, which allow the company to enter into interest rate swap agreements
to pay fixed rates and receive higher floating rates, effectively maintain the
spread between investment yields and interest crediting rates during such
periods.
Premiums paid to purchase swaptions are included in investments and are
amortized to net investment income over the exercise period of the swaptions. If
a swaption is terminated, any gain is deferred and amortized to insurance and
annuity benefits over the expected life of the insurance and annuity contracts
and any unamortized premium is charged to income. If a swaption ceases to be an
effective hedge, any related gain or loss is recognized in income.
1.15 Earnings Per Share
Basic earnings per share is computed by dividing earnings available to
common shareholders by average common shares outstanding. Diluted earnings per
share is computed assuming the conversion or exercise of dilutive convertible
preferred securities and stock options outstanding during the period.
1.16 Accounting Changes
Comprehensive Income. During 1998, the company adopted Statement of
Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in the financial statements. The company elected to report
comprehensive income and its components in a separate statement of comprehensive
income. Adoption of this statement did not change recognition or measurement of
net income and, therefore, did not impact the company's consolidated results of
operations or financial position.
Division Reporting. Effective December 31, 1998, the company adopted SFAS
131, "Disclosures about Segments of an Enterprise and Related Information,"
which changes the way companies report segment information. Adoption of this
statement did not change the company's reportable divisions, but did result in a
change in the reported amounts of division earnings. With the adoption of SFAS
131, the company reports division earnings exclusive of goodwill amortization,
net realized investment gains, and non-recurring items. This methodology is
consistent with the manner in which management reviews division results.
Division earnings for prior periods have been restated to reflect this
methodology. However, the change did not impact the company's consolidated
results of operations or financial position.
Derivatives. In June 1998, the Financial Accounting Standards Board issued
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which
requires all derivative instruments to be recognized at fair value as either
assets or liabilities in the balance sheet. Changes in the fair value of a
derivative instrument are to be reported as earnings or other comprehensive
income, depending upon the intended use of the derivative instrument. This
statement is effective for years beginning after June 15, 1999. Adoption of SFAS
133 is not expected to have a material impact on the company's consolidated
results of operations or financial position.
2. Acquisitions
2.1 Accounting for Acquisitions
With the exception of USLIFE Corporation (USLIFE), the company's
acquisitions have been accounted for using the purchase method. Under this
method, the results of operations for each acquisition are included in the
company's consolidated statement of income from the date of acquisition. The
purchase price
41
<PAGE> 20
of each acquisition is allocated to specific assets and liabilities based on
management's best estimate of their fair values at the date of acquisition. The
difference between the aggregate purchase price and the net assets acquired is
attributed to goodwill.
The merger of USLIFE was accounted for using the pooling of interests
method. Accordingly, the company's consolidated financial statements include the
results of operations, financial position, and cash flows of USLIFE for all
periods presented.
2.2 Western National
On December 23, 1994, the company acquired a 40% investment in Western
National Corporation (Western National), the holding company of Western National
Life Insurance Company, for $274 million cash. On September 17, 1996, the
company increased its equity ownership to 46% at a cost of $126 million cash.
Both transactions were recorded on an equity basis.
On February 25, 1998, the company acquired the remaining 54% equity
interest of Western National for $1.2 billion. The purchase price consisted of
$580 million cash and 10.2 million shares of American General common stock. In
addition, the company issued options to acquire 1.4 million shares of American
General common stock to replace outstanding options to acquire Western National
common stock. The fair value of these options, excluding options surrendered for
$10 million cash pursuant to a pre-existing employment agreement, was $37
million.
Western National's assets, liabilities, and results of operations were
consolidated in the company's financial statements effective January 1, 1998.
Earnings attributable to minority interests through February 25, 1998 are
reflected as a charge against consolidated income. Effective May 1, 1998,
Western National Life Insurance Company changed its name to American General
Annuity Insurance Company (American General Annuity).
2.3 Coinsurance Transaction
On May 21, 1998, the company completed the acquisition of a block of
individual annuity business in a coinsurance transaction. This transaction
increased assets and insurance and annuity liabilities of the Retirement
Services division by $2.4 billion.
2.4 USLIFE
On June 17, 1997, the company completed the acquisition of USLIFE in an
all-stock merger transaction. American General issued 39.0 million shares of
common stock, with a market value of approximately $1.8 billion, in exchange for
all USLIFE common shares.
2.5 Home Beneficial Life
On April 16, 1997, the company acquired Home Beneficial Corporation, the
holding company of Home Beneficial Life Insurance Company (Home Beneficial
Life), for $665 million. The purchase price consisted of $283 million cash and
9.5 million shares of American General common stock. During the period between
the announcement of the agreement to acquire Home Beneficial Life and the date
of acquisition, American General repurchased an amount of shares essentially
equivalent to the amount issued in the acquisition.
2.6 Independent Life
On February 29, 1996, the company acquired Independent Insurance Group,
Inc., the holding company of The Independent Life and Accident Insurance
Company, 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.
2.7 Non-Cash Activities
Non-cash activities related to the above acquisitions that are not
reflected in the consolidated statement of cash flows for the three years ended
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------- ------- -------
<S> <C> <C> <C>
Fair value of assets acquired $ 9,732 $ 1,446 $ 1,358
Liabilities assumed (8,524) (781) (1,029)
Issuance of common stock (580) (382) (138)
Issuance of stock options (37) -- --
Issuance of preferred stock -- -- (85)
Investment in Western
National -- -- 126
------- ------- -------
Net cash paid $ 591 $ 283 $ 232
------- ------- -------
</TABLE>
3. Other Charges
3.1 Litigation Settlements
In fourth quarter 1998, American General announced that certain of its life
insurance subsidiaries had entered into agreements to resolve substantially all
of its material market conduct class action lawsuits. In conjunction with the
proposed settlements, the company recorded a charge of $378 million ($246
million aftertax). The charge covers the cost of additional policyholder
benefits and other anticipated expenses resulting from the proposed settlements,
as well as other administrative and legal costs. See Note 17.2 for further
discussion of this litigation.
42
<PAGE> 21
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. In second quarter 1997, pursuant
to court-ordered mediation, the parties agreed to a settlement of $50 million as
a final resolution of this lawsuit. As a result, the company recorded an
aftertax charge of $33 million in 1997.
3.2 Merger-Related Costs
The company recorded the following expenses in second quarter 1997 related
to the merger with USLIFE:
<TABLE>
<CAPTION>
In millions Pretax Aftertax
- ----------- ------ --------
<S> <C> <C>
Change in control costs $179 $155
Transaction costs 22 22
Restructuring costs 71 46
Deferred tax asset
valuation allowance -- 24
---- ----
Total $272 $247
---- ----
</TABLE>
Change in control costs consisted primarily of severance and supplemental
retirement plan payments to USLIFE executives, payable under various USLIFE
plans in effect prior to the merger. A substantial portion of these payments was
considered excess parachute payments for tax purposes and was not tax deductible
by the company. As of December 31, 1998, substantially all of the change in
control costs had been paid.
Transaction costs included expenses for investment bankers, attorneys,
accountants, and proxy printing costs.
Restructuring costs related to the integration of USLIFE into the company's
operations and the concurrent realignment of the Life Insurance division. The
restructuring plan adopted in second quarter 1997 identified the following
activities: (1) elimination of approximately 1,200 positions in USLIFE corporate
operations and Life Insurance division administrative service functions that are
being centralized, (2) write-off of computer equipment and related software at
various locations that are being centralized, and (3) elimination of redundant
facilities, some of which are under long-term lease obligations. Total
personnel-related costs were estimated to be $34 million, and total data
processing and facilities costs were estimated to be $37 million.
Restructuring activities began in third quarter 1997 and are expected to be
substantially completed in 1999, except for payments under long-term lease
obligations. As of December 31, 1998, the company had eliminated 384 positions
and had paid $16 million of personnel-related costs. In addition, the company
had written off computer equipment and software and had eliminated redundant
facilities totaling $25 million.
During 1998, the company determined that personnel costs related to
centralizing administrative service functions would be lower than estimated,
since certain personnel voluntarily left the company prior to their anticipated
termination dates. Furthermore, the company identified additional computer
software that was no longer being used at the centralized locations during its
realignment efforts. As a result of these events, total personnel-related costs
are now estimated to be $31 million, and total data processing and facilities
costs are estimated to be $48 million. Restructuring costs in excess of the
original $71 million charge will be expensed as incurred.
A valuation allowance for the deferred tax asset related to a portion of
USLIFE's net operating loss carryforward was provided at the acquisition date
since, as a result of the acquisition, it is more likely than not that some
portion of the deferred tax asset will not be realized.
3.3 Sale of Non-Strategic Assets
Losses related to the sale of non-strategic assets were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------- ------------------
In millions Pretax Aftertax Pretax Aftertax
- ----------- ------ -------- ------ --------
<S> <C> <C> <C> <C>
Finance receivables $ 42 $ 27 $145 $ 93
Other non-strategic
assets 71 46 20 18
---- ---- ---- ----
Total $113 $ 73 $165 $111
---- ---- ---- ----
</TABLE>
In fourth quarter 1996, the company reached a decision to offer for sale
$875 million of non-strategic finance receivable portfolios. Accordingly, these
receivables and an associated allowance for losses were reclassified to assets
held for sale at December 31, 1996, and a loss was recognized to reduce the
carrying amount of the portfolios to net realizable value. The portfolios were
sold in 1997, and the company recorded an additional loss to establish a
liability for estimated future payments to the purchaser under a five-year loss
sharing agreement. The remaining liability at year-end 1998 was $28 million.
Other non-strategic assets consisted of the company's land development
operations and a Canadian life insurance subsidiary. During 1997, the company
completed the sale of these assets.
3.4 Write-Down of Group Business
In first quarter 1996, USLIFE discontinued new sales of its traditional
indemnity group major medical products. In subsequent months, the company
experienced an unexpected deterioration in persistency on this business, with
lapse rates approaching 60%. This experience resulted in a reevaluation of the
related DPAC and insurance liabilities. Based on this reevaluation, the company
recorded a $50 million ($32 million aftertax) charge in second quarter 1996.
43
<PAGE> 22
4. Investments
4.1 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
Amortized Cost Unrealized Gains Unrealized Losses
----------------------------- ----------------------------- -------------------------------
In millions 1998 1997 1996 1998 1997 1996 1998 1997 1996
- ----------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $41,019 $31,926 $28,770 $ 2,809 $ 2,021 $ 1,209 $ (137) $ (23) $ (153)
Below investment grade 3,286 1,892 1,655 93 73 56 (106) (7) (15)
Mortgage-backed 12,422 8,919 10,401 605 514 315 (8) (5) (74)
Foreign governments 843 834 863 99 90 80 (2) (4) (1)
U.S. government 899 740 737 121 91 57 (1) -- (3)
States/political subdivisions 627 546 336 44 33 15 -- -- (1)
Redeemable preferred stocks 116 104 105 2 3 4 -- -- (1)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total fixed maturity
securities $59,212 $44,961 $42,867 $ 3,773 $ 2,825 $ 1,736 $ (254) $ (39) $ (248)
------- ------- ------- ------- ------- ------- ------- ------- -------
Equity securities $ 288 $ 93 $ 111 $ 38 $ 24 $ 27 $ (1) $ (1) $ (1)
------- ------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
Fair Value
-----------------------------
In millions 1998 1997 1996
- ----------- ------- ------- -------
<S> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $43,691 $33,924 $29,826
Below investment grade 3,273 1,958 1,696
Mortgage-backed 13,019 9,428 10,642
Foreign governments 940 920 942
U.S. government 1,019 831 791
States/political subdivisions 671 579 350
Redeemable preferred stocks 118 107 108
------- ------- -------
Total fixed maturity
securities $62,731 $47,747 $44,355
------- ------- -------
Equity securities $ 325 $ 116 $ 137
------- ------- -------
</TABLE>
Net Unrealized Gains. Net unrealized gains on fixed maturity and equity
securities included in accumulated other comprehensive income at December 31
were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------- ------- -------
<S> <C> <C> <C>
Gross unrealized gains $ 3,811 $ 2,849 $ 1,763
Gross unrealized losses (255) (40) (249)
DPAC and CIP fair value
adjustments (1,083) (1,062) (598)
Deferred income taxes (874) (636) (348)
Equity in Western National's
net unrealized gains -- 58 59
------- ------- -------
Net unrealized gains
on securities $ 1,599 $ 1,169 $ 627
------- ------- -------
</TABLE>
Maturities. The contractual maturities of fixed maturity securities at
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Amortized Fair
In millions Cost Value
- ----------- --------- -------
<S> <C> <C>
Fixed maturity securities, excluding
mortgage-backed securities, due
In one year or less $ 1,299 $ 1,314
In years two through five 9,648 10,094
In years six through ten 17,908 18,822
After ten years 17,935 19,482
Mortgage-backed securities 12,422 13,019
------- -------
Total fixed maturity securities $59,212 $62,731
------- -------
</TABLE>
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.
4.2 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:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------- ------- -------
<S> <C> <C> <C>
Geographic distribution
Atlantic $ 1,728 $ 1,586 $ 1,393
Central 918 896 952
Pacific and Mountain 756 844 967
Allowance for losses (34) (54) (84)
------- ------- -------
Total mortgage loans $ 3,368 $ 3,272 $ 3,228
------- ------- -------
Property type
Retail $ 1,314 $ 1,099 $ 1,132
Office 1,080 1,128 1,082
Industrial 505 594 539
Apartments 312 363 352
Other 191 142 207
Allowance for losses (34) (54) (84)
------- ------- -------
Total mortgage loans $ 3,368 $ 3,272 $ 3,228
------- ------- -------
</TABLE>
Allowance. Activity in the allowance for mortgage loan losses was as
follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $ 54 $ 84 $ 96
Provision for mortgage
loan losses (15) (20) 2
Deductions (5) (10) (14)
---- ---- ----
Balance at December 31 $ 34 $ 54 $ 84
---- ---- ----
</TABLE>
44
<PAGE> 23
Impaired Loans. Impaired mortgage loans on real estate were $28 million,
$65 million, and $106 million at December 31, 1998, 1997, and 1996,
respectively. Interest income related to impaired loans was $3 million, $4
million, and $9 million in 1998, 1997, and 1996, respectively.
4.3 Investment Income
Investment income was as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturity securities $4,513 $3,523 $3,274
Mortgage loans on real estate 326 319 339
Other 307 265 260
------ ------ ------
Gross investment income 5,146 4,107 3,873
------ ------ ------
Investment expense
Real estate 31 58 69
Other 20 29 31
------ ------ ------
Investment expense 51 87 100
------ ------ ------
Net investment income $5,095 $4,020 $3,773
------ ------ ------
</TABLE>
The carrying amount of investments that produced no investment income
during 1998 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 1998, 1997, or 1996.
4.4 Realized Investment Gains
Realized investment gains (losses) were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ----- ----- -----
<S> <C> <C> <C>
Fixed maturity securities
Gross gains $ 64 $ 57 $ 107
Gross losses (137) (70) (107)
----- ----- -----
Total fixed maturity
securities (73) (13) --
----- ----- -----
Equity securities
Gross gains 8 5 53
Gross losses -- (1) (2)
----- ----- -----
Total equity securities 8 4 51
----- ----- -----
Mortgage loans on real estate 16 26 5
Investment real estate 10 14 2
Other long-term investments 73 19 8
DPAC/CIP amortization
and investment expense (28) (10) (4)
----- ----- -----
Realized investment gains $ 6 $ 40 $ 62
----- ----- -----
</TABLE>
4.5 Cash Flows from Investing Activities
Uses of cash for investment purchases were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------- ------- -------
<S> <C> <C> <C>
Fixed maturity securities $13,809 $10,489 $10,118
Other 695 521 560
------- ------- -------
Total $14,504 $11,010 $10,678
------- ------- -------
</TABLE>
Sources of cash from investment dispositions and repayments were as
follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------- ------- -------
<S> <C> <C> <C>
Fixed maturity securities
Sales $ 7,535 $ 6,324 $ 6,007
Calls and tenders 1,808 1,290 834
Repayments of mortgage-
backed securities 1,248 496 885
Maturities 613 1,038 621
Mortgage loans 667 795 593
Equity securities 41 87 167
Other 243 260 173
------- ------- -------
Total $12,155 $10,290 $ 9,280
------- ------- -------
</TABLE>
5. Finance Receivables
5.1 Detail of Finance Receivables
Finance receivables, which are reported net of unearned finance charges, at
December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------- ------- -------
<S> <C> <C> <C>
Real estate loans $ 5,757 $ 4,155 $ 3,734
Other consumer loans 2,560 2,556 2,516
Retail sales finance 1,340 1,301 1,375
------- ------- -------
Total finance receivables 9,657 8,012 7,625
Allowance for losses (382) (373) (395)
------- ------- -------
Finance receivables, net $ 9,275 $ 7,639 $ 7,230
------- ------- -------
</TABLE>
5.2 Allowance for Finance Receivable Losses
Activity in the allowance for finance receivable losses was as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ----- ----- -----
<S> <C> <C> <C>
Balance at January 1 $ 373 $ 395 $ 492
Provision for finance
receivable losses 212 248 417
Charge offs, net of recoveries (220) (270) (444)
Allowance related to
acquired receivables 17 -- --
Reclassified to assets held
for sale -- -- (70)
----- ----- -----
Balance at December 31 $ 382 $ 373 $ 395
----- ----- -----
</TABLE>
5.3 Contractual Maturities and Collections
Contractual maturities of finance receivables at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
After
In millions 1999 2000 2001 2002 2003 2003
- ----------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Maturities $1,219 $1,421 $1,002 $ 577 $ 341 $5,097
------ ------ ------ ------ ------ ------
</TABLE>
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.
45
<PAGE> 24
5.4 Cash Collections
Cash collections of principal were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------ ------ ------
<S> <C> <C> <C>
Real estate and consumer
loans
Cash collections $3,122 $2,859 $2,653
% of average balances 43% 46% 47%
Retail sales finance
Cash collections $1,653 $1,484 $1,777
% of average balances 127% 117% 93%
------ ------ ------
</TABLE>
5.5 Geographic Concentration
The geographic concentration of finance receivables at December 31 was as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
California 15% 11% 9%
North Carolina 8 9 9
Florida 6 6 7
Ohio 6 6 6
Illinois 6 5 6
Indiana 5 5 5
Other 54 58 58
--- --- ---
Total finance receivables 100% 100% 100%
--- --- ---
</TABLE>
6. Debt
6.1 Short-Term Debt and Credit Facilities
Short-term debt consists primarily of commercial paper. The
weighted-average interest rates on short-term borrowings at December 31 were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Corporate 5.3% 6.1% 5.9%
Consumer Finance 5.4 5.9 5.6
--- --- ---
</TABLE>
Unsecured bank credit facilities are used to support commercial paper
borrowings. At December 31, 1998, American General and certain of its
subsidiaries maintained unsecured committed credit facilities of $5.0 billion
with a total of 49 domestic and foreign banks. Interest rates are based on a
money market index, and annual commitment fees range from five to seven basis
points. There were no borrowings under these facilities at December 31, 1998.
6.2 Long-Term Debt
Long-term debt at December 31 was as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------ ------ ------
<S> <C> <C> <C>
Corporate
6.3% - 9.7%, through 2025 $1,136 $1,341 $1,471
------ ------ ------
Consumer Finance
5.4% - 9.8%, through 2009 $5,177 $4,011 $4,499
------ ------ ------
</TABLE>
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, 1998.
6.3 Long-Term Debt Maturities
Scheduled maturities of long-term debt for each of the next five years at
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
In millions 1999 2000 2001 2002 2003
- ----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Corporate $ 100 $ 350 $ -- $ -- $ 100
Consumer Finance 571 1,290 948 565 1,043
------ ------ ------ ------ ------
</TABLE>
6.4 Interest Paid
Interest paid was as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Corporate $186 $150 $162
Consumer Finance 493 485 497
---- ---- ----
</TABLE>
7. Deferred Policy Acquisition Costs (DPAC)
Activity in DPAC was as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------- ------- -------
<S> <C> <C> <C>
Balance at January 1 $ 2,718 $ 2,954 $ 2,343
Deferrals 880 631 604
Accretion of interest 187 215 197
Consolidation of
Western National 157 -- --
Amortization (706) (659) (626)
Effect of net unrealized gains
(losses) on securities 41 (406) 460
Other (24) (17) (24)
------- ------- -------
Balance at December 31 $ 3,253 $ 2,718 $ 2,954
------- ------- -------
</TABLE>
8. Cost of Insurance Purchased (CIP)
Activity in CIP was as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ----- ----- -----
<S> <C> <C> <C>
Balance at January 1 $ 680 $ 755 $ 504
Additions from acquisitions 359 66 233
Accretion of interest 88 74 76
Consolidation of
Western National 125 -- --
Amortization (249) (176) (178)
Effect of net unrealized gains
(losses) on securities (62) (55) 109
Other 15 16 11
----- ----- -----
Balance at December 31 $ 956 $ 680 $ 755
----- ----- -----
</TABLE>
CIP amortization, net of accretion, expected to be recorded in each of the
next five years is $118 million, $108 million, $99 million, $90 million, and $81
million.
46
<PAGE> 25
9. Income Taxes
9.1 Tax Expense
Components of income tax expense were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ----- ----- -----
<S> <C> <C> <C>
Current
Federal $ 458 $ 393 $ 403
State 14 16 8
----- ----- -----
Total current 472 409 411
Deferred (13) 38 (24)
----- ----- -----
Income tax expense* $ 459 $ 447 $ 387
----- ----- -----
</TABLE>
* Excludes tax benefit of $54 million, $45 million, and $21 million,
respectively, primarily related to preferred securities of subsidiaries.
A reconciliation between the Federal income tax rate and the effective tax
rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate 35% 35% 35%
Tax-exempt investment
income (2) (2) (2)
State taxes, net 1 1 1
Goodwill 1 1 1
Merger-related costs -- 7 --
Other, net -- -- 1
---- ---- ----
Effective tax rate 35% 42% 36%
---- ---- ----
</TABLE>
9.2 Deferred Tax Liabilities
Components of deferred tax liabilities and assets, included in income tax
liabilities on the consolidated balance sheet, at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------- ------- -------
<S> <C> <C> <C>
Deferred tax liabilities,
applicable to
Basis differential of
investments $ 1,303 $ 987 $ 514
DPAC and CIP 1,025 795 984
Prepaid pension expense 96 87 81
Other 455 543 530
------- ------- -------
Total deferred tax
liabilities 2,879 2,412 2,109
------- ------- -------
Deferred tax assets,
applicable to
Policy reserves (717) (541) (542)
Litigation settlements (129) -- --
Finance receivables (84) (93) (183)
Other (427) (498) (338)
------- ------- -------
Gross deferred tax assets (1,357) (1,132) (1,063)
Valuation allowance 69 68 46
------- ------- -------
Total deferred tax
assets, net (1,288) (1,064) (1,017)
------- ------- -------
Net deferred tax
liabilities $ 1,591 $ 1,348 $ 1,092
------- ------- -------
</TABLE>
The deferred tax asset valuation allowances at December 31, 1998, 1997, and
1996 were related to operating loss carryovers not expected to be utilized. At
December 31, 1998, the company had operating loss carryovers for Federal income
tax purposes of approximately $114 million, which are available to offset future
taxable income through 2012. The operating loss carryovers are predominantly
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 $907
million at December 31, 1998. At current corporate income tax rates, the maximum
amount of tax on such income is approximately $317 million. Deferred income
taxes on these accumulations are not required because no distributions are
expected.
9.3 Taxes Paid
Income taxes paid were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ---- ---- ----
<S> <C> <C> <C>
Federal $361 $419 $364
State 17 9 10
---- ---- ----
</TABLE>
9.4 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 tax returns through 1988 and has raised certain
issues related to 1987 and 1988 that the company is currently contesting in the
United States Tax Court. The IRS is currently examining the company's tax
returns for 1989 through 1996. Although the final outcome of any issues raised
is uncertain, the company believes that the ultimate liability, including
interest, will not exceed amounts recorded in the consolidated financial
statements.
10. Benefit Plans
10.1 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.
At December 31, 1998, 66% of the plans' assets were invested in equity
securities and 32% were invested in fixed income mutual funds managed by a
subsidiary of the company. Additionally, 1% of plan assets were invested in
general investment accounts of the company's
47
<PAGE> 26
subsidiaries through deposit administration insurance contracts. The benefit
plans have purchased annuity contracts from American General subsidiaries to
provide benefits for certain retirees. These contracts are expected to provide
future annual benefits to retirees of approximately $52 million.
The components of pension expense and underlying assumptions were as
follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ----- ----- -----
<S> <C> <C> <C>
Service cost (benefits earned) $ 20 $ 18 $ 22
Interest cost 50 46 46
Expected return on
plan assets (95) (85) (71)
Amortization -- 2 (1)
----- ----- -----
Pension expense (income) $ (25) $ (19) $ (4)
----- ----- -----
Discount rate on benefit
obligation 7.00% 7.25% 7.50%
Rate of increase in
compensation levels 4.25% 4.00% 4.00%
Expected long-term rate
of return on plan assets 10.25% 10.00% 10.00%
----- ----- -----
</TABLE>
The company's funding policy is to contribute annually no more than the
maximum deductible for Federal income tax purposes. The funded status of the
plans and the prepaid pension expense included in other assets at December 31
were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------- ------- -------
<S> <C> <C> <C>
Projected benefit
obligation (PBO) $ 750 $ 667 $ 662
Plan assets at fair value 1,280 1,175 976
------- ------- -------
Plan assets at fair value in
excess of PBO 530 508 314
Other unrecognized
items, net (269) (274) (139)
------- ------- -------
Prepaid pension expense $ 261 $ 234 $ 175
------- ------- -------
</TABLE>
10.2 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 insured through December 31, 1999. The majority of the
retiree medical and dental plans is unfunded and self-insured. The accrued
liability for postretirement benefits was $175 million, $169 million, and $149
million at year-end 1998, 1997, and 1996, respectively. These liabilities were
discounted at the same rates used for the pension plans. Postretirement benefit
expense was $7 million in 1998 and $8 million in 1997 and 1996.
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, 800 million shares authorized). The only series of preferred stock
outstanding is the 7% Convertible Preferred Stock. At December 31, 1998,
approximately 14.4 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.
11.2 Convertible Preferred Stock
American General has 2.3 million shares of 7% Convertible Preferred Stock
outstanding. Holders are entitled to receive annual cumulative dividends of 7%
and have the right to vote, together with holders of American General common
stock, on the basis of four-fifths of one vote for each share of preferred
stock.
The stated liquidation preference is $36.7625 per share. 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 Common Stock Activity
Common stock activity was as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- ------------ -------- -------- --------
<S> <C> <C> <C>
Shares issued
Balance at beginning of year 259,135 283,739 283,734
Issuance for acquisition 10,163 -- --
Retirement of USLIFE
treasury shares -- (24,650) --
Conversion of convertible
preferred stock -- 46 5
-------- -------- --------
Balance at end of year 269,298 259,135 283,739
-------- -------- --------
Treasury shares
Balance at beginning of year (15,929) (42,568) (41,630)
Share repurchases (2,971) (9,946) (5,273)
Issuance for acquisitions -- 9,462 3,740
Retirement of USLIFE
treasury shares -- 24,650 --
Issuance under employee
benefit plans and other 1,406 2,473 595
-------- -------- --------
Balance at end of year (17,494) (15,929) (42,568)
-------- -------- --------
Outstanding at end of year 251,804 243,206 241,171
-------- -------- --------
</TABLE>
48
<PAGE> 27
11.4 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
12.1 Stock Options
Stock option activity was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ------------------- -------------------
Average Average Average
Exercise Exercise Exercise
Shares in thousands Shares Price Shares Price Shares Price
- ------------------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 3,637 $34.48 4,498 $26.14 4,093 $24.11
Granted 2,519 59.81 1,496 43.68 1,115 33.85
Granted for
acquisition 1,384 24.78 -- -- -- --
Exercised (1,494) 25.63 (2,170) 23.13 (503) 24.12
Forfeited/expired (285) 48.70 (187) 39.05 (207) 32.67
------ ------ ------ ------ ------ ------
Balance at
December 31 5,761 $44.82 3,637 $34.48 4,498 $26.14
------ ------ ------ ------ ------ ------
Exercisable at
December 31 2,517 $31.36 2,028 $29.13 3,116 $23.98
------ ------ ------ ------ ------ ------
</TABLE>
Options may not be exercised within at least six months of, nor after 10
years from, the date of grant. Information about options outstanding at December
31, 1998 was as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------- -------------------
Average Average Average
Range of Shares Remaining Exercise Shares Exercise
Exercise Prices (000's) Life Price (000's) Price
- --------------- ------ --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$15.38-$19.99 27 2 $ 18.26 27 $ 18.26
20.00- 29.99 1,071 5 23.66 1,063 23.61
30.00- 39.99 1,029 7 33.94 871 33.60
40.00- 49.99 1,203 8 43.46 546 43.15
50.00- 59.99 2,303 9 59.25 10 50.17
60.00- 69.47 128 10 67.92 -- --
- ------------- ----- --- --------- ----- ---------
Total 5,761 8 $ 44.82 2,517 $ 31.36
- ------------- ----- --- --------- ----- ---------
</TABLE>
12.2 Shares Available
Shares available for issuance under American General's stock and incentive
plans at December 31, 1998, 1997, and 1996 totaled 6.2 million, 8.8 million, and
5.7 million, respectively.
12.3 Pro Forma Disclosures
Under an alternative accounting method, compensation expense arising from
stock options would be measured at the estimated fair value of the options at
the date of grant and recognized over the options' vesting period. Had
compensation expense been determined using this method, net income and net
income per share would have been as follows:
<TABLE>
<CAPTION>
In millions,
except per share data 1998 1997 1996
- --------------------- ------- ------- -------
<S> <C> <C> <C>
Net income
As reported $ 764 $ 542 $ 653
Pro forma 753 536 650
------- ------- -------
Net income per share
Basic
As reported $ 3.02 $ 2.21 $ 2.67
Pro forma 2.97 2.19 2.66
Diluted
As reported 2.96 2.19 2.63
Pro forma 2.92 2.17 2.62
------- ------- -------
</TABLE>
Since the alternative accounting method has been applied only to options
granted beginning in 1995 and expense is recognized over the vesting period, the
pro forma results above may not be indicative of future years' pro forma
results.
The average fair values of the options granted during 1998, 1997, and 1996
were $15.27, $10.41, and $6.79, respectively. The fair value of each option was
estimated at the date of grant using a Black-Scholes option pricing model. The
assumptions used to estimate the fair value of the stock options were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Dividend yield 2.5% 3.0% 4.0%
Expected volatility 23.0% 22.0% 22.3%
Risk-free interest rate 5.7% 6.4% 6.2%
Expected life 6 years 6 years 6 years
------- ------- -------
</TABLE>
13. Redeemable Equity
Two wholly owned subsidiaries and two subsidiary trusts of American General
(collectively, subsidiaries) have issued 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 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.
49
<PAGE> 28
Information about the preferred securities and the assets held by the
issuing subsidiaries at December 31, 1998 was as follows:
<TABLE>
<CAPTION>
American American American American American
General General General General General
Institutional Institutional Capital, Capital, Delaware,
In millions, except share data Capital B Capital A L.L.C. L.L.C. L.L.C.
- ------------------------------ ------------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Preferred securities
Securities issued and outstanding 500,000 500,000 8,600,000 11,500,000 5,000,000
Par value $ 500 $ 500 $ 215 $ 287 $ 250
Dividends paid $ 41 $ 38 $ 17 $ 24 $ 15
Date issued 3/14/97 12/4/96 8/29/95 6/5/95 6/1/95
Earliest/mandatory redemption dates 2046/2046 2045/2045 2000/2025(a) 2000/2025(a) 2003(b)/2025
---------- ---------- ---------- ----------- -------------
Assets of issuing subsidiary
Subordinated Debentures
Principal $ 516 $ 516 $ 269 $ 360 $ 313
Interest rate 8.125% 7.57% 8.125% 8.45% 6%
Mandatory redemption date 2046 2045 2025(a) 2025(a) 2025
U.S. Treasury bonds -- -- $ 3 $ 4 $ 4
---------- ---------- ---------- ----------- -------------
</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.
14. 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 revaluation of related policyholder liabilities can be
misinterpreted.
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
Fair Carrying Fair Carrying Fair Carrying
In millions Value Amount Value Amount Value Amount
- ----------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets
Fixed maturity and equity securities $63,056 $63,056 $47,863 $47,863 $44,492 $44,492
Mortgage loans on real estate 3,501 3,368 3,399 3,272 3,290 3,228
Policy loans 2,448 2,329 2,196 2,156 1,986 2,011
Finance receivables, net 9,275 9,275 7,639 7,639 7,230 7,230
Liabilities
Insurance investment contracts 39,959 40,670 27,623 28,139 26,876 28,331
Short-term debt 5,293 5,293 3,830 3,830 3,762 3,762
Long-term debt
Corporate 1,222 1,136 1,407 1,341 1,538 1,471
Consumer Finance 5,342 5,177 4,117 4,011 4,608 4,499
------- ------- ------- ------- ------- -------
</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
50
<PAGE> 29
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. This fair value does not reflect the value of the
underlying customer relationships or the related distribution system.
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. Had the company elected to terminate its interest rate swap and
treasury rate lock agreements related to debt at December 31, 1998, 1997, and
1996, it would have paid $61 million, $30 million, and $30 million,
respectively. These fair values were estimated using cash flows discounted at
current market rates.
15. Derivative Financial Instruments
15.1 Interest Rate and Currency Swap Agreements
Interest rate and currency swap agreements related to investment securities
at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------- ------- -------
<S> <C> <C> <C>
Interest rate swap agreements
to receive fixed rate
Notional amount $ 474 $ 169 $ 54
Average receive rate 6.24% 6.95% 7.00%
Average pay rate 5.48 6.39 5.91
Interest rate swap agreements
to pay fixed rate
Notional amount $ 55 $ 15 $ 60
Average receive rate 6.73% 6.74% 6.19%
Average pay rate 6.88 6.48 6.42
------- ------- -------
Currency swap agreements
(receive U.S. $/pay Canadian $)
Notional amount (in U.S. $) $ 124 $ 139 $ 99
Average exchange rate 1.50 1.50 1.57
------- ------- -------
</TABLE>
Interest rate swap agreements related to debt at December 31 were as
follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- ------- ------- -------
<S> <C> <C> <C>
Interest rate swap agreements
to pay fixed rate
Corporate
Notional amount $ 400 $ 400 --
Average receive rate 4.90% 5.72% --
Average pay rate 6.15 6.15 --
Consumer Finance
Notional amount $ 935 $ 940 $ 540
Average receive rate 4.57% 5.69% 5.92%
Average pay rate 6.94 7.39 8.05
------- ------- -------
</TABLE>
Deferred settlement costs related to the termination of interest rate swaps
in conjunction with anticipated debt issuances were $9 million, $10 million, and
$12 million at December 31, 1998, 1997, and 1996, respectively.
15.2 Treasury Rate Lock Agreements
Treasury rate lock agreements with a notional amount of $390 million were
entered into during 1997 and were settled in 1998. 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, 1998, the remaining deferred costs
were $17 million.
During 1998, the company entered into a treasury rate lock agreement with a
notional amount of $123 million, which settled in February 1999. The company's
exposure to losses associated with market risk was immaterial at December 31,
1998 and the settlement date.
15.3 Swaptions
Swaptions at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- --------- --------- ---------
<S> <C> <C> <C>
Call swaptions
Notional amount $ 3,875 $ 3,000 --
Average strike rate 4.07% 4.79% --
Put swaptions
Notional amount $ 4,200 -- --
Average strike rate 8.33% -- --
--------- --------- ---------
</TABLE>
The swaptions outstanding at December 31, 1998 expire by 2000. Should the strike
rates remain below market rates for call swaptions and above market rates for
put swaptions, the swaptions will expire, and the company's exposure would be
limited to the premiums paid. These premiums were immaterial.
15.4 Credit and Market Risk
Derivative financial instruments expose the company to credit risk in the
event of nonperformance by counterparties. The company limits this exposure by
entering into agreements with counterparties having high credit ratings and by
regularly monitoring the ratings.
The company does not expect any counterparty to fail to meet its
obligation; however, nonperformance would not have a material impact on the
company's 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 the agreements and the related items being hedged.
16. Statutory Accounting
State insurance laws and regulations prescribe accounting practices for
calculating statutory net income and equity of insurance companies. In addition,
state
51
<PAGE> 30
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, 1998.
Statutory accounting practices differ from GAAP. Significant differences
for American General's insurance subsidiaries were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ----------- -------- -------- --------
<S> <C> <C> <C>
Statutory net income $ 760 $ 791 $ 688
Change in DPAC and CIP 213 112 110
Investment valuation
differences 87 23 62
Policy reserve adjustments (33) (21) (42)
Litigation settlements (191) -- --
Other, net (31) 8 (37)
-------- -------- --------
GAAP net income $ 805 $ 913 $ 781
-------- -------- --------
Statutory equity $ 3,857 $ 3,240 $ 2,927
Asset valuation reserve 664 452 562
Investment valuation
differences* 3,450 2,640 1,258
DPAC and CIP 4,198 3,388 3,698
Goodwill 1,275 376 292
Policy reserve adjustments 180 574 409
Deferred income taxes (1,582) (1,372) (1,133)
Other, net 72 114 231
-------- -------- --------
GAAP equity $ 12,114 $ 9,412 $ 8,244
-------- -------- --------
</TABLE>
*Primarily GAAP unrealized gains on securities.
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
agreements. The amount of dividends available to American General from
subsidiaries during 1999 not limited by such restrictions is approximately $1.1
billion.
17.2 Legal Proceedings
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and sales
practices, and a number of these lawsuits have resulted in substantial
settlements. Certain of American General's subsidiaries are defendants in
similar purported class action lawsuits. On December 16, 1998, American General
announced that certain of its life insurance subsidiaries had entered into
agreements to resolve substantially all of the material pending market conduct
class action lawsuits. The settlements are not final until approved by the
courts and any appeals are resolved. If court approvals are obtained and appeals
are not taken, it is expected the settlements will be final in third quarter
1999.
In conjunction with the proposed settlements, the company recorded a charge
of $378 million ($246 million aftertax) in fourth quarter 1998. The charge
covers the cost of additional policyholder benefits and other anticipated
expenses resulting from the proposed settlements, as well as other
administrative and legal costs.
The company is party to various other lawsuits and proceedings arising in
the ordinary course of business. Many of these lawsuits and proceedings arise in
jurisdictions, such as Alabama and Mississippi, 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 not
have a 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 and Mississippi continues to create the potential for
an unpredictable judgment in any given suit.
18. Division Operations
18.1 Nature of Operations
The company manages its business operations through three divisions, which
are based on products and services offered.
Retirement Services. The Retirement Services division provides tax-deferred
retirement annuities and employer-sponsored retirement plans marketed nationwide
through exclusive sales representatives to employees of educational, health
care, public sector, and other not-for-profit organizations. The division also
offers non-qualified annuities sold through a nationwide distribution network
that includes banks and other financial institutions, as well as specialty
brokers, general agents, and direct marketers.
Life Insurance. The Life Insurance division provides traditional and
interest-sensitive life insurance and annuities to a broad spectrum of customers
through multiple distribution channels focused on specific market segments. The
division reaches customers through independent and career agents, as well as
producer groups, independent marketing organizations, independent
broker-dealers, financial planners, and brokerage houses.
Consumer Finance. The Consumer Finance division provides a variety of
consumer finance products, including home equity and consumer loans and retail
sales financing, marketed through a nationwide network of branch offices.
52
<PAGE> 31
18.2 Division Results
Results of each division include earnings from its business operations and
earnings on that amount of equity considered necessary to support its business,
excluding goodwill amortization, net realized investment gains, and
non-recurring items. Corporate operations include the cost of corporate
borrowings, earnings on corporate assets, and the net equity (minority interest)
in equity investments. Division earnings information was as follows:
<TABLE>
<CAPTION>
Revenues Income before Taxes
------------------------------- ---------------------------------------
In millions 1998 1997 1996 1998 1997 1996
- ----------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Retirement Services $ 3,095 $ 1,836 $ 1,742 $ 699 $ 375 $ 341
Life Insurance 5,506 5,314 5,088 1,021 906 839
Consumer Finance 1,609 1,523 1,726 312 255 209
------- ------- ------- ------- ------- -------
Total divisions 10,210 8,673 8,556 2,032 1,536 1,389
------- ------- ------- ------- ------- -------
Corporate operations 35 214 96 (227) (44) (134)
Goodwill amortization -- -- -- (45) (24) (22)
Realized investment gains 6 40 62 6 40 62
Non-recurring items -- -- -- (443)(a) (435)(b) (215)(c)
------- ------- ------- ------- ------- -------
Total consolidated $10,251 $ 8,927 $ 8,714 $ 1,323 $ 1,073 $ 1,080
------- ------- ------- ------- ------- -------
<CAPTION>
Earnings
-------------------------------------
In millions 1998 1997 1996
- ----------- ------- ------- -------
<S> <C> <C> <C>
Retirement Services $ 466 $ 246 $ 225
Life Insurance 674 589 547
Consumer Finance 201 165 137
------- ------- -------
Total divisions 1,341 1,000 909
------- ------- -------
Corporate operations (248) (108) (131)
Goodwill amortization (45) (24) (22)
Realized investment gains 4 27 40
Non-recurring items (288)(a) (353)(b) (143)(c)
------- ------- -------
Total consolidated $ 764 $ 542 $ 653
------- ------- -------
</TABLE>
(a) Includes $378 million pretax ($246 million aftertax) litigation settlements
and $65 million pretax ($42 million aftertax) Year 2000 costs.
(b) Includes $272 million pretax ($247 million aftertax) merger-related costs,
$113 million pretax ($73 million aftertax) loss on sale of non-strategic
assets, and $50 million pretax ($33 million aftertax) litigation
settlement.
(c) Includes $165 million pretax ($111 million aftertax) loss on sale of
non-strategic assets and $50 million pretax ($32 million aftertax)
write-down of USLIFE group business.
Division balance sheet information was as follows:
<TABLE>
<CAPTION>
Assets Liabilities
---------------------------------- ----------------------------------
In millions 1998 1997 1996 1998 1997 1996
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Retirement Services $ 56,733 $ 34,980 $ 30,256 $ 52,779 $ 33,133 $ 28,649
Life Insurance 35,656 34,428 32,447 29,166 28,099 26,879
Consumer Finance 10,867 8,977 9,169 9,640 7,976 8,239
-------- -------- -------- -------- -------- --------
Total divisions 103,256 78,385 71,872 91,585 69,208 63,767
-------- -------- -------- -------- -------- --------
Corporate 1,851 2,235 2,262 2,923 2,103 2,296
-------- -------- -------- -------- -------- --------
Total consolidated $105,107 $ 80,620 $ 74,134 $ 94,508 $ 71,311 $ 66,063
-------- -------- -------- -------- -------- --------
</TABLE>
19. Earnings Per Share
The calculation of basic and diluted earnings per share was as follows:
<TABLE>
<CAPTION>
In millions, except share data 1998 1997 1996
- ------------------------------ ------------- ------------- -------------
<S> <C> <C> <C>
Net income $ 764 $ 542 $ 653
Net dividends on convertible preferred stock (6) (6) (5)
------------- ------------- -------------
Earnings available to common shareholders(a) 758 536 648
Net dividends on dilutive securities
Convertible preferred securities of subsidiary 11 11 11
Convertible preferred stock 6 -- 5
Earnings available to common ------------- ------------- -------------
shareholders assuming dilution(b) $ 775 $ 547 $ 664
------------- ------------- -------------
Average shares outstanding(a) 251,395,799 242,068,777 242,853,420
Dilutive securities
Convertible preferred securities of subsidiary 6,144,016 6,144,016 6,144,016
Convertible preferred stock(c) 2,317,701 -- 2,019,766
Stock options 1,604,122 1,018,318 912,275
Average shares outstanding ------------- ------------- -------------
assuming dilution(b) 261,461,638 249,231,111 251,929,477
------------- ------------- -------------
Net income per share
Basic $ 3.02 $ 2.21 $ 2.67
Diluted 2.96 2.19 2.63
------------- ------------- -------------
</TABLE>
(a) Used to compute basic earnings per share.
(b) Used to compute diluted earnings per share.
(c) Excludes 2,344,320 shares in 1997 due to antidilution.
53
<PAGE> 32
20. Quarterly Data (Unaudited)
Selected quarterly financial data was as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------- -------------------------------------------
In millions,
except per share data 4th 3rd 2nd 1st 4th 3rd 2nd 1st
- --------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums and other
considerations $ 920 $ 916 $ 891 $ 878 $ 890 $ 839 $ 832 $ 801
Net investment income 1,305 1,284 1,280 1,226 1,037 1,010 1,002 971
Total revenues 2,627 2,589 2,556 2,479 2,324 2,235 2,226 2,142
Insurance and annuity
benefits 1,312 1,337 1,286 1,224 1,135 1,074 1,083 1,040
Operating costs and
expenses 442 382 385 382 383 353 344 343
Total benefits and expenses 2,600(a) 2,173 2,104 2,051 1,940 1,851 2,272(b) 1,791
Net income (loss) 1(a) 255 264 244 230 226 (124)(b) 210
------- ------- ------- ------- ------- ------- ------- -------
Per common share
Net income (loss)
Basic $ .00 $ 1.00 $ 1.03 $ .98 $ .94 $ .92 $ (.52) $ .87
Diluted .00(a) .98 1.01 .96 .92 .91 (.52)(b) .85
Dividends paid .375 .375 .375 .375 .35 .35 .35 .35
Market price
High 79 75 11/16 71 5/8 64 15/16 56 1/4 54 3/4 49 5/8 44 5/8
Low 52 9/16 59 7/8 63 1/16 52 5/16 46 9/16 46 13/16 36 1/2 39 3/8
Close 78 63 7/8 71 3/16 64 11/16 54 1/16 51 7/8 47 3/4 40 3/4
------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
1996
In millions, ----------------------------------------------------
except per share data 4th 3rd 2nd 1st
- --------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Premiums and other
considerations $ 820 $ 820 $ 824 $ 780
Net investment income 961 943 945 924
Total revenues 2,190 2,197 2,180 2,147
Insurance and annuity
benefits 1,057 1,052 1,057 1,052
Operating costs and
expenses 359 343 355 326
Total benefits and expenses 2,028(c) 1,863(d) 1,911(e) 1,832
Net income (loss) 95(c) 199(d) 163(e) 196
------- ------- ------- -------
Per common share
Net income (loss)
Basic $ .39 $ .81 $ .66 $ .80
Diluted .39(c) .80(d) .65(e) .79
Dividends paid .325 .325 .325 .325
Market price
High 41 3/4 38 3/4 37 5/8 37 7/8
Low 35 3/4 34 32 7/8 33 1/4
Close 40 7/8 37 3/4 36 3/8 34 1/2
------- ------- ------- -------
</TABLE>
(a) Includes $378 million pretax ($246 million aftertax or $.98 per share)
litigation settlements.
(b) Includes $272 million pretax ($247 million aftertax or $1.02 per share)
merger-related costs, $113 million pretax ($73 million aftertax or $.30 per
share) loss on sale of non-strategic assets, and $50 million pretax ($33
million aftertax or $.14 per share) litigation settlement.
(c) Includes $145 million pretax ($93 million aftertax or $.39 per share) loss
on sale of non-strategic assets.
(d) Includes $20 million pretax ($18 million aftertax or $.07 per share) loss
on sale of non-strategic assets.
(e) Includes $50 million pretax ($32 million aftertax or $.13 per share)
write-down of USLIFE group business.
54
<PAGE> 33
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, 1998, 1997, and 1996,
and the related consolidated statements of income, shareholders' equity,
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements 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, 1998, 1997, and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ EARNST & YOUNG LLP
Houston, Texas
February 22, 1999
55
<PAGE> 1
- --------------------------------------------------------------------------------
AMERICAN GENERAL CORPORATION
EXHIBIT 21 - SUBSIDIARIES OF AMERICAN GENERAL CORPORATION
The following list includes certain, but not all, of American General
Corporation's subsidiaries at February 28, 1999. Subsidiaries of subsidiaries
are indicated by indentations.
<TABLE>
<CAPTION>
Jurisdiction
Name of Incorporation
- -----------------------------------------------------------------------------------------
<S> <C> <C>
AGC Life Insurance Company.................................. Missouri
American General Life and Accident Insurance Company...... Tennessee
Independent Fire Insurance Company..................... Florida
American General Property Insurance Company of
Florida............................................. Florida
American General Life Insurance Company................... Texas
American General Annuity Service Corporation........... Texas
American General Life Companies........................ Delaware
American General Life Insurance Company of New York.... New York
The Variable Annuity Life Insurance Company............ Texas
The Variable Annuity Marketing Company............... Texas
VALIC Investment Services Company.................... Texas
VALIC Retirement Services Company.................... Texas
American General Property Insurance Company............... Tennessee
The Franklin Life Insurance Company....................... Illinois
The American Franklin Life Insurance Company........... Illinois
Franklin Financial Services Corporation................ Delaware
Western National Corporation.............................. Delaware
WNL Holding Corp....................................... Delaware
American General Annuity Insurance Company........... Texas
WNL Insurance Services, Inc. ........................ Delaware
American General Capital, L.L.C. ........................... 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............................. Indiana
American General Finance, Inc. ........................... Alabama
American General Financial Center......................... Utah
American General Investment Holding Corporation............. Delaware
American General Investment Management Corporation.......... Delaware
American General Realty Advisors, Inc. ..................... Delaware
American General Realty Investment Corporation ............. Texas
Knickerbocker Corporation................................... Texas
USLIFE Corporation.......................................... Delaware
All American Life Insurance Company....................... Illinois
American General Assurance Company........................ Illinois
American General Life Insurance Company of Pennsylvania... Pennsylvania
The Old Line Life Insurance Company of America............ Wisconsin
The United States Life Insurance Company in the City of
New York............................................... New York
</TABLE>
1998 FORM 10-K
23
<PAGE> 1
EXHIBIT 23 -- CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of American General Corporation of our report dated February 22, 1999,
included in the 1998 Annual Report to Shareholders of American General
Corporation.
Our audits also included the financial statement schedules of American
General Corporation listed in Item 14(a). These schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth herein.
We also consent to the incorporation by reference in
<TABLE>
<CAPTION>
REGISTRATION
STATEMENT
NUMBER ON FORM
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
333-13407................................................... S-8
33-39200.................................................... S-8
333-13401................................................... S-8
33-39201.................................................... S-8
333-13395................................................... S-8
33-51973.................................................... S-8
2-98021..................................................... S-8
333-23275................................................... S-8
333-29383................................................... S-8
333-29393................................................... S-8
333-46895................................................... S-8
333-52015................................................... S-8
333-52103................................................... S-8
333-70923................................................... S-8
333-37851................................................... S-3
333-37877................................................... S-3
33-58317.................................................... S-3
33-58317-01................................................. S-3
33-58317-02................................................. S-3
33-51045.................................................... S-3
333-40583................................................... S-3
333-40583-01................................................ S-3
333-40583-02................................................ S-3
333-40583-03................................................ S-3
333-40583-04................................................ S-3
333-67513................................................... S-3
333-67531................................................... S-3
- -----------------------------------------------------------------------------------
</TABLE>
of our report dated February 22, 1999, with respect to the consolidated
financial statements incorporated herein by reference, and our report included
in the preceding paragraph with respect to the financial statement schedules
included in this Annual Report (Form 10-K) of American General Corporation.
/s/ ERNST & YOUNG LLP
Houston, Texas
March 19, 1999
<PAGE> 1
American General Corporation: Board of Directors
Date: January 21, 1999
Subject: Form 10-K; Limited Power of Attorney for
Purpose. The purpose of this limited power of attorney is to authorize
certain officers of the company to execute, on behalf of the
undersigned person, the company's 1998 annual report on Form 10-K,
with such amendments thereto as may be necessary or appropriate,
together with any and all exhibits and other related documents,
and to file the Form 10-K with the SEC.
LIMITED POWER OF ATTORNEY
WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation
(company), will file with the Securities and Exchange Commission (Commission)
under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its
annual report on Form 10-K for the fiscal year ended December 31, 1998 (Form
10-K), with such amendments thereto as may be necessary or appropriate, together
with any and all exhibits and other documents related thereto;
NOW, THEREFORE, the undersigned in his/her capacity as a director
or officer or both, as the case may be, of the company does hereby appoint JON
P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally,
his/her true and lawful attorney or attorneys-in-fact with or without the others
and with full power of substitution and resubstitution, to execute in his/her
name, place, and stead, in his/her capacity as a director or officer or both, as
the case may be, of the company, the Form 10-K and any and all amendments
thereto as said attorneys-in-fact or any of them shall deem necessary or
appropriate, together with all instruments necessary or incidental in connection
therewith, and to file the same or cause the same to be filed with the
Commission. Each of said attorneys-in-fact shall have full power and authority
to do and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or desirable in connection with the
Form 10-K, as fully and for all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys-in-fact and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument
this 21st day of January, 1999.
/S/ ROBERT M. DEVLIN
--------------------
<PAGE> 2
American General Corporation: Board of Directors
Date: January 21, 1999
Subject: Form 10-K; Limited Power of Attorney for
Purpose. The purpose of this limited power of attorney is to authorize
certain officers of the company to execute, on behalf of the
undersigned person, the company's 1998 annual report on Form 10-K,
with such amendments thereto as may be necessary or appropriate,
together with any and all exhibits and other related documents,
and to file the Form 10-K with the SEC.
LIMITED POWER OF ATTORNEY
WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation
(company), will file with the Securities and Exchange Commission (Commission)
under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its
annual report on Form 10-K for the fiscal year ended December 31, 1998 (Form
10-K), with such amendments thereto as may be necessary or appropriate, together
with any and all exhibits and other documents related thereto;
NOW, THEREFORE, the undersigned in his/her capacity as a director
or officer or both, as the case may be, of the company does hereby appoint JON
P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally,
his/her true and lawful attorney or attorneys-in-fact with or without the others
and with full power of substitution and resubstitution, to execute in his/her
name, place, and stead, in his/her capacity as a director or officer or both, as
the case may be, of the company, the Form 10-K and any and all amendments
thereto as said attorneys-in-fact or any of them shall deem necessary or
appropriate, together with all instruments necessary or incidental in connection
therewith, and to file the same or cause the same to be filed with the
Commission. Each of said attorneys-in-fact shall have full power and authority
to do and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or desirable in connection with the
Form 10-K, as fully and for all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys-in-fact and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument
this 21st day of January, 1999.
/S/ J. EVANS ATTWELL
--------------------
<PAGE> 3
American General Corporation: Board of Directors
Date: January 21, 1999
Subject: Form 10-K; Limited Power of Attorney for
Purpose. The purpose of this limited power of attorney is to authorize
certain officers of the company to execute, on behalf of the
undersigned person, the company's 1998 annual report on Form 10-K,
with such amendments thereto as may be necessary or appropriate,
together with any and all exhibits and other related documents,
and to file the Form 10-K with the SEC.
LIMITED POWER OF ATTORNEY
WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation
(company), will file with the Securities and Exchange Commission (Commission)
under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its
annual report on Form 10-K for the fiscal year ended December 31, 1998 (Form
10-K), with such amendments thereto as may be necessary or appropriate, together
with any and all exhibits and other documents related thereto;
NOW, THEREFORE, the undersigned in his/her capacity as a director
or officer or both, as the case may be, of the company does hereby appoint JON
P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally,
his/her true and lawful attorney or attorneys-in-fact with or without the others
and with full power of substitution and resubstitution, to execute in his/her
name, place, and stead, in his/her capacity as a director or officer or both, as
the case may be, of the company, the Form 10-K and any and all amendments
thereto as said attorneys-in-fact or any of them shall deem necessary or
appropriate, together with all instruments necessary or incidental in connection
therewith, and to file the same or cause the same to be filed with the
Commission. Each of said attorneys-in-fact shall have full power and authority
to do and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or desirable in connection with the
Form 10-K, as fully and for all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys-in-fact and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument
this 21st day of January, 1999.
/S/ BRADY F. CARRUTH
--------------------
<PAGE> 4
American General Corporation: Board of Directors
Date: January 21, 1999
Subject: Form 10-K; Limited Power of Attorney for
Purpose. The purpose of this limited power of attorney is to authorize
certain officers of the company to execute, on behalf of the
undersigned person, the company's 1998 annual report on Form 10-K,
with such amendments thereto as may be necessary or appropriate,
together with any and all exhibits and other related documents,
and to file the Form 10-K with the SEC.
LIMITED POWER OF ATTORNEY
WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation
(company), will file with the Securities and Exchange Commission (Commission)
under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its
annual report on Form 10-K for the fiscal year ended December 31, 1998 (Form
10-K), with such amendments thereto as may be necessary or appropriate, together
with any and all exhibits and other documents related thereto;
NOW, THEREFORE, the undersigned in his/her capacity as a director
or officer or both, as the case may be, of the company does hereby appoint JON
P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally,
his/her true and lawful attorney or attorneys-in-fact with or without the others
and with full power of substitution and resubstitution, to execute in his/her
name, place, and stead, in his/her capacity as a director or officer or both, as
the case may be, of the company, the Form 10-K and any and all amendments
thereto as said attorneys-in-fact or any of them shall deem necessary or
appropriate, together with all instruments necessary or incidental in connection
therewith, and to file the same or cause the same to be filed with the
Commission. Each of said attorneys-in-fact shall have full power and authority
to do and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or desirable in connection with the
Form 10-K, as fully and for all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys-in-fact and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument
this 21st day of January, 1999.
/S/ W. LIPSCOMB DAVIS JR.
-------------------------
<PAGE> 5
American General Corporation: Board of Directors
Date: January 21, 1999
Subject: Form 10-K; Limited Power of Attorney for
Purpose. The purpose of this limited power of attorney is to authorize
certain officers of the company to execute, on behalf of the
undersigned person, the company's 1998 annual report on Form 10-K,
with such amendments thereto as may be necessary or appropriate,
together with any and all exhibits and other related documents,
and to file the Form 10-K with the SEC.
LIMITED POWER OF ATTORNEY
WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation
(company), will file with the Securities and Exchange Commission (Commission)
under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its
annual report on Form 10-K for the fiscal year ended December 31, 1998 (Form
10-K), with such amendments thereto as may be necessary or appropriate, together
with any and all exhibits and other documents related thereto;
NOW, THEREFORE, the undersigned in his/her capacity as a director
or officer or both, as the case may be, of the company does hereby appoint JON
P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally,
his/her true and lawful attorney or attorneys-in-fact with or without the others
and with full power of substitution and resubstitution, to execute in his/her
name, place, and stead, in his/her capacity as a director or officer or both, as
the case may be, of the company, the Form 10-K and any and all amendments
thereto as said attorneys-in-fact or any of them shall deem necessary or
appropriate, together with all instruments necessary or incidental in connection
therewith, and to file the same or cause the same to be filed with the
Commission. Each of said attorneys-in-fact shall have full power and authority
to do and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or desirable in connection with the
Form 10-K, as fully and for all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys-in-fact and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument
this 21st day of January, 1999.
/S/ J. EDWARD EASLER II
-----------------------
<PAGE> 6
American General Corporation: Board of Directors
Date: January 21, 1999
Subject: Form 10-K; Limited Power of Attorney for
Purpose. The purpose of this limited power of attorney is to authorize
certain officers of the company to execute, on behalf of the
undersigned person, the company's 1998 annual report on Form 10-K,
with such amendments thereto as may be necessary or appropriate,
together with any and all exhibits and other related documents,
and to file the Form 10-K with the SEC.
LIMITED POWER OF ATTORNEY
WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation
(company), will file with the Securities and Exchange Commission (Commission)
under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its
annual report on Form 10-K for the fiscal year ended December 31, 1998 (Form
10-K), with such amendments thereto as may be necessary or appropriate, together
with any and all exhibits and other documents related thereto;
NOW, THEREFORE, the undersigned in his/her capacity as a director
or officer or both, as the case may be, of the company does hereby appoint JON
P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally,
his/her true and lawful attorney or attorneys-in-fact with or without the others
and with full power of substitution and resubstitution, to execute in his/her
name, place, and stead, in his/her capacity as a director or officer or both, as
the case may be, of the company, the Form 10-K and any and all amendments
thereto as said attorneys-in-fact or any of them shall deem necessary or
appropriate, together with all instruments necessary or incidental in connection
therewith, and to file the same or cause the same to be filed with the
Commission. Each of said attorneys-in-fact shall have full power and authority
to do and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or desirable in connection with the
Form 10-K, as fully and for all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys-in-fact and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument
this 21st day of January, 1999.
/S/ LARRY D. HORNER
-------------------
<PAGE> 7
American General Corporation: Board of Directors
Date: January 21, 1999
Subject: Form 10-K; Limited Power of Attorney for
Purpose. The purpose of this limited power of attorney is to authorize
certain officers of the company to execute, on behalf of the
undersigned person, the company's 1998 annual report on Form 10-K,
with such amendments thereto as may be necessary or appropriate,
together with any and all exhibits and other related documents,
and to file the Form 10-K with the SEC.
LIMITED POWER OF ATTORNEY
WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation
(company), will file with the Securities and Exchange Commission (Commission)
under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its
annual report on Form 10-K for the fiscal year ended December 31, 1998 (Form
10-K), with such amendments thereto as may be necessary or appropriate, together
with any and all exhibits and other documents related thereto;
NOW, THEREFORE, the undersigned in his/her capacity as a director
or officer or both, as the case may be, of the company does hereby appoint JON
P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally,
his/her true and lawful attorney or attorneys-in-fact with or without the others
and with full power of substitution and resubstitution, to execute in his/her
name, place, and stead, in his/her capacity as a director or officer or both, as
the case may be, of the company, the Form 10-K and any and all amendments
thereto as said attorneys-in-fact or any of them shall deem necessary or
appropriate, together with all instruments necessary or incidental in connection
therewith, and to file the same or cause the same to be filed with the
Commission. Each of said attorneys-in-fact shall have full power and authority
to do and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or desirable in connection with the
Form 10-K, as fully and for all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys-in-fact and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument
this 21st day of January, 1999.
/S/ RICHARD J.V. JOHNSON
------------------------
<PAGE> 8
American General Corporation: Board of Directors
Date: January 21, 1999
Subject: Form 10-K; Limited Power of Attorney for
Purpose. The purpose of this limited power of attorney is to authorize
certain officers of the company to execute, on behalf of the
undersigned person, the company's 1998 annual report on Form 10-K,
with such amendments thereto as may be necessary or appropriate,
together with any and all exhibits and other related documents,
and to file the Form 10-K with the SEC.
LIMITED POWER OF ATTORNEY
WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation
(company), will file with the Securities and Exchange Commission (Commission)
under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its
annual report on Form 10-K for the fiscal year ended December 31, 1998 (Form
10-K), with such amendments thereto as may be necessary or appropriate, together
with any and all exhibits and other documents related thereto;
NOW, THEREFORE, the undersigned in his/her capacity as a director
or officer or both, as the case may be, of the company does hereby appoint JON
P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally,
his/her true and lawful attorney or attorneys-in-fact with or without the others
and with full power of substitution and resubstitution, to execute in his/her
name, place, and stead, in his/her capacity as a director or officer or both, as
the case may be, of the company, the Form 10-K and any and all amendments
thereto as said attorneys-in-fact or any of them shall deem necessary or
appropriate, together with all instruments necessary or incidental in connection
therewith, and to file the same or cause the same to be filed with the
Commission. Each of said attorneys-in-fact shall have full power and authority
to do and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or desirable in connection with the
Form 10-K, as fully and for all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys-in-fact and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument
this 21st day of January, 1999.
/S/ MICHAEL E. MURPHY
---------------------
<PAGE> 9
American General Corporation: Board of Directors
Date: January 21, 1999
Subject: Form 10-K; Limited Power of Attorney for
Purpose. The purpose of this limited power of attorney is to authorize
certain officers of the company to execute, on behalf of the
undersigned person, the company's 1998 annual report on Form 10-K,
with such amendments thereto as may be necessary or appropriate,
together with any and all exhibits and other related documents,
and to file the Form 10-K with the SEC.
LIMITED POWER OF ATTORNEY
WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation
(company), will file with the Securities and Exchange Commission (Commission)
under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its
annual report on Form 10-K for the fiscal year ended December 31, 1998 (Form
10-K), with such amendments thereto as may be necessary or appropriate, together
with any and all exhibits and other documents related thereto;
NOW, THEREFORE, the undersigned in his/her capacity as a director
or officer or both, as the case may be, of the company does hereby appoint JON
P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally,
his/her true and lawful attorney or attorneys-in-fact with or without the others
and with full power of substitution and resubstitution, to execute in his/her
name, place, and stead, in his/her capacity as a director or officer or both, as
the case may be, of the company, the Form 10-K and any and all amendments
thereto as said attorneys-in-fact or any of them shall deem necessary or
appropriate, together with all instruments necessary or incidental in connection
therewith, and to file the same or cause the same to be filed with the
Commission. Each of said attorneys-in-fact shall have full power and authority
to do and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or desirable in connection with the
Form 10-K, as fully and for all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys-in-fact and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument
this 21st day of January, 1999.
/S/ JON P. NEWTON
-----------------
<PAGE> 10
American General Corporation: Board of Directors
Date: January 21, 1999
Subject: Form 10-K; Limited Power of Attorney for
Purpose. The purpose of this limited power of attorney is to authorize
certain officers of the company to execute, on behalf of the
undersigned person, the company's 1998 annual report on Form 10-K,
with such amendments thereto as may be necessary or appropriate,
together with any and all exhibits and other related documents,
and to file the Form 10-K with the SEC.
LIMITED POWER OF ATTORNEY
WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation
(company), will file with the Securities and Exchange Commission (Commission)
under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its
annual report on Form 10-K for the fiscal year ended December 31, 1998 (Form
10-K), with such amendments thereto as may be necessary or appropriate, together
with any and all exhibits and other documents related thereto;
NOW, THEREFORE, the undersigned in his/her capacity as a director
or officer or both, as the case may be, of the company does hereby appoint JON
P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally,
his/her true and lawful attorney or attorneys-in-fact with or without the others
and with full power of substitution and resubstitution, to execute in his/her
name, place, and stead, in his/her capacity as a director or officer or both, as
the case may be, of the company, the Form 10-K and any and all amendments
thereto as said attorneys-in-fact or any of them shall deem necessary or
appropriate, together with all instruments necessary or incidental in connection
therewith, and to file the same or cause the same to be filed with the
Commission. Each of said attorneys-in-fact shall have full power and authority
to do and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or desirable in connection with the
Form 10-K, as fully and for all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys-in-fact and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument
this 21st day of January, 1999.
/S/ MICHAEL J. POULOS
---------------------
<PAGE> 11
American General Corporation: Board of Directors
Date: January 21, 1999
Subject: Form 10-K; Limited Power of Attorney for
Purpose. The purpose of this limited power of attorney is to authorize
certain officers of the company to execute, on behalf of the
undersigned person, the company's 1998 annual report on Form 10-K,
with such amendments thereto as may be necessary or appropriate,
together with any and all exhibits and other related documents,
and to file the Form 10-K with the SEC.
LIMITED POWER OF ATTORNEY
WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation
(company), will file with the Securities and Exchange Commission (Commission)
under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its
annual report on Form 10-K for the fiscal year ended December 31, 1998 (Form
10-K), with such amendments thereto as may be necessary or appropriate, together
with any and all exhibits and other documents related thereto;
NOW, THEREFORE, the undersigned in his/her capacity as a director
or officer or both, as the case may be, of the company does hereby appoint JON
P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally,
his/her true and lawful attorney or attorneys-in-fact with or without the others
and with full power of substitution and resubstitution, to execute in his/her
name, place, and stead, in his/her capacity as a director or officer or both, as
the case may be, of the company, the Form 10-K and any and all amendments
thereto as said attorneys-in-fact or any of them shall deem necessary or
appropriate, together with all instruments necessary or incidental in connection
therewith, and to file the same or cause the same to be filed with the
Commission. Each of said attorneys-in-fact shall have full power and authority
to do and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or desirable in connection with the
Form 10-K, as fully and for all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys-in-fact and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument
this 21st day of January, 1999.
/S/ ROBERT E. SMITTCAMP
-----------------------
<PAGE> 12
American General Corporation: Board of Directors
Date: January 21, 1999
Subject: Form 10-K; Limited Power of Attorney for
Purpose. The purpose of this limited power of attorney is to authorize
certain officers of the company to execute, on behalf of the
undersigned person, the company's 1998 annual report on Form 10-K,
with such amendments thereto as may be necessary or appropriate,
together with any and all exhibits and other related documents,
and to file the Form 10-K with the SEC.
LIMITED POWER OF ATTORNEY
WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation
(company), will file with the Securities and Exchange Commission (Commission)
under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its
annual report on Form 10-K for the fiscal year ended December 31, 1998 (Form
10-K), with such amendments thereto as may be necessary or appropriate, together
with any and all exhibits and other documents related thereto;
NOW, THEREFORE, the undersigned in his/her capacity as a director
or officer or both, as the case may be, of the company does hereby appoint JON
P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally,
his/her true and lawful attorney or attorneys-in-fact with or without the others
and with full power of substitution and resubstitution, to execute in his/her
name, place, and stead, in his/her capacity as a director or officer or both, as
the case may be, of the company, the Form 10-K and any and all amendments
thereto as said attorneys-in-fact or any of them shall deem necessary or
appropriate, together with all instruments necessary or incidental in connection
therewith, and to file the same or cause the same to be filed with the
Commission. Each of said attorneys-in-fact shall have full power and authority
to do and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or desirable in connection with the
Form 10-K, as fully and for all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys-in-fact and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument
this 21st day of January, 1999.
/S/ ANNE M. TATLOCK
-------------------
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 62,731<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 325
<MORTGAGE> 3,368
<REAL-ESTATE> 226
<TOTAL-INVEST> 69,863
<CASH> 341
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 4,209<F2>
<TOTAL-ASSETS> 105,107
<POLICY-LOSSES> 59,664<F3>
<UNEARNED-PREMIUMS> 193<F3>
<POLICY-OTHER> 469<F3>
<POLICY-HOLDER-FUNDS> 2,518<F3>
<NOTES-PAYABLE> 11,606
1,728<F4>
85<F5>
<COMMON> 939
<OTHER-SE> 7,847<F6>
<TOTAL-LIABILITY-AND-EQUITY> 105,107
3,605<F7>
<INVESTMENT-INCOME> 5,095
<INVESTMENT-GAINS> 6
<OTHER-INCOME> 1,545<F8>
<BENEFITS> 5,159
<UNDERWRITING-AMORTIZATION> 680<F9>
<UNDERWRITING-OTHER> (893)<F10>
<INCOME-PRETAX> 1,323<F11>
<INCOME-TAX> 459<F12>
<INCOME-CONTINUING> 764
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 764
<EPS-PRIMARY> 3.02
<EPS-DILUTED> 2.96
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>MOST FIXED MATURITY SECURITIES ARE CLASSIFIED AS AVAILABLE-FOR-SALE AND
RECORDED AT FAIR VALUE.
<F2>INCLUDES COST OF INSURANCE PURCHASED (CIP).
<F3>THE SUM OF POLICY LOSSES, UNEARNED PREMIUMS, POLICY-OTHER, AND POLICYHOLDER
FUNDS COMPRISES INSURANCE AND ANNUITY LIABILITIES.
<F4>CONSISTS OF NON-CONVERTIBLE AND CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARIES.
<F5>CONSISTS OF CONVERTIBLE PREFERRED STOCK.
<F6>CONSISTS OF NET OF THE FOLLOWING: COST OF TREASURY STOCK; RETAINED EARNINGS;
AND ACCUMULATED OTHER COMPREHENSIVE INCOME.
<F7>INCLUDES INSURANCE CHARGES.
<F8>INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES.
<F9>CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET OF ACCRETION
OF INTEREST.
<F10>CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP.
<F11>EXCLUDES $17 MILLION OF MINORITY INTEREST AND $137 MILLION OF DIVIDENDS ON
PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE
CONSOLIDATED INCOME STATEMENT.
<F12>EXCLUDES $6 MILLION TAX BENEFIT FOR MINORITY INTEREST AND $48 MILLION TAX
BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF
SUBSIDIARIES.
</FN>
</TABLE>
