SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 1-7981
American General Corporation
(Exact name of registrant as specified in its articles of incorporation)
Texas 74-0483432
(State of Incorporation) (I.R.S. Employer
Identification No.)
2929 Allen Parkway, Houston, Texas 77019-2155
(Address of principal executive offices) (Zip Code)
(713) 522-1111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X . No .
As of October 29, 1999, there were 247,117,242 shares (excluding shares held
in treasury and by a subsidiary) of American General's Common Stock and
2,317,701 shares of American General's 7% Convertible Preferred Stock
outstanding.
INDEX TO FORM 10-Q
Page
Part I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Statement of Income for the nine months
and quarters ended September 30, 1999 and 1998.... 2
Consolidated Balance Sheet at September 30,1999 and
December 31, 1998 ................................ 3
Consolidated Statement of Shareholders' Equity
for the nine months ended September 30, 1999
and 1998 ......................................... 4
Consolidated Condensed Statement of Cash Flows for
the nine months ended September 30, 1999 and 1998. 5
Notes to Consolidated Financial Statements ......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............. 13
Part II. OTHER INFORMATION.
Item 1. Legal Proceedings .................................. 27
Item 6. Exhibits and Reports on Form 8-K ................... 27
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN GENERAL CORPORATION
Consolidated Statement of Income
(Unaudited)
(In millions, except per share data)
Nine Months Ended Quarter Ended
September 30, September 30,
1999 1998 1999 1998
Revenues
Premiums and other considerations. $ 2,866 $ 2,685 $ 952 $ 916
Net investment income ............ 3,897 3,790 1,300 1,284
Finance charges .................. 1,077 1,002 364 344
Realized investment gains(losses). (12) 6 (5) 1
Other ............................ 181 141 65 44
Total revenues ............... 8,009 7,624 2,676 2,589
Benefits and expenses
Insurance and annuity benefits ... 4,020 3,847 1,329 1,337
Operating costs and expenses ..... 1,215 1,149 407 382
Commissions ...................... 910 783 311 279
Change in deferred policy
acquisition costs and cost of
insurance purchased ............. (337) (150) (116) (66)
Provision for finance receivable
losses .......................... 150 153 50 53
Goodwill amortization ............ 36 32 12 12
Interest expense
Corporate ....................... 146 138 51 46
Consumer Finance ................ 420 376 144 130
Total benefits and expenses .. 6,560 6,328 2,188 2,173
Earnings
Income before income tax expense . 1,449 1,296 488 416
Income tax expense ............... 507 455 171 139
Income before minority interest
and net dividends on preferred
securities of subsidiaries ...... 942 841 317 277
Minority interest in net income of
Western National Corporation .... - 11 - -
Net dividends on preferred
securities of subsidiaries ...... 68 67 23 22
Net income ................... $ 874 $ 763 $ 294 $ 255
Net income per share
Basic ........................... $ 3.48 $ 3.02 $ 1.18 $ 1.00
Diluted ......................... $ 3.39 $ 2.95 $ 1.15 $ .98
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Balance Sheet
(Unaudited)
(In millions, except share data)
September 30, December 31,
1999 1998
Assets
Investments
Fixed maturity securities (amortized cost:
$61,676; $59,212) ........................... $ 61,281 $ 62,731
Mortgage loans on real estate ................. 3,464 3,368
Equity securities (cost: $303; $288)........... 334 325
Policy loans .................................. 2,367 2,329
Investment real estate ........................ 215 226
Other long-term investments ................... 429 230
Short-term investments ........................ 1,700 654
Total investments ......................... 69,790 69,863
Cash ........................................... 365 341
Assets held in Separate Accounts ............... 19,452 16,158
Finance receivables, net ....................... 9,790 9,275
Deferred policy acquisition costs .............. 4,529 3,253
Cost of insurance purchased .................... 1,085 956
Goodwill ....................................... 1,485 1,590
Other assets ................................... 4,779 3,671
Total assets .............................. $111,275 $105,107
Liabilities
Insurance and annuity liabilities .............. $ 65,378 $ 62,844
Liabilities related to Separate Accounts ....... 19,452 16,158
Debt (short-term)
Corporate ($1,750; $1,607) .................... 3,038 2,743
Consumer Finance ($3,966; $3,686) ............. 9,471 8,863
Income tax liabilities ......................... 764 1,543
Other liabilities .............................. 4,038 2,357
Total liabilities ......................... 102,141 94,508
Redeemable equity
Company-obligated mandatorily redeemable
preferred securities of subsidiaries
holding solely company subordinated notes
Non-convertible ............................. 1,675 1,480
Convertible ................................. 249 248
Total redeemable equity ................... 1,924 1,728
Shareholders' equity
Convertible preferred stock (shares issued
and outstanding: 2,317,701) ................... 85 85
Common stock (shares issued: 269,298,493;
outstanding: 247,038,482; 251,804,294) ........ 929 939
Cost of treasury stock ......................... (1,133) (759)
Retained earnings .............................. 7,577 7,007
Accumulated other comprehensive income (loss) .. (248) 1,599
Total shareholders' equity ................ 7,210 8,871
Total liabilities and equity .............. $111,275 $105,107
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Statement of Shareholders' Equity
(Unaudited)
(In millions, except per share data)
Nine Months Ended
September 30,
1999 1998
Convertible preferred stock
Balance at beginning and end of period ............ $ 85 $ 85
Common stock
Balance at beginning of period .................... 939 326
Issuance of common shares for acquisition ......... - 580
Stock options issued for acquisition .............. - 37
Issuance of treasury shares ....................... (10) (15)
Balance at end of period .......................... 929 928
Cost of treasury stock
Balance at beginning of period .................... (759) (621)
Share repurchases ................................. (421) (145)
Issuance under employee benefit plans and other ... 47 47
Balance at end of period .......................... (1,133) (719)
Retained earnings
Balance at beginning of period .................... 7,007 6,624
Net income ........................................ 874 763
Cash dividends (per share)
Preferred ($1.93; $1.93) ......................... (4) (4)
Common ($1.20; $1.13) ............................ (300) (281)
Balance at end of period .......................... 7,577 7,102
Accumulated other comprehensive income (loss)
Balance at beginning of period..................... 1,599 1,169
Change in net unrealized gains (losses)
on securities .................................... (1,847) 904
Balance at end of period .......................... (248) 2,073
Total shareholders' equity ...................... $ 7,210 $ 9,469
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Condensed Statement of Cash Flows
(Unaudited)
(In millions)
Nine Months Ended
September 30,
1999 1998
Operating activities
Net cash provided by operating activities ... $ 1,709 $ 1,681
Investing activities
Investment purchases .............................. (17,221) (8,593)
Investment dispositions and repayments ............ 14,278 7,158
Finance receivable originations and purchases ..... (4,484) (4,488)
Finance receivable principal payments received .... 3,817 3,550
Net increase in short-term investments ............ (1,046) (285)
Acquisition of Western National Corporation ....... - (591)
Other, net ........................................ (152) (198)
Net cash used for investing activities ...... (4,808) (3,447)
Financing activities
Retirement Services and Life Insurance
Policyholder account deposits ................... 4,903 3,473
Policyholder account withdrawals ................ (3,626) (3,361)
Net policyholder account deposits .............. 1,277 112
Short-term collateralized financings ............ 1,047 757
Total Retirement Services and Life Insurance .. 2,324 869
Consumer Finance
Net increase in short-term debt ................. 234 501
Long-term debt issuances ........................ 680 1,129
Long-term debt redemptions ...................... (354) (815)
Total Consumer Finance ........................ 560 815
Corporate
Net increase in short-term debt ................. 143 769
Long-term debt issuance ......................... 150 -
Long-term debt redemptions ...................... - (354)
Issuance of preferred securities of subsidiary .. 194 -
Common stock repurchases ........................ (419) (141)
Dividends on common and preferred stock ......... (304) (285)
Non-recourse obligation collateralized by bonds . 483 -
Other, net ...................................... (8) 79
Total Corporate ............................... 239 68
Net cash provided by financing activities ... 3,123 1,752
Net increase (decrease) in cash .................... 24 (14)
Cash at beginning of period ........................ 341 263
Cash at end of period .............................. $ 365 $ 249
Supplemental disclosure of cash flow information:
Cash paid during the period for
Income taxes .................................... $ 152 $ 258
Interest
Corporate ...................................... 145 145
Consumer Finance ............................... 438 391
Dividends on preferred securities of subsidiaries 83 82
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1999
1. Accounting Policies. The accompanying unaudited consolidated financial
statements of American General Corporation and its subsidiaries (American
General or the company) have been prepared in accordance with generally
accepted accounting principles for interim periods. In the opinion of
management, these statements include all adjustments that are necessary
for a fair presentation of the company's consolidated financial position
at September 30, 1999, the consolidated results of operations for the
three months and nine months ended September 30, 1999 and 1998, and the
consolidated shareholders' equity and cash flows for the nine months
ended September 30, 1999 and 1998.
2. New Accounting Standards. In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(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.
In June 1999, the FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," which defers the effective date of SFAS 133 for
one year, to years beginning after June 15, 2000. Adoption of SFAS 133
is not expected to have a material impact on the company's consolidated
results of operations and financial position.
3. Comprehensive Income. The components of consolidated comprehensive
income (loss) for the nine months and quarters ended September 30, 1999
and 1998 were as follows:
Nine Months Ended Quarter Ended
(In millions) September 30, September 30,
1999 1998 1999 1998
Net income .................. $ 874 $ 763 $ 294 $ 255
Other comprehensive income
Gross change in unrealized
gains(losses)on securities*
[pretax:($2,859); $1,392;
($571); $876] ............. (1,850) 898 (371) 565
Less: gains (losses)
realized in net income .... (3) (6) 1 (8)
Change in net unrealized
gains(losses)on securities*
[pretax: ($2,854); $1,402;
($573); $888] ............. (1,847) 904 (372) 573
Comprehensive income
(loss) ................. $ (973) $1,667 $ (78) $ 828
* Net of deferred policy acquisition costs.
Item 1. Financial Statements (continued).
4. Calculation of Earnings Per Share. The calculation of basic and diluted
earnings per share was as follows:
Nine Months Ended Quarter Ended
(In millions, September 30, September 30,
except share data) 1999 1998 1999 1998
Net income .............. $ 874 $ 763 $ 294 $ 255
Net dividends on
convertible preferred
stock .................. (4) (4) (1) (1)
Earnings available
to common
shareholders (a)........ 870 759 293 254
Net dividends on
dilutive securities
Convertible preferred
securities of
subsidiary ........... 8 8 3 3
Convertible preferred
stock ................ 4 4 1 1
Earnings available
to common
shareholders assuming
dilution (b) ........... $ 882 $ 771 $ 297 $ 258
(In thousands)
Average shares
outstanding (a)......... 249,792 251,051 248,045 252,586
Dilutive securities
Convertible preferred
securities of
subsidiary ........... 6,144 6,144 6,144 6,144
Convertible preferred
stock ................ 2,318 2,318 2,318 2,318
Stock options ......... 1,306 1,499 1,782 2,163
Restricted stock ...... 344 148 398 223
Average shares
outstanding assuming
dilution (b) ........... 259,904 261,160 258,687 263,434
Net income per share
Basic ................. $ 3.48 $ 3.02 $ 1.18 $ 1.00
Diluted ............... $ 3.39 $ 2.95 $ 1.15 $ .98
(a) Used to compute basic earnings per share.
(b) Used to compute diluted earnings per share.
Item 1. Financial Statements (continued)
5. Acquisition. On September 8, 1999, the company announced a definitive
agreement to acquire Financial Life Companies, Inc., the parent company
of North Central Life Insurance Company. The transaction, which is
subject to regulatory approvals, is expected to close during fourth
quarter 1999. North Central Life is a national provider of credit life
and credit disability insurance.
6. Investing Activities. Cash flows related to investing activities were
as follows:
Dispositions and
Purchases Repayments
Nine Months Ended Nine Months Ended
(In millions) September 30, September 30,
1999 1998 1999 1998
Fixed maturity securities $16,593 $8,202 $13,945 $6,527
Mortgage loans 381 238 239 541
Equity securities 38 2 27 39
Other 209 151 67 51
Total $17,221 $8,593 $14,278 $7,158
7. Derivative Financial Instruments. Derivative financial instruments did
not have a material effect on net investment income, interest expense,
or net income during the nine months ended September 30, 1999 or 1998.
Significant activity related to derivative financial instruments during
the nine months ended September 30, 1999 was as follows:
During fourth quarter 1998, the company entered into interest rate swap
agreements with notional amounts of $200 million to hedge against the
risk of declining interest rates on anticipated security purchases.
During first quarter 1999, the company purchased securities with
maturities different from those of the anticipated purchases. As a
result, the interest rate swap agreements were terminated, with an
immaterial gain.
During first quarter 1999, the company settled a treasury rate lock
agreement with a notional amount of $123 million, which was outstanding
at December 31, 1998. This agreement was used to hedge against the risk
of rising interest rates on an anticipated issuance of debt. The company
issued $150 million of long-term debt in February 1999.
During the nine months ended September 30, 1999, call and put swaptions
with notional amounts of $4.9 billion were purchased, while swaptions
with notional amounts of $2.4 billion expired. The company uses options
to enter into interest rate swap agreements to limit its exposure to
reduced spreads between investment yields and interest crediting rates
should interest rates decrease or increase significantly over prolonged
periods. Call and put swaptions with notional amounts of $4.9 billion
and $5.7 billion, respectively, and average strike rates of 4.3% and
8.5%, respectively, were outstanding at September 30, 1999. These
swaptions expire in 2000.
Item 1. Financial Statements (continued).
8. Dollar Roll Agreements. American General uses dollar roll agreements as
part of its strategy to increase investment income. Dollar rolls are
agreements to sell mortgage-backed securities (MBSs) and repurchase
substantially the same securities at a specified price and date in the
future. The dollar rolls are accounted for as short-term collateralized
financings and are included in other liabilities. At September 30, 1999,
the company had $1.0 billion of outstanding dollar roll agreements. The
average amount outstanding and the weighted average interest rate on
dollar rolls for the nine months ended September 30, 1999 were $757
million and 4.6%, respectively.
9. Redeemable Equity. On September 8, 1999, American General Capital I (the
Trust), a subsidiary trust of American General, issued 8,000,000 shares,
or $200 million, of non-convertible preferred securities. Quarterly
cumulative dividends on the preferred securities are payable by the Trust
at the annual rate of 7-7/8%.
The sole assets of the Trust are Junior Subordinated Debentures
(Subordinated Debentures) issued by American General and mandatorily
redeemable in 2048. The Trust has no independent operations. The
Subordinated Debentures are eliminated in the company's consolidated
financial statements. The interest terms and payment dates of the
Subordinated Debentures held by the Trust correspond to those of the
Trust's 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, under certain conditions, at the
option of the company, on a proportionate basis.
10. Legal Contingencies.
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 class action lawsuits. American
General previously reported that these life insurance subsidiaries had
entered into agreements to resolve substantially all of the material
pending market conduct class action lawsuits, and that the company
recorded a charge in fourth quarter 1998 covering the cost of additional
policyholder benefits and other anticipated expenses resulting from the
proposed settlements, as well as other administrative and legal costs.
The order approving the settlement agreement for The Franklin Life
Insurance Company was entered by the court on June 1, 1999, and became
final on July 1, 1999. The order approving the settlement agreement for
the life insurance subsidiaries of USLIFE Corporation was entered by the
Item 1. Financial Statements (continued).
court on July 7, 1999, and became final on August 6, 1999. While the
order approving the settlement agreement for American General Life
Insurance Company and American General Life Insurance Company of New York
was entered by the court on June 23, 1999, an appeal has been filed and
remains outstanding as of the date of this report. The order approving
the settlement agreement for American General Life and Accident Insurance
Company was entered by the court on August 26, 1999, and became final on
September 27, 1999.
Satellite Dish Financing. On May 18, 1999, the Chancery Court of the
First Judicial District of Jones County, Mississippi in a case captioned
Clayton D. Smith, et al. v. Delta TV Corporation, Don Acy, US
Electronics, American General Financial Center, Civil Action No. 96-0254,
rendered a judgment awarding approximately $500,000 in compensatory
damages and $167 million in punitive damages against A.G. Financial
Service Center, Inc. (Financial Service Center). Financial Service
Center is an indirect subsidiary of the company and formerly was named
American General Financial Center. The lawsuit was filed on November 15,
1996, by 29 individuals who in the mid-1990s each purchased a satellite
dish for approximately $2,500 from independent, unaffiliated dealers and
distributors who arranged financing for the satellite dishes through
Financial Service Center. Financial Service Center believes the judgment
is unwarranted and contrary to law. Financial Service Center has
appealed the judgment and believes that it has substantial bases for
success on appeal. Financial Service Center, together with certain other
American General companies, currently are named as defendants in other
pending cases, most of which are in Mississippi, involving the financing
of satellite dishes.
On August 19, 1999, Financial Service Center filed a voluntary petition
to reorganize under Chapter 11 of the United States Bankruptcy Code with
the United States Bankruptcy Court for the Southern District of Indiana.
The decision to reorganize was necessitated by the judgment rendered
against Financial Service Center by the Mississippi state court. The
filing for reorganization under Chapter 11 is limited to Financial
Service Center and intended to provide a fair and orderly process for
managing the appeal and the other claims against Financial Service
Center. Prior to the bankruptcy filing, Financial Service Center had
assets of approximately $7 million.
Although substantial risks and uncertainties remain with respect to the
ultimate outcome of these cases, internal and external legal counsel have
advised the company that it is not probable within the meaning of SFAS
5, "Accounting for Contingencies," that the company will ultimately incur
a material liability in connection with these cases. Accordingly, no
provision has been made in the consolidated financial statements related
to this contingency.
Item 1. Financial Statements (continued).
Other. The company is a party to various other lawsuits and proceedings,
including class action lawsuits, arising in the ordinary course of
business. Many of these lawsuits and proceedings, including those filed
by individuals who have excluded themselves from the market conduct
settlements, lawsuits relating to policies not covered by the market
conduct settlements, claims concerning the sale of industrial insurance
policies, and numerous cases involving the financing of satellite dishes,
arise in jurisdictions, such as Alabama and Mississippi and other
jurisdictions, that permit damage awards disproportionate to the actual
economic damages alleged to have been 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 some jurisdictions continues
to create the potential for an unpredictable judgment in any given suit.
11. 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
consolidated tax return through 1988. During 1999, the company and the
IRS reached a settlement of all contested issues through 1988, which
resulted in a change in the tax basis of assets acquired in a 1988
taxable purchase business combination. To reflect the new tax basis, the
company reduced tax liabilities by $70 million and reduced goodwill by
the same amount, in accordance with SFAS 109, "Accounting for Income
Taxes." The IRS is currently examining the company's tax returns for
1989 through 1996.
12. Division Results. American General reports its financial results in
three business divisions consisting of Retirement Services, Life
Insurance, and Consumer Finance, as well as a category for corporate
operations. Results of each division include earnings from its business
operations and earnings on that amount of equity considered necessary to
support its business, and exclude the impact of goodwill, net realized
investment gains (losses), and non-recurring items. Corporate operations
include parent company expenses, the cost of corporate borrowings, and
earnings on corporate assets. Operating earnings excludes aftertax
realized investment gains (losses) and non-recurring items.
Item 1. Financial Statements (continued).
Division results for the nine months ended September 30, were as follows:
Income
Revenues Before Taxes* Net Income
(In millions) 1999 1998 1999 1998 1999 1998
Retirement Services $2,661 $2,265 $ 641 $ 531 $ 427 $ 354
Life Insurance 4,079 4,134 814 763 532 500
Consumer Finance 1,280 1,192 259 228 167 146
Total divisions 8,020 7,591 1,714 1,522 1,126 1,000
Corporate operations 1 27 (217) (163) (140) (106)
Goodwill amortization (36) (32) (36) (32)
Net dividends on
preferred securities
of subsidiaries (68) (67)
Minority interest in
net income of Western
National Corporation - (11)
Operating earnings 882 784
Realized investment
gains (losses) (12) 6 (12) 6 (8) 3
Non-recurring item - - - (37) - (24)
Total consolidated $8,009 $7,624 $1,449 $1,296 $ 874 $ 763
Division results for the quarter ended September 30, were as follows:
Income
Revenues Before Taxes* Net Income
(In millions) 1999 1998 1999 1998 1999 1998
Retirement Services $ 903 $ 789 $ 213 $ 171 $ 140 $ 117
Life Insurance 1,340 1,389 277 259 182 170
Consumer Finance 436 408 88 79 57 52
Total divisions 2,679 2,586 578 509 379 339
Corporate operations 2 2 (73) (62) (46) (37)
Goodwill amortization (12) (12) (12) (12)
Net dividends on
preferred securities
of subsidiaries (23) (22)
Operating earnings 298 268
Realized investment
gains (losses) (5) 1 (5) 1 (4) -
Non-recurring item - - - (20) - (13)
Total consolidated $2,676 $2,589 $ 488 $ 416 $ 294 $ 255
*Excludes minority interest and net dividends on preferred securities of
subsidiaries, which are reported aftertax on statement of income.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This item presents specific comments on material changes to the company's
consolidated results of operations, capital resources, and liquidity for the
periods reflected in the interim financial statements filed with this report.
This analysis should be read in conjunction with the consolidated financial
statements and related notes on pages 2 through 12 of this Quarterly Report
on Form 10-Q.
The reasons for any significant variations between the quarters ended
September 30, 1999 and 1998 are the same as those discussed below for the
respective nine month periods, unless otherwise noted.
OVERVIEW
American General reported financial highlights as follows:
Nine Months Ended Quarter Ended
(In millions, September 30, September 30,
except per share data) 1999 1998 1999 1998
Operating earnings $ 882 $ 784 $ 298 $ 268
Operating earnings per share 3.42 3.03 1.16 1.03
Net income 874 763 294 255
Net income per share 3.39 2.95 1.15 .98
Revenues and deposits 15,641 13,579 5,187 4,703
Assets 111,275 102,197
Shareholders' equity 7,210 9,469
Operating earnings and net income increased 13% and 15%, respectively, for the
nine months ended September 30, 1999, compared to the same period in 1998,
primarily due to increases in earnings in the company's Retirement Services
division (up 21%), Life Insurance division (up 6%), and Consumer Finance
division (up 14%). Operating earnings and net income for third quarter 1999
increased 11% and 15%, respectively, compared to third quarter 1998.
Quarterly per share amounts increased 13% and 17%, respectively, compared to
the 11% and 15% increases in aggregate operating earnings and net income, due
to the effect of repurchasing 6.6 million shares of the company's common stock
during the last twelve months. Revenues and deposits increased $2.1 billion,
or 15%, for the nine month period and $484 million, or 10%, for the quarter
ended September 30, 1999 compared to the same periods in 1998, primarily due
to higher fixed and variable deposits in the Retirement Services division.
Growth in the operating divisions, as discussed below, resulted in a 13%
increase in assets, excluding the fair value adjustment related to securities,
from September 30, 1998 to September 30, 1999. During the last twelve months,
net income increased shareholders' equity by $875 million. This increase was
offset by dividends to shareholders of $400 million, share repurchases of $471
million, and a decrease in the fair value adjustment on securities of $2.3
billion. In the first nine months of 1999, the company purchased 5.8 million
shares of its common stock for $421 million. The company purchased 2.7
million shares for $200 million in third quarter 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
BUSINESS DIVISIONS
The company manages its business operations through three divisions, which are
based on the products and services offered, the distribution channels
utilized, and the markets served. The results of each division for the nine
months and quarters ended September 30, 1999 and 1998 are discussed below.
Retirement Services
Retirement Services division results were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
Earnings $ 427 $ 354 $ 140 $ 117
Deposits
Fixed 3,697 2,773 1,311 1,012
Variable 2,221 1,816 692 664
Assets
Investments 40,312 40,052
Separate Accounts 17,512 11,896
Net investment income 2,205 2,037 748 704
Investment margin
Fixed 733 599 243 199
Variable 157 118 58 41
Operating expenses 232 167 81 60
Earnings. Division earnings for the nine months and quarter ended
September 30, 1999 increased $73 million or 21%, and $23 million or 20%,
respectively, compared to the same periods in 1998. Earnings growth was
primarily attributable to growth in invested assets supporting fixed accounts,
higher fixed investment spread, and growth in Separate Account assets. Asset
growth, excluding the fair value adjustment related to the division's
securities, was 16% from September 30, 1998 to September 30, 1999. This
growth was due to fixed and variable deposits, stock market appreciation on
assets held in Separate Accounts, and interest credited to fixed accounts,
partially offset by account withdrawals.
Deposits. Fixed deposits for the nine months and quarter ended September 30,
1999 increased 33% and 29%, respectively, due to the division's continued
success in marketing non-qualified single premium fixed annuities through
financial institutions. This increase was partially offset by an 8% decline
in tax-qualified fixed deposits, reflecting participants' continuing interest
in equity-based variable products. Correspondingly, variable deposits
increased 22% for the nine months ended September 30, 1999, compared to the
same period in 1998. Variable deposits increased only 4% during third quarter
1999, compared to third quarter 1998, due to a lower amount of large capital
transfers during the quarter. The amount of capital transfers can vary
significantly each quarter.
Net Investment Income on Invested Assets. Net investment income on invested
assets increased 8% for the nine months and 6% for the quarter ended
September 30, 1999, due to a 12% growth in average invested assets, partially
offset by a decline in investment yield of 28 basis points for the nine
months and 23 basis points for the quarter ended September 30, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Fixed Investment Margin. Fixed investment margin represents the difference
between net investment income on invested assets and interest credited to
policyholders' fixed accounts. The 22% increase in fixed investment margin
resulted from the year-to-date increase in net investment income combined with
a decline in average crediting rates on policyholder reserves.
Investment results on fixed accounts were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
Investment yield 7.71% 7.99% 7.68% 7.91%
Average crediting rate 5.38 5.90 5.35 5.88
Fixed investment spread 2.33 2.09 2.33 2.03
Fixed investment spread is the difference between yield on invested assets and
the average interest rate credited to policyholder fixed accounts. The 28
basis point decrease in yield for the nine-month period was due to lower
yields on new investments and lower premiums on investments called or
tendered before their maturity dates. The decrease in the average crediting
rate exceeded the decrease in investment yield, producing an increase in
investment spread of 24 basis points for the nine-month period.
Variable Investment Margin. Variable investment margin consists of mortality
and expense risk fees for Separate Accounts and asset management fees of
assets within the Separate Accounts. The $39 million, or 33%, increase in
variable investment margin for the nine months ended September 30, 1999,
compared to the same period in 1998, was driven by increases in Separate
Account assets, partially offset by lower fee rates due to competitive
pressures.
Surrenders. The division's rate of policyholder surrenders as a percentage
of average policyholders' account balances were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
1999 1998 1999 1998
Tax-qualified 6.14% 5.70% 6.08% 5.63%
Non-qualified 9.39 11.39 9.56 11.00
Factors contributing to higher tax-qualified surrenders included increased
competition from other investment products and lower average interest
crediting rates on fixed accounts. The decrease in non-qualified surrenders
was due to the growth in assets associated with the sales of financial
institution proprietary products that are within the surrender charge period.
Operating Expenses. Operating expenses increased $65 million for the nine
months and $21 million for the quarter ended September 30, 1999, compared to
the same periods of 1998, due to administrative expenses to support the higher
level of sales, as well as new marketing and sales initiatives. In addition,
the division incurred higher costs to improve its infrastructure, including
administrative system upgrades and the establishment of a centralized
customer care center. The ratio of operating expenses to average assets
increased to .52% for the nine months of 1999 from .43% for the same period
of 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Life Insurance
Life Insurance division results were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
Earnings $ 532 $ 500 $ 182 $ 170
Deposits 1,714 1,366 508 438
Assets
Investments 28,157 29,717
Separate Accounts 1,940 1,115
Insurance and annuity liabilities 26,031 25,421
Premiums and other considerations 2,294 2,344 755 793
Net investment income 1,651 1,675 539 561
Operating expenses 530 532 173 163
Earnings. Division earnings increased 6% for the nine months ended
September 30, 1999 compared to the same period in 1998. The increase was
primarily due to increased investment margin, growth in insurance in force,
and improved mortality margins.
Sales, Deposits, and Premiums. Sales and deposits of individual life
insurance and annuities were as follows:
Nine Months Ended Quarter Ended
(In millions) September 30, September 30,
1999 1998 1999 1998
Sales
Individual life insurance $ 629 $ 456 $ 160 $ 136
Annuities 445 358 148 113
Deposits
Individual life insurance 1,236 953 353 312
Annuities 478 413 155 126
Total annualized sales of individual life and annuity products increased 32%
and 23% for the first nine months and quarter ended September 30, 1999,
respectively, compared to the same periods in 1998. The increases of $173
million in life insurance sales for the nine months, and $24 million for third
quarter, were due to strong sales of corporate executive benefits products in
1999, growth in recently introduced variable products, and increased sales of
term life insurance. Sales of corporate executive benefits products fluctuate
significantly from quarter to quarter due to large case size. New annuity
sales increased 24% and 31% for the first nine months and third quarter 1999,
respectively, due to continued strong sales of variable annuity products
through financial institutions.
Total deposits in 1999 were 25% higher for the nine months, and 16% higher for
third quarter, compared to the same periods of 1998, primarily due to the
increased sales of corporate executive benefits products and variable
annuities. Premiums and other considerations decreased year-to-date in 1999
compared to 1998 primarily due to de-emphasis of non-strategic, non-life lines
of business.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Assets. Investments, excluding the fair value adjustment related to the
division's securities, increased 2% from September 30, 1998 to September 30,
1999. Assets held in Separate Accounts increased $825 million from September
30, 1998, primarily due to deposits and an increase in market value over the
past twelve months, partially offset by surrenders and withdrawals over the
same period.
Investment Results. Investment results were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
1999 1998 1999 1998
Investment yield 8.24% 8.48% 8.02% 8.53%
Average crediting rate 5.91 6.02 5.93 5.99
Investment spread 2.33 2.46 2.09 2.54
Net investment income and investment yield decreased in the first nine months
and third quarter of 1999, compared to the same periods of 1998, due to lower
premiums on investments called or tendered before their maturity dates and a
lower yield on new and reinvested funds. These decreases were partially offset
by management's reduction of crediting rates on interest-sensitive products,
resulting in a 13 basis point decrease in investment spread compared to the
1998 year-to-date period and a 45 basis point decline in the third quarter.
Mortality and Persistency. Death claims and premium termination rates were
as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
1999 1998 1999 1998
Death claims (in millions) $ 753 $ 751 $ 245 $ 247
Death claims per $1,000
of in force $ 3.68 $ 3.63 $ 3.60 $ 3.58
Premium termination rate 12.61% 12.69% 13.29% 13.58%
Death claims per $1,000 of in force increased in the first nine months and
third quarter of 1999, compared to the same periods in 1998, due to an
increase in average policy size and the effect from aging of the in force
business. This increase reflects sales of policies with greater face amounts
to individuals who, on average, are older. Overall, mortality experience
improved relative to pricing assumptions. The decrease in the quarterly
premium termination rate for third quarter 1999 compared to third quarter 1998
reflects expected fluctuations in terminations.
Operating Expenses. Operating expenses decreased $2 million for the first
nine months of 1999 and increased $10 million for the third quarter, compared
to the same periods in 1998. During the first nine months of 1999, the
division benefitted from efficiency gains derived from consolidation of
administrative functions under a centralized shared services platform and
lower pension and employee benefit-related expenses, offset by higher
technology costs, costs associated with terminating certain reinsurance
arrangements, and costs of new initiatives to market variable and corporate
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
executive benefits products. The increase for third quarter 1999 relates to
lower state premium tax expense in third quarter 1998. The ratio of operating
expenses to direct premiums and deposits was 14.52% and 15.01% for the first
nine months and third quarter of 1999, respectively, compared to 15.95% and
14.86% in the same periods of 1998.
Consumer Finance
Consumer Finance division results were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
($ in millions) 1999 1998 1999 1998
Earnings $ 167 $ 146 $ 57 $ 52
Average finance receivables 9,867 8,308 10,018 8,679
Finance charges 1,077 1,002 364 344
Finance margin 657 626 220 214
Interest spread 8.40% 9.49% 8.27% 9.20%
Operating expenses $ 366 $ 355 $ 124 $ 120
Earnings. Division earnings increased 14% for the nine months and 10% for the
quarter ended September 30, 1999, compared to the same periods of 1998,
primarily due to an increase in average finance receivables, improved credit
quality, and efficiency gains, partially offset by lower yields.
Finance Receivables. Finance receivables, net of the allowance for finance
receivable losses, increased $1.4 billion, from $8.4 billion at September 30,
1998 to $9.8 billion at September 30, 1999. Average finance receivables
increased 19% in the first nine months of 1999 compared to the same period in
1998, due to growth from $6.0 billion of new loan production in the division's
branch offices, $1.8 billion of real estate loans acquired, and $6.4 billion
of loans liquidated during the last twelve months.
Finance Margin. Finance margin, which represents the difference between
finance charges and the cost of borrowings to support the level of finance
receivables, increased 5% for the nine months ended September 30, 1999,
compared to the same period in 1998. Finance charges increased 8% due to the
19% increase in average finance receivables during the first nine months of
1999, partially offset by a 152 basis point decline in yield. Cost of
borrowing increased 12% due to the 19% increase in average borrowings,
partially offset by a 43 basis point decline in borrowing cost.
Interest Spread. The components of interest spread and risk-adjusted spread
were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
1999 1998 1999 1998
Yield on finance receivables 14.59% 16.11% 14.45% 15.75%
Borrowing cost 6.19 6.62 6.18 6.55
Interest spread 8.40 9.49 8.27 9.20
Charge-off ratio 2.04 2.58 2.02 2.44
Risk-adjusted spread 6.36% 6.91% 6.25% 6.76%
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
The spread between yield and borrowing cost decreased 109 basis points for the
first nine months of 1999 and 93 basis points for the third quarter of 1999,
compared to the same periods in 1998, since yields declined more than
borrowing costs. The lower yield on finance receivables reflected the higher
proportion of loans secured by real estate, which generally have lower yields
and lower charge offs.
Risk-adjusted spread represents the difference between interest spread and the
charge-off ratio. The nine-month decrease in risk-adjusted spread of 55 basis
points, compared to the 109 basis point decrease in interest spread, was a
result of improvement in the charge-off ratios in all portfolios and the
increased proportion of real estate loans in the total portfolio.
Operating Expenses. Operating expenses as a percentage of average finance
receivables decreased to 4.96% for the nine-month period in 1999 from 5.69%
for the same period in 1998. This decrease reflects a 19% increase in average
finance receivables compared to a 3% increase in operating expenses for the
nine months ended September 30, 1999 compared to the same period in 1998.
Credit Quality. 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:
Nine Months Ended Quarter Ended
September 30, September 30,
($ in millions) 1999 1998 1999 1998
Charge offs $ 150 $ 161 $ 50 $ 53
% of average receivables 2.04% 2.58% 2.02% 2.44%
September 30, December 31,
1999 1998 1998
Delinquencies (60+ days) $ 393 $ 353 $ 384
% of finance receivables 3.67% 3.75% 3.75%
Allowance for finance
receivable losses $ 386 $ 365 $ 382
% of finance receivables 3.80% 4.15% 3.96%
The decrease in the charge-off ratio for the first nine months and quarter
ended September 30, 1999, compared to the same periods in 1998, resulted from
the improvement in credit quality due to the continued shift towards a higher
percentage of real estate loans and the division's adherence to strict
underwriting standards. At September 30, 1999, real estate loans represented
63% of total finance receivables, compared to 56% at September 30, 1998 and
60% at December 31, 1998. The increase in delinquencies at September 30, 1999
compared to September 30, 1998 and December 31, 1998 was due to the maturing
of acquired real estate portfolios that contained minimal delinquent loans
when purchased. The decrease in the delinquency ratio at September 30, 1999
compared to the prior periods reflects the higher amount of delinquencies
offset by increased finance receivable balances.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
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. The allowance as a percentage of finance receivables
has declined as a result of improved credit quality and portfolio growth;
however, the ratio of allowance for finance receivable losses to annualized
quarterly charge offs improved to 192% for third quarter 1999 compared to 171%
for third quarter 1998 and 161% for fourth quarter 1998.
INVESTMENTS
Invested assets consist primarily of fixed maturity securities, mortgage loans
on real estate, and policy loans.
Fair Value of Securities. An increase in interest rates and resulting
decreases in bond values in 1999 caused a $3.9 billion decrease in the fair
value adjustment to fixed maturity securities and a related $1.8 billion
reduction in shareholders' equity from December 31, 1998. The components of
the fair value adjustment at September 30, 1999 and December 31, 1998, and the
1999 change, were as follows:
September 30, December 31,
(In millions) 1999 1998 Change
Fair value adjustment to fixed
maturity securities $ (395) $ 3,519 $(3,914)
Decrease in deferred policy
acquisition costs and cost of
insurance purchased (17) (1,083) 1,066
Decrease (increase) in deferred
income taxes 145 (861) 1,006
Net unrealized gains (losses)
Fixed maturity securities (267) 1,575 (1,842)
Equity securities 19 24 (5)
Net unrealized gains (losses) on
securities $ (248) $ 1,599 $(1,847)
Fixed Maturity Securities. At September 30, 1999, fixed maturity securities
included $46.3 billion of corporate bonds, $12.7 billion of mortgage-backed
securities, and $2.2 billion of bonds issued by governmental agencies. The
average credit rating of the fixed maturity securities was A at September 30,
1999 and A+ at December 31, 1998. Average credit ratings by category at
September 30, 1999 were as follows:
September 30, Average Credit
(In millions) 1999 % Rating
Investment grade $45,089 73% A
Mortgage-backed 12,667 21 AAA
Below investment grade 3,525 6 BB-
Total fixed maturity securities $61,281 100% A
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Below Investment Grade Securities. Below investment grade securities have
credit ratings below BBB-. Below investment grade securities were 6% of fixed
maturity securities at September 30, 1999 and December 31, 1998. The company
invests in below investment grade securities to enhance the overall yield of
the portfolio. Investment income from below investment grade securities was
$264 million (9.9% yield) for the nine months ended September 30, 1999 and
$228 million (10.7% yield) for the same period in 1998. Realized investment
losses on below investment grade securities were $72 million and $16 million
for the nine months ended September 30, 1999 and 1998, respectively.
Non-Performing Securities. Bonds are deemed to be non-performing when the
payment of interest is sufficiently uncertain as to preclude accrual
of interest. Non-performing bonds were less than .1% of total fixed maturity
securities at September 30, 1999 and December 31, 1998.
Mortgage Loans. Mortgage loans on real estate, consisting primarily of loans
on office and retail properties, represented 5% of invested assets at
September 30, 1999 and December 31, 1998. Mortgage loan statistics at
September 30, 1999 and December 31, 1998 were as follows:
September 30, December 31,
(In millions) 1999 1998
Mortgage loans $ 3,494 $ 3,402
Allowance for losses (30) (34)
Mortgage loans, net $ 3,464 $ 3,368
Percentage of mortgage loans
Allowance for losses .9% 1.0%
Restructured loans 1.9 2.1
Delinquent loans (60+ days) .5 .6
Watch list loans 1.9 2.4
The yield on restructured loans was 7.9% for the nine months ended
September 30, 1999.
CAPITAL RESOURCES
Corporate Capital. American General's target capital structure consists of
25% corporate debt, 15% redeemable equity, and 60% shareholders' equity. At
September 30, 1999, corporate capital totaling $12.4 billion, excluding the
fair value adjustment on securities, consisted of $3.0 billion corporate debt
(24%), $1.9 billion redeemable equity (16%), and $7.5 billion shareholders'
equity (60%).
Redeemable equity increased $196 million from December 31, 1998 to
September 30, 1999 due to the September 1999 issuance of 7-7/8% preferred
securities. Net proceeds from this issuance were used to reduce short-term
debt and repurchase the company's common stock.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Retirement Services and Life Insurance. 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.
American General's target statutory equity for each of its principal
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
September 30, 1999, American General's principal retirement services and life
insurance companies, on a combined basis, had total adjusted capital of $4.7
billion, which was 2.6 times the Company Action Level RBC.
Consumer Finance. The Consumer Finance division's capital varies directly
with the amount of finance receivables. Consumer Finance capital of $10.9
billion at September 30, 1999 included $9.5 billion of Consumer Finance debt,
which was not guaranteed by the parent company, and $1.4 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 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 September 30, 1999 and December 31, 1998.
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 debt
markets at competitive rates. At September 30, 1999, the company had
committed and unused credit facilities of $5.0 billion, substantially all of
which were to support the company's commercial paper borrowings. The company
believes that its overall sources of liquidity will continue to be sufficient
to satisfy its foreseeable financial obligations.
Parent Company. The parent company received $254 million of dividends, net
of capital contributions, from subsidiaries during the nine months ended
September 30, 1999, compared to $729 million for the same period in 1998.
Net dividends received by the parent company were $114 million in third
quarter 1999, compared to $193 million in third quarter 1998. The decline in
net dividends for the nine month period was primarily a result of capital
contributions in first quarter 1999, which were required to fund market
conduct-related costs in the Life Insurance division. These capital
contributions were necessary to maintain target capital levels. 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 the company's ability to meet its cash obligations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Retirement Services. Principal sources of cash for the Retirement Services
division were as follows:
Nine Months Ended
September 30,
(In millions) 1999 1998
Operating cash flow $1,228 $1,175
Fixed policyholder account deposits,
net of withdrawals 1,093 168
Variable account deposits, net of
withdrawals 1,867 1,815
Short-term collateralized financings 643 435
Net cash provided by operating activities increased $53 million in the first
nine months of 1999, compared to the same period of 1998, primarily due to an
increase in premiums from structured settlement sales, as well as higher
investment income from the division's larger investment base. The $925
million increase in net fixed policyholder account deposits was due to growth
in single premium fixed annuity business sold through financial institutions.
The increase in net variable account deposits was a result of policyholders'
continuing interest in equity-based investments and new product introductions.
Because the investment risk on variable accounts lies predominately with the
policyholder, deposits and withdrawals related to Separate Accounts are not
included in the company's consolidated condensed statement of cash flows. The
increase in cash from short-term collateralized financings, which are included
in other liabilities, relates to the company's expanded use of dollar rolls
as part of its investment strategy.
The major uses of cash were the purchase of investments necessary to support
increases in insurance and annuity liabilities and, to a lesser extent,
dividends paid to the parent. The subsidiaries in this division paid net
dividends of $103 million in the first nine months of 1999 and received net
contributions of $6 million in the same period of 1998. The 1998 net
contributions reflect $188 million of capital contributions in second quarter
1998 to support the acquisition of a block of individual annuity business.
Life Insurance. Principal sources of cash for the Life Insurance division
were as follows:
Nine Months Ended
September 30,
(In millions) 1999 1998
Operating cash flow $ 209 $ 313
Fixed policyholder account deposits,
net of withdrawals 184 (56)
Variable account deposits, net of
withdrawals 567 275
Short-term collateralized financings 404 322
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Net cash provided by operating activities decreased $104 million in the nine
months ended September 30, 1999, compared to the 1998 period, primarily due
to the funding in 1999 of previously accrued market conduct costs. The $240
million increase in net fixed policyholder account deposits reflects the
growth in lump sum fixed deposits that will be transferred to variable
accounts over a one year period, as well as higher withdrawals in 1998 for
annuities that had reached the end of their surrender period. The $292
million increase in net variable account deposits in 1999 compared to 1998 was
a result of growth in the corporate executive benefits business, combined with
policyholders' continuing interest 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, to a lesser
extent, dividends paid to the parent. In the first nine months of 1999, the
division's subsidiaries received capital contributions of $247 million
primarily to fund market conduct-related costs and paid dividends of $381
million, resulting in net dividends paid of $134 million, compared to $578
million of net dividends paid in the same period of 1998.
Consumer Finance. Principal sources of cash for the Consumer Finance division
were as follows:
Nine Months Ended
September 30,
(In millions) 1999 1998
Operating cash flow $ 377 $ 334
Increase in debt 560 815
Net cash provided by operating activities increased $43 million in the first
nine months of 1999, compared to the same period of 1998, due to the increase
in finance charges from higher average net receivables. Cash generated from
the increase in debt during the first nine months of 1999, compared to the
same period in 1998, declined due to lower growth in finance receivables in
1999. Net dividends paid to the parent totaled $164 million and $18 million
in the first nine months of 1999 and 1998, respectively. The 1998 growth in
receivables limited the amount of dividends paid to the parent company in the
first nine months of 1998.
YEAR 2000
Internal Systems. American General has numerous technology and non-technology
systems that are managed on a decentralized basis. The company's Year 2000
readiness efforts have been performed by its key business units with
centralized oversight. Each business unit has executed a plan to minimize the
risk of a significant negative impact on its operations.
While the specifics of the plans varied, the plans included 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; and (5)
return the systems to operations. As of September 30, 1999, these activities
had been substantially completed, making the company's critical systems Year
2000 ready.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
The company will continue to test its systems through fourth quarter 1999 to
maintain Year 2000 readiness. In addition, the company currently is
implementing plans for the century transition. These plans restrict systems
modifications from November 1999 through January 2000, create rapid response
teams to address problems, and limit vacations for certain business and
systems personnel.
Third Party Relationships. The company has relationships with various third
parties who must also 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
infrastructure 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 exercises less, or no, control over third parties' Year 2000
readiness.
The company has developed plans to assess and mitigate the risks associated
with the potential failure of third parties to achieve Year 2000 readiness.
The company's plans include the following: (1) identify and classify third
party dependencies; (2) research, analyze, and document Year 2000 readiness
for critical third parties; (3) test critical hardware and software products
and electronic interfaces; and (4) where feasible, take reasonable precautions
to protect against receipt of non-Year 2000 ready data from third parties.
As of September 30, 1999, these activities had been substantially completed.
Where necessary, critical third party dependencies have been included in the
company's contingency plans. Due to the various stages of Year 2000 readiness
for these critical third-party dependencies, the company's activities related
to critical third parties will continue, as necessary, into early 2000.
Contingency Plans. The company's contingency planning process, which was
designed to reduce the risk of Year 2000-related business failures relating
to internal systems and third party relationships, included the following
activities: (1) evaluate the consequences of failure of critical business
processes with significant exposure to Year 2000 risk; (2) determine the
probability of a Year 2000-related failure for those critical processes that
have a high consequence of failure; (3) develop an action plan to complete
contingency plans for critical processes that rank high in consequence and
probability of failure; and (4) complete the applicable contingency plans.
As of September 30, 1999, these activities had been substantially completed.
Individual contingency plans will continue to be tested and updated, as
necessary, into early 2000.
Risks and Uncertainties. Based on the Year 2000 readiness of its internal
systems, century transition plans, plans to deal with third party
relationships, and contingency plans, 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
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
achieved due to 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, failure of contingency plans to reduce Year 2000-related
business failures, 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 September 30, 1999, the company has incurred and expensed
pretax expenses of $95 million related to Year 2000 readiness, including $15
million incurred year-to-date in 1999 and $37 million incurred in the first
nine months of 1998. These 1998 expenses, of which $11 million related to the
Retirement Services division, $21 million related to the Life Insurance
division, and $3 million related to the Consumer Finance division, were
excluded from 1998 division earnings, consistent with the manner in which
management reviewed division results. In 1999, Year 2000 readiness expenses
have been included in division earnings.
The company currently anticipates that it will incur future costs of
approximately $5 million to $10 million (pretax) to complete any activities
related to third party relationships and contingency plans and to maintain
Year 2000 readiness into early 2000. In addition, the company has elected to
accelerate the planned replacement of certain systems as part of its Year 2000
plans. Costs of the replacement systems are being capitalized and amortized
over their useful lives, in accordance with the company's normal accounting
policies. Total capitalizable costs were approximately $5 million at
September 30, 1999.
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 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 critical systems and
operations; (5) the ability to secure necessary regulatory approvals; and (6)
adverse litigation results or resolution of litigation. Investors are also
directed to other risks and uncertainties set forth 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 10 to the Registrant's Unaudited Consolidated
Financial Statements in Part I of this Form 10-Q for the quarter ended
September 30, 1999.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibit 11 Computation of Earnings Per Share (included in Note 4 of
Notes to Financial Statements)
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends
Exhibit 27 Financial Data Schedule
b. Reports on Form 8-K.
The following reports on Form 8-K were filed after June 30, 1999:
1. Current Report on Form 8-K dated August 19, 1999, with respect to
a voluntary petition filed by A.G. Financial Service Center, Inc.
to reorganize under Chapter 11 of the United States Bankruptcy
Code.
2. Current Report on Form 8-K dated September 2, 1999, with respect to
the pricing of a public offering of 8,000,000 shares of 7-7/8%
preferred securities of American General Capital I, a subsidiary
trust of the company, at $25 per share.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 12, 1999.
AMERICAN GENERAL CORPORATION
(Registrant)
By: NICHOLAS R. RASMUSSEN
Nicholas R. Rasmussen
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
EXHIBIT INDEX
Exhibit
11 Computation of Earnings per Share (included in Note 4 of
Notes to Financial Statements)
12 Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends
27 Financial Data Schedule
Exhibit 12
AMERICAN GENERAL CORPORATION
Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
(Unaudited)
($ in millions)
Nine Months Ended
September 30,
1999 1998
Consolidated operations:
Income before income tax expense, minority interest,
and dividends on preferred securities ............. $1,449 $1,296
Fixed charges deducted from income
Interest expense .................................. 566 514
Implicit interest in rents ........................ 18 14
Total fixed charges deducted from income ........ 584 528
Earnings available for fixed charges........... $2,033 $1,824
Fixed charges per above ............................. $ 584 $ 528
Dividends on preferred stock and securities ......... 111 110
Combined fixed charges and preferred
stock dividends ................................. $ 695 $ 638
Ratio of earnings to fixed charges .................. 3.48 3.45
Ratio of earnings to combined fixed charges
and preferred stock dividends ..................... 2.93 2.86
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense, minority
interest, and dividends on preferred securities . $1,449 $1,296
Corporate fixed charges deducted from income -
corporate interest expense ...................... 169 158
Earnings available for fixed charges .......... $1,618 $1,454
Corporate fixed charges per above ................. $ 169 $ 158
Dividends on preferred stock and securities ....... 111 110
Combined corporate fixed charges and
preferred stock dividends ..................... $ 280 $ 268
Ratio of earnings to corporate fixed charges ...... 9.55 9.22
Ratio of earnings to combined corporate
fixed charges and preferred stock dividends ..... 5.78 5.43
Exhibit 12
(continued)
AMERICAN GENERAL CORPORATION
Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
(Unaudited)
($ in millions)
Nine Months Ended
September 30,
1999 1998
American General Finance, Inc.:
Income before income tax expense .................... $ 252 $ 218
Fixed charges deducted from income
Interest expense .................................. 420 376
Implicit interest in rents ........................ 11 8
Total fixed charges deducted from income ........ 431 384
Earnings available for fixed charges .......... $ 683 $ 602
Ratio of earnings to fixed charges .................. 1.58 1.57
Exhibit 12
(continued)
AMERICAN GENERAL CORPORATION
Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
(Unaudited)
($ in millions)
Quarter Ended
September 30,
1999 1998
Consolidated operations:
Income before income tax expense, minority interest,
and dividends on preferred securities ............. $ 488 $ 416
Fixed charges deducted from income
Interest expense .................................. 195 176
Implicit interest in rents ........................ 6 4
Total fixed charges deducted from income ........ 201 180
Earnings available for fixed charges........... $ 689 $ 596
Fixed charges per above ............................. $ 201 $ 180
Dividends on preferred stock and securities ......... 38 37
Combined fixed charges and preferred
stock dividends ................................. $ 239 $ 217
Ratio of earnings to fixed charges .................. 3.43 3.31
Ratio of earnings to combined fixed charges
and preferred stock dividends ..................... 2.89 2.75
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense, minority
interest, and dividends on preferred securities . $ 488 $ 416
Corporate fixed charges deducted from income -
corporate interest expense ...................... 58 54
Earnings available for fixed charges .......... $ 546 $ 470
Corporate fixed charges per above ................. $ 58 $ 54
Dividends on preferred stock and securities ....... 38 37
Combined corporate fixed charges and
preferred stock dividends ..................... $ 96 $ 91
Ratio of earnings to corporate fixed charges ...... 9.36 8.80
Ratio of earnings to combined corporate
fixed charges and preferred stock dividends ..... 5.69 5.22
Exhibit 12
(continued)
AMERICAN GENERAL CORPORATION
Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
(Unaudited)
($ in millions)
Quarter Ended
September 30,
1999 1998
American General Finance, Inc.:
Income before income tax expense .................... $ 86 $ 74
Fixed charges deducted from income
Interest expense .................................. 144 130
Implicit interest in rents ........................ 4 2
Total fixed charges deducted from income ........ 148 132
Earnings available for fixed charges .......... $ 234 $ 206
Ratio of earnings to fixed charges .................. 1.58 1.56
<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 FINANICAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 61,281<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 334
<MORTGAGE> 3,464
<REAL-ESTATE> 215
<TOTAL-INVEST> 69,790
<CASH> 365
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 5,614<F2>
<TOTAL-ASSETS> 111,275
<POLICY-LOSSES> 62,265<F3>
<UNEARNED-PREMIUMS> 201<F3>
<POLICY-OTHER> 457<F3>
<POLICY-HOLDER-FUNDS> 2,455<F3>
<NOTES-PAYABLE> 12,509
1,924<F4>
85<F5>
<COMMON> 929
<OTHER-SE> 6,196<F6>
<TOTAL-LIABILITY-AND-EQUITY> 111,275
2,866<F7>
<INVESTMENT-INCOME> 3,897
<INVESTMENT-GAINS> (12)
<OTHER-INCOME> 1,258<F8>
<BENEFITS> 4,020
<UNDERWRITING-AMORTIZATION> 490<F9>
<UNDERWRITING-OTHER> (827)<F10>
<INCOME-PRETAX> 1,449<F11>
<INCOME-TAX> 507<F12>
<INCOME-CONTINUING> 874
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 874
<EPS-BASIC> 3.48
<EPS-DILUTED> 3.39
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>ALL FIXED MATURITY SECURITIES ARE 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 AND 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 $104 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF
SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED
INCOME STATEMENT.
<F12>EXCLUDES $36 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS
RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
</FN>
</TABLE>
