SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 30, 1999, there were 249,106,485 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 six months
and quarters ended June 30, 1999 and 1998 ........ 2
Consolidated Balance Sheet at June 30, 1999 and
December 31, 1998 ................................ 3
Consolidated Statement of Shareholders' Equity
for the six months ended June 30,1999 and 1998 ... 4
Consolidated Condensed Statement of Cash Flows for
the six months ended June 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 .............. 12
Part II. OTHER INFORMATION.
Item 1. Legal Proceedings ...................................... 26
Item 4. Submission of Matters to a Vote of Security Holders..... 26
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)
Six Months Ended Quarter Ended
June 30, June 30,
1999 1998 1999 1998
Revenues
Premiums and other considerations. $ 1,914 $ 1,769 $ 990 $ 891
Net investment income ............ 2,597 2,506 1,312 1,280
Finance charges .................. 713 658 356 331
Realized investment gains(losses). (7) 5 (5) 4
Other ............................ 116 97 60 50
Total revenues ............... 5,333 5,035 2,713 2,556
Benefits and expenses
Insurance and annuity benefits ... 2,691 2,510 1,378 1,286
Operating costs and expenses ..... 808 767 416 385
Commissions ...................... 599 504 321 255
Change in deferred policy
acquisition costs and cost of
insurance purchased ............. (221) (84) (135) (50)
Provision for finance receivable
losses .......................... 100 100 48 51
Goodwill amortization ............ 24 20 12 11
Interest expense
Corporate ....................... 95 92 51 42
Consumer Finance ................ 276 246 138 124
Total benefits and expenses .. 4,372 4,155 2,229 2,104
Earnings
Income before income tax expense . 961 880 484 452
Income tax expense ............... 336 316 168 165
Income before minority interest
and net dividends on preferred
securities of subsidiaries ...... 625 564 316 287
Minority interest in net income of
Western National Corporation .... - 11 - -
Net dividends on preferred
securities of subsidiaries ...... 45 45 23 23
Net income ................... $ 580 $ 508 $ 293 $ 264
Net income per share
Basic ........................... $ 2.30 $ 2.02 $ 1.17 $ 1.03
Diluted ......................... $ 2.25 $ 1.97 $ 1.14 $ 1.01
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Balance Sheet
(Unaudited)
(In millions, except share data)
June 30, December 31,
1999 1998
Assets
Investments
Fixed maturity securities (amortized cost:
$60,756; $59,212) ........................... $ 61,084 $ 62,731
Mortgage loans on real estate ................. 3,429 3,368
Equity securities (cost: $287; $288)........... 332 325
Policy loans .................................. 2,348 2,329
Investment real estate ........................ 224 226
Other long-term investments ................... 405 230
Short-term investments ........................ 1,096 654
Total investments ......................... 68,918 69,863
Cash ........................................... 348 341
Assets held in Separate Accounts ............... 19,695 16,158
Finance receivables, net ....................... 9,573 9,275
Deferred policy acquisition costs .............. 4,245 3,253
Cost of insurance purchased .................... 1,091 956
Goodwill ....................................... 1,496 1,590
Other assets ................................... 4,503 3,671
Total assets .............................. $109,869 $105,107
Liabilities
Insurance and annuity liabilities .............. $ 64,576 $ 62,844
Liabilities related to Separate Accounts ....... 19,695 16,158
Debt (short-term)
Corporate ($1,703; $1,607) .................... 2,990 2,743
Consumer Finance ($3,789; $3,686) ............. 9,232 8,863
Income tax liabilities ......................... 914 1,543
Other liabilities .............................. 3,154 2,357
Total liabilities ......................... 100,561 94,508
Redeemable equity
Company-obligated mandatorily redeemable
preferred securities of subsidiaries
holding solely company subordinated notes
Non-convertible ............................. 1,480 1,480
Convertible ................................. 249 248
Total redeemable equity ................... 1,729 1,728
Shareholders' equity
Convertible preferred stock (shares issued
and outstanding: 2,317,701) ................... 85 85
Common stock (shares issued: 269,298,493;
outstanding: 249,651,754; 251,804,294) ........ 926 939
Cost of treasury stock ......................... (940) (759)
Retained earnings .............................. 7,384 7,007
Accumulated other comprehensive income ......... 124 1,599
Total shareholders' equity ................ 7,579 8,871
Total liabilities and equity .............. $109,869 $105,107
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Statement of Shareholders' Equity
(Unaudited)
(In millions, except per share data)
Six Months Ended
June 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 ....................... (13) (14)
Balance at end of period .......................... 926 929
Cost of treasury stock
Balance at beginning of period .................... (759) (621)
Share repurchases ................................. (221) (78)
Issuance under employee benefit plans and other ... 40 39
Balance at end of period .......................... (940) (660)
Retained earnings
Balance at beginning of period .................... 7,007 6,624
Net income ........................................ 580 508
Cash dividends (per share)
Preferred ($1.29; $1.29) ......................... (3) (3)
Common ($.80; $.75) .............................. (200) (186)
Balance at end of period .......................... 7,384 6,943
Accumulated other comprehensive income
Balance at beginning of period..................... 1,599 1,169
Change in net unrealized gains (losses)
on securities .................................... (1,475) 331
Balance at end of period .......................... 124 1,500
Total shareholders' equity ...................... $ 7,579 $ 8,797
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Condensed Statement of Cash Flows
(Unaudited)
(In millions)
Six Months Ended
June 30,
1999 1998
Operating activities
Net cash provided by operating activities ... $ 1,253 $ 1,024
Investing activities
Investment purchases .............................. (12,273) (5,305)
Investment dispositions and repayments ............ 10,288 4,625
Finance receivable originations and purchases ..... (2,921) (3,069)
Finance receivable principal payments received .... 2,513 2,353
Net increase in short-term investments ............ (442) (239)
Acquisition of Western National Corporation ....... - (591)
Other, net ........................................ (74) (107)
Net cash used for investing activities ...... (2,909) (2,333)
Financing activities
Retirement Services and Life Insurance
Policyholder account deposits ................... 3,210 2,122
Policyholder account withdrawals ................ (2,338) (2,231)
Net policyholder account deposits
(withdrawals) ............................... 872 (109)
Short-term collateralized financings ............ 277 305
Total Retirement Services and Life Insurance .. 1,149 196
Consumer Finance
Net increase in short-term debt ................. 58 355
Long-term debt issuances ........................ 455 873
Long-term debt redemptions ...................... (191) (632)
Total Consumer Finance ........................ 322 596
Corporate
Net increase in short-term debt ................. 96 882
Long-term debt issuance ........................ 150 -
Long-term debt redemptions ...................... - (354)
Common stock repurchases ........................ (219) (74)
Dividends on common and preferred stock ......... (203) (189)
Non-recourse obligation collateralized by bonds . 483 -
Other, net ...................................... (115) 184
Total Corporate ............................... 192 449
Net cash provided by financing activities ... 1,663 1,241
Net increase (decrease) in cash .................... 7 (68)
Cash at beginning of period ........................ 341 263
Cash at end of period .............................. $ 348 $ 195
Supplemental disclosure of cash flow information:
Cash paid during the period for
Income taxes .................................... $ 48 $ 143
Interest
Corporate ...................................... 89 98
Consumer Finance ............................... 265 240
Dividends on preferred securities of
subsidiaries ................................... 68 68
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Notes to Consolidated Financial Statements
June 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 June 30, 1999, the
consolidated results of operations for the three months and six
months ended June 30, 1999 and 1998, and the consolidated
shareholders' equity and cash flows for the six months ended June 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 or financial position.
3. Comprehensive Income. The components of consolidated comprehensive
income for the six months and quarters ended June 30, 1999 and 1998
were as follows:
Six Months Ended Quarter Ended
(In millions) June 30, June 30,
1999 1998 1999 1998
Net income .................. $ 580 $ 508 $ 293 $ 264
Other comprehensive income
Gross change in unrealized
gains(losses)on securities*
[pretax:($2,288); $516;
($1,410); $302] ........... (1,479) 333 (912) 195
Less: gains (losses)
realized in net income .... (4) 2 (5) 2
Change in net unrealized
gains(losses)on securities*
[pretax: ($2,281); $514;
($1,402); $299] ........... (1,475) 331 (907) 193
Comprehensive income
(loss) ................. $ (895) $ 839 $ (614) $ 457
* 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:
Six Months Ended Quarter Ended
(In millions, June 30, June 30,
except share data) 1999 1998 1999 1998
Net income .............. $580 $508 $293 $264
Net dividends on
convertible preferred
stock .................. (3) (3) (2) (2)
Earnings available
to common
shareholders (a)........ 577 505 291 262
Net dividends on
dilutive securities
Convertible preferred
securities of
subsidiary ........... 5 5 2 2
Convertible preferred
stock ................ 3 3 2 2
Earnings available
to common
shareholders assuming
dilution (b) ........... $585 $513 $295 $266
(In thousands)
Average shares
outstanding (a)......... 250,679 250,271 249,997 253,252
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 ......... 1,125 1,276 1,319 1,633
Restricted stock ...... 317 110 385 213
Average shares
outstanding assuming
dilution (b) ........... 260,583 260,119 260,163 263,560
Net income per share
Basic ................. $2.30 $2.02 $1.17 $1.03
Diluted ............... $2.25 $1.97 $1.14 $1.01
(a) Used to compute basic earnings per share.
(b) Used to compute diluted earnings per share.
Item 1. Financial Statements (continued).
5. Investing Activities. Cash flows related to investing activities
were as follows:
Dispositions and
Purchases Repayments
Six Months Ended Six Months Ended
(In millions) June 30, June 30,
1999 1998 1999 1998
Fixed maturity securities $11,819 $5,118 $10,065 $4,266
Mortgage loans 271 145 166 278
Equity securities 20 1 21 37
Other 163 41 36 44
Total $12,273 $5,305 $10,288 $4,625
6. Derivative Financial Instruments. Derivative financial instruments
did not have a material effect on net investment income, interest
expense, or net income during the six months ended June 30, 1999 or
1998. Significant activity related to derivative financial
instruments during the six months ended June 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 six months ended June 30, 1999, call and put swaptions
with notional amounts of $4.9 billion were purchased, while $1.9
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 $5.4 billion and $5.7 billion,
respectively, and average strike rates of 4.2% and 8.5%,
respectively, were outstanding at June 30, 1999. These swaptions
expire in 1999 and 2000.
7. 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
June 30, 1999, the company had $277 million of outstanding dollar
roll agreements. The average amount outstanding and the weighted
average interest rate on dollar rolls for the six months ended
June 30, 1999 were $725 million and 4.6%, respectively.
Item 1. Financial Statements (continued).
8. 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 settlements are not final until approved by the courts and any
appeals are resolved. 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 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. Court approval of the
settlement agreement for American General Life and Accident Insurance
Company is still pending.
Satellite Dish. 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
American General Financial Center (Financial Center), an indirect
subsidiary of the company. The lawsuit was filed on November 15,
1996, by 29 individuals each of whom purchased a satellite dish in
the early 1990s for approximately $2,500 from unaffiliated
distributors who arranged financing for these satellite dishes
through Financial Center. Financial Center intends to appeal the
judgment and believes that it has substantial bases for success in
the appeal.
Although substantial risks and uncertainties remain with respect to
the ultimate outcome of this case, 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 the
case. Accordingly, no provision has been made in the consolidated
financial statements related to this contingency.
Item 1. Financial Statements (continued).
Other. In addition to those lawsuits or proceedings disclosed herein
and in prior reports, the company is a party to various other
lawsuits and proceedings 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 as well as numerous cases involving the financing of
satellite dishes, arise in jurisdictions, such as Alabama and
Mississippi, 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 jurisdictions like Alabama and Mississippi continues
to create the potential for an unpredictable judgment in any given
suit.
9. 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. 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 deferred 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.
10. 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 (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 six months ended June 30, were as follows:
Income
Revenues Before Taxes* Earnings
(In millions) 1999 1998 1999 1998 1999 1998
Retirement Services $1,758 $1,476 $ 428 $ 360 $ 287 $ 237
Life Insurance 2,739 2,745 537 504 350 330
Consumer Finance 844 784 171 149 110 94
Total divisions 5,341 5,005 1,136 1,013 747 661
Corporate operations (1) 25 (144) (101) (94) (69)
Goodwill amortization (24) (20) (24) (20)
Net dividends on
preferred securities
of subsidiaries (45) (45)
Minority interest in
net income of Western
National Corporation - (11)
Operating earnings 584 516
Realized investment
gains (losses) (7) 5 (7) 5 (4) 3
Non-recurring item - - - (17) - (11)
Total consolidated $5,333 $5,035 $ 961 $ 880 $ 580 $ 508
Division results for the quarter ended June 30, were as follows:
Income
Revenues Before Taxes* Earnings
(In millions) 1999 1998 1999 1998 1999 1998
Retirement Services $ 913 $ 765 $ 217 $ 188 $ 145 $ 123
Life Insurance 1,383 1,382 272 259 177 169
Consumer Finance 423 395 89 75 57 47
Total divisions 2,719 2,542 578 522 379 339
Corporate operations (1) 10 (77) (55) (49) (39)
Goodwill amortization (12) (11) (12) (11)
Net dividends on
preferred securities
of subsidiaries (23) (23)
Operating earnings 295 266
Realized investment
gains (losses) (5) 4 (5) 4 (2) 3
Non-recurring item - - - (8) - (5)
Total consolidated $2,713 $2,556 $ 484 $ 452 $ 293 $ 264
* 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 11 of this Quarterly Report
on Form 10-Q.
The reasons for any significant variations between the quarters ended June 30,
1999 and 1998 are the same as those discussed below for the respective six
month periods, unless otherwise noted.
OVERVIEW
American General reported financial highlights as follows:
Six Months Ended Quarter Ended
(In millions, June 30, June 30,
except per share data) 1999 1998 1999 1998
Operating earnings $ 584 $ 516 $ 295 $ 266
Operating earnings per share 2.26 2.00 1.15 1.02
Net income 580 508 293 264
Net income per share 2.25 1.97 1.14 1.01
Revenues and deposits 10,454 8,876 5,489 4,450
Assets 109,869 101,025
Shareholders' equity 7,579 8,797
Operating earnings and net income increased 13% and 14%, respectively, for the
six months ended June 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 17%).
Operating earnings and net income for second quarter 1999 increased 11%,
compared to second quarter 1998. Quarterly per share amounts increased 13%,
compared to the 11% increase in aggregate operating earnings and net income,
due to the effect of repurchasing 4.8 million shares of the company's common
stock during the last twelve months. Revenues and deposits increased $1.6
billion, or 18%, for the six month period and $1.0 billion, or 23%, for the
quarter ended June 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 business in the operating divisions, as discussed below,
resulted in an 11% increase in assets, excluding the fair value adjustment
related to securities, from June 30, 1998 to June 30, 1999. During the last
twelve months, net income increased shareholders' equity by $836 million.
This increase was offset by dividends to shareholders of $395 million, share
repurchases of $338 million, and a decrease in the fair value adjustment on
securities of $1.4 billion. In the first six months of 1999, the company
purchased 3.1 million shares of its common stock for $221 million. The
company purchased 1.6 million shares for $117 million in second 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 products and services offered. The results of each division for the
six months and quarters ended June 30, 1999 and 1998 are discussed below.
Retirement Services
Retirement Services division results were as follows:
Six Months Ended Quarter Ended
June 30, June 30,
(In millions) 1999 1998 1999 1998
Earnings $ 287 $ 237 $ 145 $ 123
Deposits
Fixed 2,386 1,761 1,331 840
Variable 1,529 1,152 749 601
Assets
Investments 39,553 38,495
Separate Accounts 17,854 13,168
Investment margin
Fixed 490 400 251 204
Variable 99 77 51 40
Operating expenses 151 107 80 50
Earnings. Division earnings for the six months and quarter ended June 30,
1999 increased $50 million or 21%, and $22 million or 18%, respectively,
compared to the same periods in 1998. Earnings growth was driven by continued
growth in investments 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 15% from June
30, 1998 to June 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 six months and quarter ended June 30, 1999
increased 36% and 59%, respectively, due to the division's continued success
in marketing single premium fixed annuities through the financial institution
distribution channel. Variable deposit growth of 33% in the first six months
of 1999 and 24% during second quarter 1999, compared to the same periods in
1998, reflects continued consumer interest in equity-based variable products
and the division's introduction of Portfolio Director Plus, a new variable
product line that offers expanded investment options.
Fixed Investment Margin. Fixed investment margin represents the difference
between net investment income on invested assets and interest credited to
policyholders' fixed accounts. Fixed investment spread is the difference
between yield on invested assets and the average interest rate credited to
policyholder fixed accounts.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Investment results on fixed accounts were as follows:
Six Months Ended Quarter Ended
June 30, June 30,
(In millions) 1999 1998 1999 1998
Net investment income $1,457 $1,333 $ 741 $ 687
Investment yield 7.72% 8.03% 7.78% 8.16%
Average crediting rate 5.38 5.85 5.39 5.88
Fixed investment spread 2.34 2.18 2.39 2.28
Net investment income for the six months ended June 30, 1999 increased 9% due
to growth in invested assets. The 31 basis point decrease in yield for the
six month period was due to lower yields on new investments, lower premiums
on investments called or tendered before their maturity dates, and the impact
of purchase accounting adjustments related to the acquisition of American
General Annuity on February 25, 1998. The decrease in the average crediting
rate exceeded the decrease in investment yield, producing an increase in
investment spread of 16 basis points for the six month period. The year-to-
date increase in net investment income combined with a decline in average
crediting rates on policyholder reserves resulted in a 23% increase in fixed
investment margin.
Variable Investment Margin. Variable investment margin consists of mortality
and expense risk fees for Separate Accounts and mutual fund management fees.
The $22 million, or 28%, increase in variable investment margin for the first
six months of 1999, compared to the same period in 1998, was related to growth
in Separate Account assets resulting from new sales and market appreciation.
Surrenders. The division's rate of policyholder surrenders as a percentage
of average policyholders' account balances were as follows:
Six Months Ended Quarter Ended
June 30, June 30,
1999 1998 1999 1998
Tax-qualified 6.02% 5.52% 6.17% 5.49%
Non-qualified 9.36 11.80 10.62 12.67
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 $44 million for the six
months and $30 million for the quarter ended June 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 than normal costs to improve its infrastructure,
including administrative system upgrades and the establishment of a customer
care center to improve customer service. The ratio of operating expenses to
average assets increased to .52% for the first six months of 1999 from .42%
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:
Six Months Ended Quarter Ended
June 30, June 30,
(In millions) 1999 1998 1999 1998
Earnings $ 350 $ 330 $ 177 $ 169
Deposits 1,206 928 696 453
Assets
Investments 28,011 29,133
Separate Accounts 1,841 1,129
Insurance and annuity liabilities 25,975 25,323
Premiums and other considerations 1,539 1,551 780 775
Net investment income 1,112 1,114 557 566
Operating expenses 357 369 185 182
Earnings. Division earnings increased 6% for the six months ended June 30,
1999 compared to the same period in 1998. The increase was primarily due to
growth in insurance in force, improved interest margins, and lower operating
expenses.
Sales, Deposits, and Premiums. Sales and deposits of individual life
insurance and annuities were as follows:
Six Months Ended Quarter Ended
(In millions) June 30, June 30,
1999 1998 1999 1998
Sales
Individual life insurance $ 469 $ 320 $ 305 $ 143
Annuities 297 245 154 136
Deposits
Individual life insurance 883 641 519 301
Annuities 323 287 177 152
Total sales of individual life and annuity products increased 36% and 64% for
the first six months and quarter ended June 30, 1999, respectively, compared
to the same periods in 1998. The increases of $149 million in annualized life
insurance sales for the six months, and $162 million for second quarter, were
due to strong sales of corporate executive benefits products in second quarter
1999 and growth in recently introduced variable life products, offset by lower
sales of universal life insurance due to the low interest rate environment.
Sales of corporate executive benefits products can fluctuate significantly
from quarter to quarter due to large case size. New annuity sales increased
21% and 12% for the first six months and second quarter 1999, respectively,
due to continued strong sales of variable annuity products through financial
institutions.
Total deposits in 1999 were 30% higher for the six months, and 54% higher for
second 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).
Investment Spread. Investment results and interest crediting rates were as
follows:
Six Months Ended Quarter Ended
June 30, June 30,
1999 1998 1999 1998
Investment yield 8.34% 8.48% 8.32% 8.61%
Average crediting rate 5.89 6.03 5.84 6.01
Investment spread 2.45 2.45 2.48 2.60
Net investment income and investment yield decreased in the first six months
and second 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 of crediting rates on interest-sensitive products, resulting in
a flat investment spread compared to the 1998 year-to-date period and a 12
basis point decline in the second quarter. Investments, excluding the fair
value adjustment related to the division's securities, increased 1% from
June 30, 1998 to June 30, 1999.
Mortality and Persistency. Death claims and premium termination rates were
as follows:
Six Months Ended Quarter Ended
June 30, June 30,
1999 1998 1999 1998
Death claims (in millions) $ 508 $ 504 $ 258 $ 253
Death claims per $1,000
of in force $ 3.73 $ 3.65 $ 3.80 $ 3.67
Premium termination rate 12.26% 12.23% 12.10% 11.79%
Death claims per $1,000 of in force increased due to the effect from aging of
the in force business. The increase in the quarterly premium termination rate
reflects unusually favorable persistency in second quarter 1998. Overall,
mortality experience and persistency experience were within pricing
assumptions.
Operating Expenses. Operating expenses decreased $12 million for the first
six months of 1999 and increased $3 million for the second quarter, compared
to the same periods in 1998. During the first six months of 1999, the division
benefitted from efficiency gains related to consolidation and centralization
of common functions utilizing a shared services platform, as well as lower
employee benefits expense. These decreases were partially offset by increases
related to higher technology costs and new initiatives to market variable and
corporate executive benefits products. The increase for second quarter 1999
resulted from premium taxes paid on the higher corporate executive benefits
deposits. The ratio of operating expenses to direct premiums and deposits was
14.30% and 13.63% for the first six months and second quarter of 1999,
respectively, compared to 16.49% and 16.38% in the same periods of 1998. The
improved expense ratios reflect efficiency gains and higher deposits in 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Consumer Finance
Consumer Finance division results were as follows:
Six Months Ended Quarter Ended
June 30, June 30,
($ in millions) 1999 1998 1999 1998
Earnings $ 110 $ 94 $ 57 $ 47
Average finance receivables 9,792 8,122 9,862 8,242
Finance charges 713 658 356 331
Finance margin 437 412 218 207
Interest spread 8.46% 9.64% 8.30% 9.53%
Operating expenses $ 242 $ 235 $ 119 $ 116
Earnings. Division earnings increased 17% for the six months and 19% for the
quarter ended June 30, 1999, compared to the same periods of 1998, primarily
due to improved credit quality and an increase in average finance receivables.
Finance Receivables. Finance receivables, net of the allowance for finance
receivable losses, at June 30, 1999 increased $1.3 billion to $9.6 billion
from June 30, 1998. Average finance receivables increased 21% in the first
six months of 1999 compared to the same period in 1998, primarily due to new
loan production in the division's branch offices and acquisitions of real
estate loan portfolios.
Credit Quality. Net charge-off and delinquency ratios reflect the quality of
receivables, the success of collection efforts, and general economic
conditions. Charge offs, delinquencies, and the allowance for finance
receivable losses were as follows:
Six Months Ended Quarter Ended
June 30, June 30,
($ in millions) 1999 1998 1999 1998
Charge offs $ 100 $ 108 $ 48 $ 54
% of average receivables 2.05% 2.66% 1.96% 2.62%
June 30, December 31,
1999 1998 1998
Delinquencies (60+ days) $ 371 $ 317 $ 384
% of finance receivables 3.53% 3.43% 3.75%
Allowance for finance
receivable losses $ 386 $ 365 $ 382
% of finance receivables 3.87% 4.24% 3.96%
The decrease in the charge-off ratio for the first six months of 1999,
compared to the same period 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 strict adherence to its underwriting standards. At
June 30, 1999, real estate loans represented 62% of total finance receivables,
compared to 55% at June 30, 1998 and 60% at December 31, 1998. The increases
in delinquencies and the delinquency ratio at June 30, 1999 compared to June
30, 1998 were due to the seasoning of acquired real estate portfolios that
contained minimal delinquent loans when purchased.
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. As a result of improved credit quality and portfolio
growth, the allowance ratio has declined. The ratio of allowance for finance
receivable losses to annualized quarterly charge offs for second quarter 1999
improved to 201% from 171% for second quarter 1998 and 161% for fourth quarter
1998. The second quarter 1999 charge offs were reduced by $2 million of
proceeds from the sale of loans previously charged off.
Finance Margin. Finance margin represents the difference between finance
charges and the cost of borrowings to support the level of finance
receivables. Finance margin increased 6% for the six months ended June 30,
1999, compared to the same period in 1998, due to the increase in aggregate
finance charges exceeding the increase in interest expense. Finance charges
increased 8% due to the increase in average finance receivables during the
first six months of 1999.
Interest Spread. The components of interest spread and risk-adjusted spread
were as follows:
Six Months Ended Quarter Ended
June 30, June 30,
1999 1998 1999 1998
Yield on finance receivables 14.66% 16.30% 14.47% 16.13%
Borrowing cost 6.20 6.66 6.17 6.60
Interest spread 8.46 9.64 8.30 9.53
Charge-off ratio 2.05 2.66 1.96 2.62
Risk-adjusted spread 6.41% 6.98% 6.34% 6.91%
The interest spread between yield and borrowing cost decreased 118 basis
points for the first six months of 1999 and 123 basis points for the second
quarter of 1999, compared to the same periods in 1998, due to lower yields,
partially offset by lower borrowing costs. The lower yield on finance
receivables reflects the increased proportion of real estate loans, which
generally have lower yields and lower charge offs due to their higher credit
quality.
Risk-adjusted spread represents the difference between interest spread and the
charge-off ratio. The six month decrease in risk-adjusted spread of 57 basis
points, compared to the 118 basis point decrease in interest spread, was a
result of the improvement in the charge-off ratio due to better credit quality
of the portfolio.
Operating Expenses. Operating expenses as a percentage of average finance
receivables decreased to 4.97% for the six month period in 1999 from 5.80% for
the same period in 1998. This decrease reflects a 21% increase in average
finance receivables compared to a 3% increase in operating expenses.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
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 $3.2 billion decrease in the fair
value adjustment to fixed maturity securities and a related $1.5 billion
reduction in shareholders' equity from December 31, 1998. The components of
the fair value adjustment at June 30, 1999 and December 31, 1998, and the 1999
change, were as follows:
June 30, December 31,
(In millions) 1999 1998 Change
Fair value adjustment to fixed
maturity securities $ 328 $ 3,519 $(3,191)
Decrease in deferred policy
acquisition costs and cost of
insurance purchased (181) (1,083) 902
Increase in deferred income taxes (52) (861) 809
Net unrealized gains
Fixed maturity securities 95 1,575 (1,480)
Equity securities 29 24 5
Net unrealized gains on
securities $ 124 $ 1,599 $(1,475)
Fixed Maturity Securities. At June 30, 1999, fixed maturity securities
included $46.4 billion of corporate bonds, $12.4 billion of mortgage-backed
securities, and $2.1 billion of bonds issued by governmental agencies. The
average credit rating of the fixed maturity securities was A at June 30, 1999
and A+ at December 31, 1998. Average credit ratings by category at June 30,
1999 were as follows:
June 30, Average Credit
(In millions) 1999 % Rating
Investment grade $45,154 74% A
Mortgage-backed 12,357 20 AAA
Below investment grade 3,573 6 BB-
Total fixed maturity securities $61,084 100% A
Below Investment Grade Securities. Below investment grade securities have
credit ratings below BBB-. Below investment grade securities were 5% of total
invested assets at June 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 $177
million (10.1% yield) for the six months ended June 30, 1999 and $148 million
(11.1% yield) for the same period in 1998. Realized investment losses on
below investment grade securities were $54 million and $1 million for the six
months ended June 30, 1999 and 1998, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
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 0.1% of total fixed
maturity securities at June 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 June 30,
1999 and December 31, 1998. Mortgage loan statistics at June 30, 1999 and
December 31, 1998 were as follows:
June 30, December 31,
(In millions) 1999 1998
Mortgage loans $ 3,456 $ 3,402
Allowance for losses (27) (34)
Mortgage loans, net $ 3,429 $ 3,368
Percentage of mortgage loans
Allowance for losses .8% 1.0%
Restructured loans 2.0 2.1
Delinquent loans (60+ days) .5 .6
Watch list loans 2.2 2.4
The yield on restructured loans was 7.9% for the six months ended June 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
June 30, 1999, corporate capital totaling $12.2 billion, excluding the fair
value adjustment on securities, consisted of $3.0 billion corporate debt
(25%), $1.7 billion redeemable equity (14%), and $7.5 billion shareholders'
equity (61%).
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 June 30,
1999, American General's principal retirement services and life insurance
companies, on a combined basis, had statutory equity of $4.7 billion, which
was 2.6 times the Company Action Level RBC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Consumer Finance. The Consumer Finance division's capital varies directly
with the amount of finance receivables. Consumer Finance capital of $10.7
billion at June 30, 1999 included $9.2 billion of Consumer Finance debt, which
was not guaranteed by the parent company, and $1.5 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 June 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
markets at competitive rates. At June 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 $140 million of dividends, net
of capital contributions, from subsidiaries during the six months ended June
30, 1999, compared to $536 million for the same period in 1998. Net dividends
received by the parent company were $163 million in second quarter 1999,
compared to $85 million in second quarter 1998. The decline in net dividends
for the six 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.
Retirement Services. Principal sources of cash for the Retirement Services
division were as follows:
Six Months Ended
June 30,
(In millions) 1999 1998
Operating cash flow $ 852 $ 648
Fixed policyholder account deposits,
net of withdrawals 703 (40)
Variable account deposits, net of
withdrawals 1,302 1,207
Short-term collateralized financings 267 127
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Net cash provided by operating activities increased $204 million in the first
six 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 $743
million increase in net fixed policyholder account deposits was due to growth
in the single premium fixed annuity business sold through the financial
institution distribution channel. 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 $87 million in the first six months of 1999 and received net
contributions of $51 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:
Six Months Ended
June 30,
(In millions) 1999 1998
Operating cash flow $ 129 $ 209
Fixed policyholder account deposits,
net of withdrawals 169 (69)
Variable account deposits, net of
withdrawals 422 159
Short-term collateralized financings 10 178
Net cash provided by operating activities decreased $80 million in the six
months ended June 30, 1999, compared to the 1998 period, primarily due to the
funding in 1999 of previously accrued market conduct costs. The $238 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 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 six months of 1999, the
division's subsidiaries received capital contributions of $229 million
primarily to fund market conduct-related costs and paid dividends of $246
million, resulting in net dividends paid of $17 million, compared to $418
million of net dividends paid in the same period of 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Consumer Finance. Principal sources of cash for the Consumer Finance division
were as follows:
Six Months Ended
June 30,
(In millions) 1999 1998
Operating cash flow $ 283 $ 231
Increase in debt 322 596
Net cash provided by operating activities increased $52 million in the first
six 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 six 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 $134 million and $18 million in the
first six months of 1999 and 1998, respectively. The 1998 growth in
receivables limited the amount of dividends paid to the parent company in the
first half of 1998.
YEAR 2000
Internal Systems. American General has numerous 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 as they
do currently; and (5) return the systems to operations. As of June 30, 1999,
these activities had been substantially completed, making the company's
critical systems Year 2000 ready.
The company will continue to test its systems throughout 1999 to maintain Year
2000 readiness. In addition, the company currently is developing plans for
the century transition, which will restrict systems modifications from
November 1999 through January 2000, create rapid response teams to address
problems, and limit vacations for key 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
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; and (3) test critical hardware and software
products and electronic interfaces. As of June 30, 1999, these activities
have 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 testing activities related to critical third
parties will extend throughout 1999.
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 June 30, 1999, these activities have been substantially completed.
Individual contingency plans will continue to be tested and updated throughout
1999.
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
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 June 30, 1999, the company has incurred and expensed $90
million (pretax) related to Year 2000 readiness, including $10 million
incurred during 1999 and $17 million incurred in the first six months of 1998.
The 1998 year-to-date expenses, of which $6 million related to the Retirement
Services division, $9 million related to the Life Insurance division, and $1
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 were included in
division earnings.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
The company currently anticipates that it will incur future costs of
approximately $10 million to $15 million (pretax) to maintain Year 2000
readiness and complete any activities related to third party relationships and
contingency plans. 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 June 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 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 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 8 to the Registrant's Unaudited Consolidated
Financial Statements in Part I of this Form 10-Q for the quarter ended June
30, 1999.
Environmental-Ochoa. In March 1994, two subsidiaries of American General were
named as defendants in a lawsuit, The People of the State of 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 sought 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. This
lawsuit was dismissed on June 8, 1999.
Item 4. Submission of Matters to a Vote of Security Holders.
Annual Meeting.
On April 29, 1999, American General held its annual meeting of shareholders.
As of that date, shareholders of the company's common and preferred shares
outstanding were entitled to 253,429,474 votes. At the meeting, the company's
shareholders voted on the following matters: (1) election of twelve directors
constituting the company's entire board, for one-year terms; (2) re-approval
of the Performance-Based Plan for Executive Officers; (3) approval of the
American General Corporation 1999 Stock and Incentive Plan; and (4)
ratification of the appointment of Ernst & Young LLP as independent auditors
for 1999. Each matter was approved by the shareholders. The votes cast for,
against, and abstentions as to each such matter were as follows:
Votes For Votes Against Abstentions
Election of Directors:
J. Evans Attwell 213,728,446 2,057,130 -
Brady F. Carruth 214,909,382 876,194 -
W. Lipscomb Davis Jr. 214,860,155 925,421 -
Robert M. Devlin 214,859,564 926,012 -
J. Edward Easler II 214,832,144 953,432 -
Larry D. Horner 214,855,724 929,852 -
Richard J.V. Johnson 214,865,692 919,884 -
Michael E. Murphy 214,867,763 917,813 -
Jon P. Newton 214,915,867 869,709 -
Michael J. Poulos 214,829,235 956,341 -
Robert E. Smittcamp 214,921,517 864,059 -
Anne M. Tatlock 214,937,057 848,519 -
Item 4. Submission of Matters to a Vote of Security Holders (continued).
Votes For Votes Against Abstentions
Re-approval of the
Performance-Based Plan: 206,069,918 8,587,999 1,127,659
Approval of the American
General Corporation 1999
Stock and Incentive Plan: 180,600,789 33,934,514 1,250,273
Independent Auditors: 214,722,575 257,656 805,345
A more detailed description of the matters voted on by shareholders of the
company at this meeting is included in the definitive Proxy Statement dated
March 22, 1999 and incorporated herein by reference.
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 report on Form 8-K was filed after March 31, 1999:
1. Current Report on Form 8-K dated May 18, 1999, with respect to the
judgment rendered by the First Judicial District of Jones County,
Mississippi awarding approximately $500,000 in compensatory damages
and $167 million in punitive damages against American General
Financial Center, a subsidiary of the company.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 13, 1999.
AMERICAN GENERAL CORPORATION
(Registrant)
By: NICHOLAS R. RASMUSSEN
Nicholas R. Rasmussen
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
EXHIBIT INDEX
Exhibit
11 Computation of Earnings per Share (included in Note 4 of
Notes to Financial Statements)
12 Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends
27 Financial Data Schedule
Exhibit 12
AMERICAN GENERAL CORPORATION
Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
(Unaudited)
($ in millions)
Six Months Ended
June 30,
1999 1998
Consolidated operations:
Income before income tax expense, minority interest,
and dividends on preferred securities ............. $ 961 $ 880
Fixed charges deducted from income
Interest expense .................................. 371 338
Implicit interest in rents ........................ 12 10
Total fixed charges deducted from income ........ 383 348
Earnings available for fixed charges........... $1,344 $1,228
Fixed charges per above ............................. $ 383 $ 348
Dividends on preferred stock and securities ......... 73 73
Combined fixed charges and preferred
stock dividends ................................. $ 456 $ 421
Ratio of earnings to fixed charges .................. 3.51 3.53
Ratio of earnings to combined fixed charges
and preferred stock dividends ..................... 2.95 2.91
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense, minority
interest, and dividends on preferred securities . $ 961 $ 880
Corporate fixed charges deducted from income -
corporate interest expense ...................... 111 104
Earnings available for fixed charges .......... 1,072 $ 984
Corporate fixed charges per above ................. $ 111 $ 104
Dividends on preferred stock and securities ....... 73 73
Combined corporate fixed charges and
preferred stock dividends ..................... $ 184 $ 177
Ratio of earnings to corporate fixed charges ...... 9.66 9.44
Ratio of earnings to combined corporate
fixed charges and preferred stock dividends ..... 5.82 5.54
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)
Six Months Ended
June 30,
1999 1998
American General Finance, Inc.:
Income before income tax expense .................... $ 166 $ 144
Fixed charges deducted from income
Interest expense .................................. 276 246
Implicit interest in rents ........................ 7 6
Total fixed charges deducted from income ........ 283 252
Earnings available for fixed charges .......... $ 449 $ 396
Ratio of earnings to fixed charges .................. 1.59 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
June 30,
1999 1998
Consolidated operations:
Income before income tax expense, minority interest,
and dividends on preferred securities ............. $ 484 $ 452
Fixed charges deducted from income
Interest expense .................................. 189 166
Implicit interest in rents ........................ 7 5
Total fixed charges deducted from income ........ 196 171
Earnings available for fixed charges........... $ 680 $ 623
Fixed charges per above ............................. $ 196 $ 171
Dividends on preferred stock and securities ......... 36 36
Combined fixed charges and preferred
stock dividends ................................. $ 232 $ 207
Ratio of earnings to fixed charges .................. 3.49 3.65
Ratio of earnings to combined fixed charges
and preferred stock dividends ..................... 2.94 3.00
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense, minority
interest, and dividends on preferred securities . $ 484 $ 452
Corporate fixed charges deducted from income -
corporate interest expense ...................... 58 50
Earnings available for fixed charges .......... $ 542 $ 502
Corporate fixed charges per above ................. $ 58 $ 50
Dividends on preferred stock and securities ....... 36 36
Combined corporate fixed charges and
preferred stock dividends ..................... $ 94 $ 86
Ratio of earnings to corporate fixed charges ...... 9.38 10.07
Ratio of earnings to combined corporate
fixed charges and preferred stock dividends ..... 5.74 5.81
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
June 30,
1999 1998
American General Finance, Inc.:
Income before income tax expense .................... $ 86 $ 73
Fixed charges deducted from income
Interest expense .................................. 138 124
Implicit interest in rents ........................ 3 3
Total fixed charges deducted from income ........ 141 127
Earnings available for fixed charges .......... $ 227 $ 200
Ratio of earnings to fixed charges .................. 1.61 1.57
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 61,084<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 332
<MORTGAGE> 3,429
<REAL-ESTATE> 224
<TOTAL-INVEST> 68,918
<CASH> 348
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 5,336<F2>
<TOTAL-ASSETS> 109,869
<POLICY-LOSSES> 61,431<F3>
<UNEARNED-PREMIUMS> 196<F3>
<POLICY-OTHER> 406<F3>
<POLICY-HOLDER-FUNDS> 2,543<F3>
<NOTES-PAYABLE> 12,222
1,729<F4>
85<F5>
<COMMON> 926
<OTHER-SE> 6,568<F6>
<TOTAL-LIABILITY-AND-EQUITY> 109,869
1,914<F7>
<INVESTMENT-INCOME> 2,597
<INVESTMENT-GAINS> (7)
<OTHER-INCOME> 829<F8>
<BENEFITS> 2,691
<UNDERWRITING-AMORTIZATION> 312<F9>
<UNDERWRITING-OTHER> (533)<F10>
<INCOME-PRETAX> 961<F11>
<INCOME-TAX> 336<F12>
<INCOME-CONTINUING> 580
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 580
<EPS-BASIC> 2.30
<EPS-DILUTED> 2.25
<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 COVERTIBLE 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 $69 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES SHOWN
SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT.
<F12>EXCLUDES $24 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO
PREFERRED SECURITIES OF SUBSIDIARIES.
</FN>
</TABLE>
