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, 2000
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 31, 2000, there were 252,548,567 shares (excluding shares held in
treasury and by a subsidiary) of American General's Common Stock outstanding.
INDEX TO FORM 10-Q
Page
Part I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Income Statement for the six months
and quarters ended June 30, 2000 and 1999 ........ 2
Consolidated Balance Sheet at June 30, 2000 and
December 31, 1999 ................................ 3
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the six months ended
June 30, 2000 and 1999 ........................... 4
Consolidated Condensed Statement of Cash Flows for
the six months ended June 30, 2000 and 1999 ...... 5
Notes to Consolidated Financial Statements ......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............ 13
Item 3. Quantitative and Qualitative Disclosures
about Market Risk .............................. 27
Part II. OTHER INFORMATION.
Item 1. Legal Proceedings .................................... 28
Item 4. Submission of Matters to a Vote of
Security Holders ............................... 28
Item 6. Exhibits and Reports on Form 8-K ..................... 29
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN GENERAL CORPORATION
Consolidated Income Statement
(Unaudited)
(In millions, except per share data)
Six Months Ended Quarter Ended
June 30, June 30,
2000 1999 2000 1999
Revenues
Premiums and other considerations. $ 1,966 $ 1,914 $ 973 $ 990
Net investment income ............ 2,675 2,597 1,345 1,312
Finance charges .................. 789 713 398 356
Realized investment losses ....... (109) (7) (58) (5)
Other ............................ 151 116 77 60
Total revenues ............... 5,472 5,333 2,735 2,713
Benefits and expenses
Insurance and annuity benefits ... 2,751 2,691 1,367 1,378
Operating expenses ............... 796 808 400 416
Commissions ...................... 646 599 329 321
Change in deferred policy
acquisition costs and cost of
insurance purchased ............. (242) (221) (126) (135)
Provision for finance receivable
losses .......................... 97 100 48 48
Goodwill amortization ............ 24 24 12 12
Interest expense
Corporate ....................... 110 95 56 51
Consumer Finance ................ 333 276 170 138
Other charges .................... 315 - 315 -
Total benefits and expenses .. 4,830 4,372 2,571 2,229
Earnings
Income before income tax expense . 642 961 164 484
Income tax expense ............... 213 336 45 168
Income before net dividends on
preferred securities of
subsidiaries .................... 429 625 119 316
Net dividends on preferred
securities of subsidiaries ...... 50 45 25 23
Net income ................... $ 379 $ 580 $ 94 $ 293
Net income per share
Basic ........................... $ 1.53 $ 2.30 $ .38 $ 1.17
Diluted ......................... $ 1.50 $ 2.25 $ .38 $ 1.14
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Balance Sheet
(Unaudited)
(In millions)
June 30, December 31,
2000 1999
Assets
Investments
Fixed maturity securities (amortized cost:
$63,806; $62,375) ........................ $ 61,631 $ 60,625
Mortgage loans on real estate .............. 3,732 3,686
Equity securities (cost: $329; $299) ....... 369 339
Policy loans ............................... 2,395 2,375
Investment real estate ..................... 219 222
Other long-term investments ................ 518 412
Short-term investments ..................... 2,675 676
Total investments ...................... 71,539 68,335
Cash ........................................ 274 294
Assets held in separate accounts ............ 25,600 24,097
Finance receivables, net .................... 11,260 10,634
Deferred policy acquisition costs ........... 5,452 4,980
Cost of insurance purchased ................. 1,134 1,170
Goodwill .................................... 1,462 1,501
Other assets ................................ 4,442 4,436
Total assets ........................... $121,163 $115,447
Liabilities
Insurance and annuity liabilities ........... $ 67,301 $ 66,401
Liabilities related to separate accounts .... 25,600 24,097
Debt (short-term)
Corporate ($2,134; $1,932) ................. 3,173 3,120
Consumer Finance ($4,903; $4,489) .......... 10,753 10,206
Income tax liabilities ...................... 687 833
Other liabilities ........................... 5,249 2,446
Total liabilities ...................... 112,763 107,103
Redeemable equity
Company-obligated mandatorily redeemable
preferred securities of subsidiaries
holding solely company subordinated notes
Non-convertible .......................... 1,971 1,675
Convertible .............................. - 249
Total redeemable equity ................ 1,971 1,924
Shareholders' equity
Convertible preferred stock (shares issued
and outstanding: 0, 2.3) ................... - 85
Common stock (shares issued: 269.3, 269.3;
outstanding: 252.5, 248.1) ................. 869 962
Retained earnings ........................... 7,892 7,732
Accumulated other comprehensive income (loss) (1,457) (1,278)
Cost of treasury stock ...................... (875) (1,081)
Total shareholders' equity ............. 6,429 6,420
Total liabilities and equity ........... $121,163 $115,447
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(Unaudited)
(In millions, except per share data)
Six Months Ended
June 30,
Shareholders' Equity 2000 1999
Convertible preferred stock
Balance at beginning of period .................. $ 85 $ 85
Conversion ...................................... (85) -
Balance at end of period ........................ - 85
Common stock
Balance at beginning of period .................. 962 939
Issuance of treasury shares ..................... (93) (13)
Balance at end of period ........................ 869 926
Retained earnings
Balance at beginning of period .................. 7,732 7,007
Net income ...................................... 379 580
Cash dividends (per share)
Preferred ($.64; $1.29) ......................... (1) (3)
Common ($.88; $.80) ............................ (218) (200)
Balance at end of period ........................ 7,892 7,384
Accumulated other comprehensive income (loss)
Balance at beginning of period................... (1,278) 1,599
Change in net unrealized gains (losses)
on securities .................................. (179) (1,475)
Balance at end of period ........................ (1,457) 124
Cost of treasury stock
Balance at beginning of period .................. (1,081) (759)
Issuance for conversion of preferred stock and
preferred securities .......................... 418 -
Issuance for employee benefit plans and other ... 31 40
Share repurchases ............................... (243) (221)
Balance at end of period ........................ (875) (940)
Total shareholders' equity .................... $6,429 $7,579
Comprehensive Income
Net income ....................................... $ 379 $ 580
Change in net unrealized gains (losses)
on securities
Fair value of fixed maturity securities ........ (425) (3,191)
Deferred policy acquisition costs and cost of
insurance purchased ........................... 154 905
Deferred income taxes .......................... 96 807
Change in fixed maturity securities ............ (175) (1,479)
Change in equity securities and other .......... (4) 4
Total ......................................... (179) (1,475)
Comprehensive income (loss) ...................... $ 200 $ (895)
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Condensed Statement of Cash Flows
(Unaudited)
(In millions)
Six Months Ended
June 30,
2000 1999
Operating activities
Net cash provided by operating activities ... $ 1,199 $ 1,253
Investing activities
Investment purchases .............................. (9,107) (12,273)
Investment dispositions and repayments ............ 7,756 10,288
Finance receivable originations and purchases ..... (3,404) (2,921)
Finance receivable principal payments received .... 2,655 2,513
Net increase in short-term investments ............ (1,999) (442)
Other, net ........................................ (73) (74)
Net cash used for investing activities ...... (4,172) (2,909)
Financing activities
Retirement Services and Life Insurance
Policyholder account deposits ................... 3,711 3,210
Policyholder account withdrawals ................ (3,354) (2,338)
Net policyholder account deposits .............. 357 872
Short-term collateralized financings ............ 2,055 277
Total Retirement Services and Life Insurance .. 2,412 1,149
Consumer Finance
Net increase in short-term debt ................. 414 58
Long-term debt issuances ........................ 831 455
Long-term debt redemptions ...................... (699) (191)
Short-term collateralized financings ............ 14 -
Total Consumer Finance ........................ 560 322
Corporate
Net increase in short-term debt ................. 202 96
Long-term debt issuance ......................... - 150
Long-term debt redemption ....................... (150) -
Issuance of preferred securities of subsidiary .. 295 -
Common stock repurchases ........................ (219) (219)
Dividends on common and preferred stock ......... (219) (203)
Non-recourse obligation collateralized by bonds . - 483
Other, net ...................................... 72 (115)
Total Corporate ............................... (19) 192
Net cash provided by financing activities ... 2,953 1,663
Net increase (decrease) in cash .................... (20) 7
Cash at beginning of period ........................ 294 341
Cash at end of period .............................. $ 274 $ 348
Supplemental disclosure of cash flow information:
Cash paid during the period for
Income taxes .................................... $ 208 $ 48
Interest
Corporate ...................................... 109 89
Consumer Finance ............................... 332 265
Dividends on preferred securities of
subsidiaries ................................... 75 68
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2000
(In millions, except per share data)
1. Accounting Policies. The accompanying unaudited consolidated financial
statements of American General Corporation (American General) and its
subsidiaries (collectively, the company or we) 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, 2000, the consolidated results
of operations for the six months and quarters ended June 30, 2000 and
1999, and the consolidated shareholders' equity, comprehensive income, and
cash flows for the six months ended June 30, 2000 and 1999.
2. Future Accounting Standard. In June 1998, the Financial Accounting
Standards Board 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 in the
balance sheet. Changes in the fair value of a derivative instrument will
be reported as earnings or other comprehensive income, depending upon the
intended use of the derivative instrument. We will adopt SFAS 133 on
January 1, 2001. We do not expect adoption to have a material impact on
the company's results of operations and financial position.
3. Calculation of Earnings Per Share. We calculate basic and diluted
earnings per share as follows:
Six Months Ended Quarter Ended
June 30, June 30,
2000 1999 2000 1999
Net income .................. $ 379 $ 580 $ 94 $ 293
Net dividends on convertible
preferred stock ............ - (3) - (2)
Basic earnings .............. 379 577 94 291
Net dividends on dilutive
securities
Convertible preferred
securities of subsidiary . 5 5 2 2
Convertible preferred stock - 3 - 2
Dilutive earnings ........... $ 384 $ 585 $ 96 $ 295
Average basic shares
outstanding ................ 248.1 250.7 247.4 250.0
Dilutive securities
Convertible preferred
securities of subsidiary . 6.1 6.1 6.1 6.1
Convertible preferred stock - 2.3 - 2.3
Stock options ............. .8 1.2 .8 1.4
Restricted stock .......... .6 .3 .6 .4
Average diluted shares
outstanding ................ 255.6 260.6 254.9 260.2
Net income per share
Basic ...................... $1.53 $2.30 $ .38 $1.17
Diluted .................... $1.50 $2.25 $ .38 $1.14
Item 1. Financial Statements (continued).
4. 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, 2000 or 1999.
Significant activity related to derivative financial instruments in 2000
was as follows:
During the six months ended June 30, 2000, we purchased call swaptions
with notional amounts of $1.8 billion, while swaptions with notional
amounts of $14.4 billion expired. Swaptions, which are options to enter
into interest rate swap agreements, limit the company's exposure to
reduced spreads between investment yields and interest rates credited to
policyholders should interest rates decrease or increase significantly
over prolonged periods. Call and put swaptions with notional amounts of
$3.8 billion and $400 million, respectively; average strike rates of 5.3%
and 9.5%, respectively; and total premium paid of $1 million and
$.2 million, respectively, were outstanding at June 30, 2000. These
swaptions expire throughout 2000.
Should the strike rates remain below market rates (for call swaptions)
and above market rates (for put swaptions), the swaptions will expire and
the company's exposure would be limited to the premiums paid.
5. Dollar Rolls. We use dollar roll agreements as part of our strategy to
increase investment income. Dollar rolls are agreements to sell
mortgage-backed securities and repurchase substantially the same
securities at a specified price and date in the future. We account for
dollar rolls as short-term collateralized financings and include the
repurchase obligation in other liabilities. At June 30, 2000, the
company had $2.1 billion of outstanding dollar roll agreements. The
average amount outstanding and the weighted-average interest rate on the
short-term collateralized borrowings for the six months ended June 30,
2000 were $1.8 billion and 5.7%, respectively.
6. Investing Activities. Cash flows related to investing activities were
as follows:
Dispositions and
Purchases Repayments
Six Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Fixed maturity securities $8,679 $11,819 $7,458 $10,065
Mortgage loans 257 271 216 166
Equity securities 36 20 41 21
Other 135 163 41 36
Total $9,107 $12,273 $7,756 $10,288
7. Redeemable Equity. In second quarter 2000, we had activity in preferred
securities of subsidiaries as follows:
1) On June 27, 2000, American General Capital II (the trust), a
subsidiary trust of American General, issued 300,000 shares, or
$300 million, of non-convertible preferred securities. Semi-annual
cumulative dividends on the preferred securities are payable by the
trust at the annual rate of 8-1/2%.
Item 1. Financial Statements (continued).
The trust has no independent operations. The sole assets of the
trust are Junior Subordinated Debentures (subordinated debentures)
issued by American General and mandatorily redeemable in 2030. The
interest terms and payment dates of the subordinated debentures held
by the trust correspond to those of the trust's preferred
securities. The subordinated debentures are eliminated in our
consolidated financial statements.
Our obligation 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.
2) On June 30, 2000, holders of approximately 5 million shares of our
6% convertible preferred securities of subsidiaries converted their
securities at a conversion rate of 1.2288 per share into 6.1 million
shares of American General common stock. On that date, the
conversion rights expired for the remaining 10,811 shares. On
July 5, 2000, we announced that we will exercise our right to redeem
these shares at $50 par value on August 31, 2000.
8. Convertible Preferred Stock. On March 1, 2000, we redeemed all
outstanding shares of our mandatorily convertible preferred stock.
Holders received .8264 share of our common stock for each share of
preferred stock redeemed. In total, we issued 1.9 million shares of
common stock.
9. Other Charges. The company recorded the following non-recurring items,
totaling $193 million aftertax or $.76 per share, during second quarter
2000:
1) On June 21, 2000, one of the company's life insurance subsidiaries
entered into settlements to resolve pending class action litigation
and related regulatory inquiries concerning industrial life
insurance. See Note 10 for further discussion of this matter. In
conjunction with the proposed settlements, we recorded a charge of
$265 million ($175 million aftertax or $.68 per share). The charge
covers the cost of policyholder benefits, including premium
adjustments and benefit enhancements, and other charges and expenses
resulting from the proposed settlements, as well as related
administrative and legal costs.
2) In late June 2000, we discovered a potential fraud committed against
a subsidiary that conducts mortgage warehouse lending activities in
our consumer finance division. Recent mortgages processed by one
originator allegedly had been funded based on fraudulent
information. In July, the originator's license was suspended and
the originator and its parent company filed for bankruptcy. Based
on the available information, we recorded a charge of $50 million
($32 million aftertax or $.13 per share) for our estimated loss
related to this alleged fraud. We are pursuing all appropriate
remedies to recover this loss, including insurance recovery and
legal action.
Item 1. Financial Statements (continued).
3) During second quarter 2000, we finalized certain tax issues
associated with our 1989-1992 tax returns under examination by the
Internal Revenue Service. As a result, we reduced goodwill by
$27 million and recognized a $14 million ($.05 per share) tax benefit
to reflect the use of acquired net operating loss carryforwards.
10. Legal Proceedings. The company is party to various lawsuits and
proceedings, including the following:
1) In the mid-1990s, one of our subsidiaries, American General
Financial Center (renamed A.G. Financial Service Center, Inc.)
(Financial Service Center), provided financing for satellite dishes
sold by independent unaffiliated dealers. 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 (the Clayton Smith matter),
rendered a judgment awarding approximately $500,000 in compensatory
damages and $167 million in punitive damages against Financial
Service Center. The lawsuit was filed on November 15, 1996, by 29
individuals who had each purchased a satellite dish. Financial
Service Center, together with certain other American General
companies, currently are named as defendants in other pending cases
involving the financing of satellite dishes.
In August 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 was intended
to provide a fair and orderly process for managing the claims
against Financial Service Center.
In January 2000, settlement agreements were entered into in
connection with the Clayton Smith matter and other pending cases
relating to satellite dish financing. Accordingly, we recorded a
charge of $57 million ($36 million aftertax) in fourth quarter 1999
to cover the proposed settlements and other litigation. Resolution
of the satellite dish litigation within the recorded charge is
dependent upon a number of factors, including obtaining the
bankruptcy court's approval of Financial Service Center's plan of
reorganization. If court approvals are obtained and appeals are not
taken, we expect that the settlements will be final in third quarter
2000.
Item 1. Financial Statements (continued).
2) Prior to our acquisition of USLIFE Corporation, one of its
subsidiaries entered the workers' compensation reinsurance business
in 1997. We discontinued writing new workers' compensation
reinsurance business in 1998. Our largest contract was a quota
share reinsurance agreement with Superior National Insurance Group,
Inc. and its affiliates (collectively, Superior National),
effective May 1, 1998. On November 29, 1999, we initiated an
arbitration proceeding to rescind this contract from its inception,
based in part on misrepresentations and nondisclosures which we
believe were made by Superior National.
On March 3, 2000, the California Department of Insurance ordered
seizure of certain of Superior National's insurance subsidiaries as
a result of their financial condition. On April 26, 2000, Superior
National Insurance Group, Inc. filed a voluntary petition to
reorganize under Chapter 11 of the United States Bankruptcy Code
with the United States Bankruptcy Court for the Central District of
California.
We do not believe that the action of the California Department of
Insurance or the bankruptcy filing will prevent the company from
ultimately arbitrating its claim for rescission, and we plan to
fully pursue all remedies through the arbitration process. Although
we believe, based on the advice of counsel, that the company will
succeed in rescinding the contract, risks and uncertainties remain
with respect to the ultimate outcome. In the unlikely event the
company does not prevail in the arbitration, we do not expect the
additional aftertax losses from our workers' compensation business
to exceed $85 million, after recoveries from reinsurers. We believe
that any ultimate loss related to our workers' compensation business
will not have a material adverse effect on our results of operations
and financial position.
3) Certain companies acquired by American General Life and Accident
Insurance Company (collectively, AGLA), a subsidiary of the company,
previously issued small face amount life insurance policies known
as industrial life insurance. AGLA ceased writing industrial life
insurance more than twenty years ago. On December 10, 1999, a class
action was filed against AGLA, Leola McNeil v. American General Life
and Accident Insurance Company et al., Civil Action No. 3-99-1157
(M.D. TN 1999), principally challenging AGLA's pricing practices
with respect to certain minority purchasers of industrial life
insurance and seeking compensatory and punitive damages and
injunctive relief. On April 27, 2000, the Florida Department of
Insurance (the Department) issued a cease and desist order to AGLA,
In the Matter of American General Life and Accident Insurance
Company, Case No. 348600-00-C, requiring AGLA to cease collecting
a portion of premiums from Florida minority policyholders and to
submit a corrective action plan to the Department. Prior to that
date, AGLA had taken action to cease collecting a portion of the
premiums on its industrial life policies from affected minority
policyholders nationwide.
Item 1. Financial Statements (continued).
On June 21, 2000, American General announced that AGLA entered into
a settlement, subject to court approval, to resolve the McNeil class
action. We also announced that AGLA entered into an agreement with
the Department to resolve related regulatory matters, including the
cease and desist order. Since the announcement, 31 other states,
representing in excess of 90% of AGLA's industrial life
policyholders, have joined in the settlement. The regulatory
settlement agreements are contingent on final court approval of the
class action settlement.
In conjunction with the proposed settlements, we recorded a charge
of $265 million ($175 million aftertax) in second quarter 2000. The
charge covers the cost of policyholder benefits, including premium
adjustments and benefit enhancements, and other charges and expenses
resulting from the proposed settlements, as well as related
administrative and legal costs.
The company is also party to various other lawsuits and proceedings
arising in the ordinary course of business. These lawsuits and
proceedings include certain class action claims and claims filed by
individuals who excluded themselves from market conduct settlements
relating to life insurance pricing and sales practices. In addition,
many of these claims 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, we believe 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 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 has completed examinations of our tax returns through
1992 and is currently examining our tax returns for 1993 through 1996.
Although the final outcome of any issues raised is uncertain, we believe
that the ultimate liability, including interest, will not have a material
adverse effect on the financial statements.
12. Division Results. We report our financial results in three business
divisions, as well as a category for corporate operations. Results of
each division include earnings from its business operations and earnings
on the amount of equity we consider necessary to support its business.
Corporate operations include corporate capital costs and other income or
expenses not allocated to the business divisions. Goodwill amortization,
net realized investment gains (losses), and non-recurring items are also
excluded from division results, consistent with the manner in which we
review and evaluate the divisions.
Item 1. Financial Statements (continued).
Division results for the six months ended June 30, were as follows:
Income
Revenues Before Taxes Net Income
2000 1999 2000 1999 2000 1999
Retirement Services $1,947 $1,758 $ 492 $ 428 $ 328 $ 287
Life Insurance 2,723 2,739 573 537 377 350
Consumer Finance 932 844 189 171 121 110
Total divisions 5,602 5,341 1,254 1,136 826 747
Corporate operations (21) (1) (164) (144) (109) (94)
Goodwill amortization (24) (24) (24) (24)
Net dividends on
preferred securities
of subsidiaries (50) (45)
Operating earnings 643 584
Realized investment
losses (109) (7) (109) (7) (71) (4)
Non-recurring items - - (315) - (193) -
Consolidated total $5,472 $5,333 $ 642 $ 961 $ 379 $ 580
Division results for the quarter ended June 30, were as follows:
Income
Revenues Before Taxes Net Income
2000 1999 2000 1999 2000 1999
Retirement Services $ 964 $ 913 $ 249 $ 217 $ 166 $ 145
Life Insurance 1,371 1,383 289 272 190 177
Consumer Finance 469 423 97 89 62 57
Total divisions 2,804 2,719 635 578 418 379
Corporate operations (11) (1) (86) (77) (56) (49)
Goodwill amortization (12) (12) (12) (12)
Net dividends on
preferred securities
of subsidiaries (25) (23)
Operating earnings 325 295
Realized investment
losses (58) (5) (58) (5) (38) (2)
Non-recurring items - - (315) - (193) -
Consolidated total $2,735 $2,713 $ 164 $ 484 $ 94 $ 293
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This item presents specific comments on material changes to our 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 June 30,
2000 and 1999 are the same as those discussed below for the respective six
month periods, unless otherwise noted. Amounts in the tables are in millions,
except per share data.
OVERVIEW
The company is a diversified financial services organization with over
$121 billion of assets and over $20 billion of annual revenues and deposits.
We are a leading provider of retirement services, life insurance, consumer
loans, and investments to 12 million customers.
Our financial highlights were as follows:
Six Months Ended Quarter Ended
June 30, June 30,
2000 1999 2000 1999
Revenues and deposits(1) $ 11,283 $ 9,965 $ 5,718 $ 5,228
Earnings
Operating earnings 643 584 325 295
Net income 379 580 94 293
Earnings per share
Operating earnings 2.54 2.26 1.29 1.15
Net income 1.50 2.25 .38 1.14
Assets(2) 122,866 109,722
Shareholders' equity(2)
Total 7,911 7,484
Per share 31.23 29.65
Operating return on equity 16.46% 15.74% 16.33% 15.75%
(1) Excludes realized investment losses.
(2) Excludes fair value adjustment under SFAS 115.
Revenues and deposits increased $1.3 billion, or 13%, for the six months ended
June 30, 2000, compared to the same period in 1999, due to higher fixed and
variable deposits in our retirement services and life insurance divisions.
Operating earnings increased 10% for the first six months of 2000 due to
increases in earnings in our retirement services division (up 14%), life
insurance division (up 8%), and consumer finance division (up 10%). Operating
earnings per share increased 12%, compared to the 10% increase in operating
earnings, as a result of the decline in average shares outstanding due to the
repurchase of 7.0 million shares of our common stock in the last twelve
months.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Net income decreased $201 million, or 35%, for the six months ended June 30,
2000, due to aftertax charges of $193 million and aftertax realized investment
losses of $71 million. The charges mainly relate to our settlement of
industrial life insurance litigation and a fraud loss in second quarter 2000.
See Note 9 of the financial statements for further discussion of the charges.
The investment losses from sale of our securities reflect our ongoing
management of the investment portfolio to maximize its relative value and to
optimize the company's tax position. The $427 million increase in
shareholders' equity reflects $930 million in net income over the last twelve
months, in addition to a $250 million increase related to the conversion of
our convertible preferred securities, partially offset by dividends paid to
our shareholders of $422 million and share repurchases of $447 million.
BUSINESS DIVISIONS
We manage our business operations through three divisions - retirement
services, life insurance, and consumer finance - based on products and
services offered. Results of each of our business division's operations are
discussed below.
Retirement Services
Our retirement services division results were as follows:
Six Months Ended Quarter Ended
June 30, June 30,
2000 1999 2000 1999
Fixed margin $ 490 $ 468 $ 247 $ 238
Variable fees 119 84 60 44
Asset management fees 31 15 16 7
Other revenue 32 16 16 9
Net revenue 672 583 339 298
Operating expenses 166 151 84 80
Other, net* 14 4 6 1
Pretax earnings 492 428 249 217
Income taxes 164 141 83 72
Division earnings $ 328 $ 287 $ 166 $ 145
*Primarily commissions and change in DPAC/CIP.
Earnings. Retirement services earnings are a function of the level of our
managed assets, fixed margin, variable fees, asset management fees, and
operating expenses. Division earnings for the six months ended June 30, 2000
increased 14%, or $41 million, compared to the same period in 1999. The
increase was due to the 18% growth in managed assets from June 30, 1999 to
June 30, 2000, which generated an increase in fixed margin, variable fees, and
asset management fees that was partially offset by higher operating expenses.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Assets and Deposits. Investments and separate account assets grew 10% and
27%, respectively, from June 30, 1999 to June 30, 2000. Assets and deposits
were as follows:
Six Months Ended Quarter Ended
June 30, June 30,
2000 1999 2000 1999
Assets
Investments* $ 43,707 $39,732
Separate accounts 22,669 17,854
Premiums and deposits
Fixed 2,828 2,386 $1,491 $1,331
Variable 1,786 1,529 899 749
Mutual funds 476 49 205 29
Surrender ratios
Fixed 9.94% 7.62% 10.05% 8.31%
Variable 5.74 5.00 5.21 4.86
*Excludes fair value adjustment under SFAS 115.
Total premiums and deposits increased 28%, or $1.1 billion, for the six months
ended June 30, 2000 and 23%, or $.5 billion, in second quarter compared to the
same periods in 1999. The 18% increase in fixed premiums and deposits for the
six month period and the 12% increase for second quarter resulted from our
strong sales of fixed annuities through financial institutions. Variable
deposit growth of 17% and 20% for the first six months and second quarter of
2000, respectively, reflects our ability to meet continued consumer interest
in equity-based products through group retirement plans. Mutual fund deposit
growth was $427 million in the first six months and $176 million in second
quarter, compared to the 1999 periods, reflecting our recent introduction of
this product to meet customer demand for mutual funds without an annuity
wrapper. Changes in the surrender ratios resulted from widening of the spread
between market and credited interest rates, more policies without surrender
protection, and increased competition.
Fixed Margin. Fixed margin, the difference between net investment income on
general account investments and interest credited to policyholders' fixed
accounts, increased 5% in the first six months of 2000 compared to 1999.
Fixed investment spread measures this difference in terms of interest rates.
Net investment income and the components of fixed investment spread were as
follows:
Six Months Ended Quarter Ended
June 30, June 30,
2000 1999 2000 1999
Net investment income $1,567 $1,457 $ 792 $ 741
Investment yield* 7.72% 7.72% 7.73% 7.78%
Average crediting rate 5.35 5.38 5.37 5.39
Fixed investment spread 2.37% 2.34% 2.36% 2.39%
*Excludes fair value adjustment under SFAS 115.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
The $22 million increase in the fixed investment margin for the first six
months of 2000 was largely due to a higher level of invested assets and the
resulting 8% increase in net investment income. Investment yield, average
crediting rate, and fixed investment spread were relatively flat for the six
months and quarter ended June 30, 2000 compared to the same periods in 1999,
primarily due to management of the interest crediting rates.
Variable and Asset Management Fees. Variable fees are annuity product fees,
primarily mortality and expense charges, which we earn from separate accounts.
Asset management fees are the advisory and management fees we earn on mutual
fund and separate account assets. The increase in these fees of $51 million,
or 51%, for the first six months of 2000, compared to the same period of 1999,
was driven by a 27% growth in separate account assets. Our variable fee rate
increased 13 basis points to 1.36% for the first six months of 2000, primarily
due to more favorable revenue-sharing agreements with third-party asset
managers.
Operating Expenses. Operating expenses increased $15 million for the six
months and $4 million for the quarter ended June 30, 2000, compared to the
same periods in 1999, primarily due to increased personnel costs for our
expanded sales efforts and $3 million of operating expenses for a mutual fund
group that we purchased in first quarter 2000. The ratio of operating
expenses to average assets under management improved to .49% for the first six
months of 2000 from .54% for the same period a year ago.
Life Insurance
Our life insurance division results were as follows:
Six Months Ended Quarter Ended
June 30, June 30,
2000 1999 2000 1999
Premiums and
other considerations $1,527 $1,539 $ 770 $ 780
Net investment income 1,091 1,112 547 557
Other income 105 88 54 46
Total revenues 2,723 2,739 1,371 1,383
Insurance and annuity benefits 1,428 1,475 721 742
Operating expenses 334 357 167 185
Other expenses* 388 370 194 184
Total expenses 2,150 2,202 1,082 1,111
Pretax earnings 573 537 289 272
Income taxes 196 187 99 95
Division earnings $ 377 $ 350 $ 190 $ 177
*Primarily commissions and change in DPAC/CIP.
Earnings. The division's profitability is driven by growth in insurance
reserves and insurance in force, as well as interest spread, mortality, and
operating expenses. Earnings increased 8% for the six months ended June 30,
2000 compared to the same period in 1999. The increase resulted from a 4%
growth in combined general and separate account reserves and a 9% increase in
insurance in force, due to growth in existing business as well as new
ventures, and reduced operating expenses.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Sales and Premiums and Deposits. Sales represent annualized premiums and
deposits for new products issued. Premiums represent funds received on
traditional in force business, while deposits represent funds we receive for
interest-sensitive insurance and annuities. Sales and premiums and deposits
of the life insurance division were as follows:
Six Months Ended Quarter Ended
June 30, June 30,
2000 1999 2000 1999
Sales
Individual life insurance $ 279 $ 252 $ 140 $ 136
Individual annuities 464 297 228 154
Premiums and deposits
Life insurance $1,745 $1,829 $ 881 $1,010
Annuities 477 332 241 183
Other 291 333 145 163
Total $2,513 $2,494 $1,267 $1,356
Individual life insurance sales for the first six months of 2000 increased 10%
over the 1999 period due to increasing sales of variable products, universal
life, and term insurance. The increase also related to a 25% increase in life
insurance sales through our independent distribution channel, which more than
offset a decline in sales through career agents due to changes in marketing
emphasis. Total life insurance premiums and deposits decreased 5% in the six
month period and 13% in the quarter due to lower corporate market deposits,
which can fluctuate significantly from quarter to quarter.
Individual annuity sales increased 56% in the first six months of 2000,
compared to the same period of 1999, while annuity premiums and deposits
increased 44%. These increases were due to strong sales of variable annuities
through our financial institution channel.
Other premiums and deposits, which include primarily accident and health and
property and casualty business, declined 12% for the first six months of 2000,
compared to the same period of 1999, due to our de-emphasis of these lines of
business.
Investment Spread. Investment results and interest crediting rates were as
follows:
Six Months Ended Quarter Ended
June 30, June 30,
2000 1999 2000 1999
Assets
Investments* $28,673 $27,523
Separate accounts 2,931 1,841
Liabilities
Insurance and annuities 25,964 25,976
Separate accounts 2,931 1,841
Investment yield 8.06% 8.34% 8.07% 8.32%
Average crediting rate 5.87 5.89 5.90 5.86
Investment spread 2.19% 2.45% 2.17% 2.46%
*Excludes fair value adjustment under SFAS 115.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Net investment income and the investment yield decreased during the first six
months and second quarter of 2000, compared to the same periods of 1999, due
to lower income from securities called before their maturity dates and lower
market rates on new and reinvested funds. This decrease in net investment
income was partially offset by an increase in investment income generated by
the higher amount of investments and separate account assets.
Mortality and Persistency. Death claims and premium termination rates were
as follows:
Six Months Ended Quarter Ended
June 30, June 30,
2000 1999 2000 1999
Death claims $ 518 $ 508 $ 259 $ 258
Death claims per $1,000
in force $ 3.82 $ 3.73 $ 3.83 $ 3.80
Premium termination rate 11.87% 12.26% 11.59% 12.10%
Death claims per $1,000 of in force increased during the first six months and
second quarter of 2000, compared to the same periods in 1999, consistent with
the increasing average age of the in force business. The lower premium
termination rate for 2000 reflects higher than normal terminations in our
career agency lines during 1999. Mortality and persistency experience during
the first six months of 2000 reflected normal fluctuations and remained within
our pricing assumptions.
Expenses. Operating expenses decreased $23 million, or 7%, for the first six
months and decreased 10% for second quarter 2000 compared to the same periods
in 1999. Reductions in salary-related and technology costs more than offset
costs to market new products. The year-to-date ratio of operating expenses
to direct premiums and deposits improved to 13.19% in 2000 compared to 14.30%
in 1999.
Other expenses, which consist of commissions and the change in DPAC and CIP,
increased 5% in the first six months of 2000 compared to the same period in
1999. Commissions increased period over period due to the higher level of
sales in 2000. Deferrals of commissions and certain operating expenses, as
well as the related amortization of previously-capitalized DPAC and CIP, were
unchanged in 2000 from the prior year.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Consumer Finance
Our consumer finance division results were as follows:
Six Months Ended Quarter Ended
June 30, June 30,
2000 1999 2000 1999
Finance margin $ 456 $ 437 $ 228 $ 218
Other income 143 131 71 67
Net revenue 599 568 299 285
Provision for finance
receivable losses 97 100 48 48
Operating expenses 251 242 123 119
Other expenses* 62 55 31 29
Pretax earnings 189 171 97 89
Income taxes 68 61 35 32
Division earnings $ 121 $ 110 $ 62 $ 57
*Primarily insurance benefits.
Earnings. Division earnings are a function of the amount and mix of finance
receivables, interest spread, credit quality, and operating expenses.
Earnings increased 10% for the six months ended June 30, 2000, compared to the
same period in 1999, due to increases in average receivables, improved credit
quality, and the benefits of operating efficiencies, partially offset by lower
interest spread.
Finance Receivables. The mix of finance receivables was as follows:
June 30,
2000 1999
Real estate loans $ 7,249 $6,218
Non-real estate loans 2,988 2,497
Retail sales finance 1,406 1,244
Total finance receivables 11,643 9,959
Allowance for losses (383) (386)
Finance receivables, net $11,260 $9,573
Average finance receivables
Year-to-date $11,181 $9,792
Quarter 11,305 9,862
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
We increased our finance receivables portfolio by $1.7 billion during the last
twelve months. Average finance receivables in the first six months of 2000
increased 14% compared to the same period in 1999, due to higher loan
production and acquisitions of real estate and non-real estate loan
portfolios. Over the last twelve months, we generated $6.6 billion of loans
in our branch offices and purchased $1.3 billion of real estate loans and
$.5 billion of non-real estate loans, while $6.5 billion of loans were repaid.
At quarter end, 62% of the portfolio was secured by real estate, unchanged
from a year ago. During first quarter 2000, we completed the sale of
$27 million of fully-reserved receivables, resulting in a pretax gain of
$1 million. The allowance for finance receivable losses decreased $3 million
from the prior year period, primarily due to the sale of these receivables,
partially offset by an increase for a portfolio of non-real estate loans
purchased in second quarter 2000.
Finance Margin. Finance margin is the difference between the finance charges
we charge our customers and interest expense on the debt required to fund
finance receivables. Interest spread measures this difference in terms of
interest rates. Finance margin and the components of interest spread were as
follows:
Six Months Ended Quarter Ended
June 30, June 30,
2000 1999 2000 1999
Finance charges $ 789 $ 713 $ 398 $ 356
Interest expense 333 276 170 138
Finance margin $ 456 $ 437 $ 228 $ 218
Yield on finance receivables 14.17% 14.66% 14.15% 14.47%
Borrowing cost 6.47 6.20 6.52 6.17
Interest spread 7.70% 8.46% 7.63% 8.30%
Year-to-date finance charges increased 11% from the prior year period due to
the increase in our average finance receivables, partially offset by the
decline in yield on real estate loans. Interest expense increased for the
same period due to increases in average debt outstanding and higher borrowing
costs. Interest spread decreased in 2000 due to the combined effect of the
decline in yield and the increase in our borrowing cost.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Credit Quality. Net charge-off and delinquency ratios reflect the quality of
our receivables portfolio, the success of our collection efforts, and general
economic conditions. Credit quality information was as follows:
Six Months Ended Quarter Ended
June 30, June 30,
2000 1999 2000 1999
Charge offs $ 97 $ 100 $ 48 $ 48
Delinquencies 367 371
Allowance for losses 383 386
Ratios
Charge-off 1.74% 2.05% 1.72% 1.96%
Delinquency 3.02 3.53
Allowance 3.29 3.87
Charge-off coverage 1.98x 1.93x 1.98x 2.01x
Risk-adjusted yield 12.43% 12.61% 12.43% 12.51%
The decrease in the charge-off ratio reflects a higher percentage of real
estate loans in the portfolio during the first six months and second quarter
of 2000, compared to the same periods in 1999. The decreases in delinquencies
and the delinquency ratio at June 30, 2000, compared to June 30, 1999, were
due to continued improvement in credit quality, the higher level of recently
purchased receivables in the first six months of 2000, and the sale of
$27 million of fully-reserved receivables in first quarter 2000.
The allowance for finance receivable losses is maintained at an amount that
we believe is adequate to absorb anticipated charge offs in our existing
portfolio. The allowance as a percentage of finance receivables has continued
to decline as the portfolio has grown, reflecting improved credit quality.
We have maintained a slightly higher year-to-date charge-off coverage ratio
at 2 times annual charge offs.
Risk-adjusted yield represents the yield on finance receivables less the
charge-off ratio. Although risk-adjusted yield declined, the decrease is less
than the decline in yield on finance receivables due to the improvement in the
charge-off ratio.
Operating Expenses. Operating expenses as a percentage of average finance
receivables for the first six months of 2000 improved to 4.49% from 4.97% for
the same period of 1999. This decrease reflects a 14% increase in average
finance receivables compared to a 3% increase in operating expenses.
Operating expenses increased due to higher salary-related and technology
costs, partially offset by lower litigation expenses.
INVESTMENTS
Our invested assets consisted primarily of fixed maturity securities (86%),
mortgage loans on real estate (5%), short-term investments (4%), and policy
loans (3%) at June 30, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Fair Value of Securities. At June 30, 2000, the market value of our fixed
maturity securities was 96.6% of amortized cost compared to 97.2% of amortized
cost at December 31, 1999. The negative fair value adjustment on our fixed
maturity securities portfolio increased by $425 million, with a related $175
million negative adjustment to shareholders' equity. The components of the
fair value adjustment at June 30, 2000 and December 31, 1999, and the six
month change, were as follows:
June 30, December 31,
2000 1999 Change
Fair value adjustment to fixed
maturity securities $(2,175) $(1,750) $ (425)
Related increase in DPAC/CIP 501 347 154
Related decrease in deferred
income taxes 591 495 96
Valuation allowance on deferred
tax asset (381) (381) -
Net unrealized losses
Fixed maturity securities (1,464) (1,289) (175)
Other 7 11 (4)
Net unrealized losses
on securities $(1,457) $(1,278) $ (179)
Fixed Maturity Securities. At June 30, 2000, our fixed maturity securities
investment portfolio consisted of $46.2 billion of corporate bonds,
$13.2 billion of mortgage-backed securities, and $2.1 billion of bonds issued
by governmental agencies. The average credit rating of the portfolio was A
at June 30, 2000 and A+ at December 31, 1999. Average ratings by category at
June 30, 2000 were as follows:
June 30, Average Credit
2000 % Rating
Investment grade $44,982 73% A
Mortgage-backed 13,207 21 AAA
Below investment grade 3,442 6 B+
Total fixed maturity securities $61,631 100% A
Investment income from our below investment grade securities was $197 million
(10.6% yield) for the six months ended June 30, 2000 and $177 million (10.1%
yield) for the same period in 1999. Realized investment losses on below
investment grade securities were $76 million and $54 million for the six
months ended June 30, 2000 and 1999, respectively.
Non-performing bonds were less than 0.1% of total fixed maturity securities
at June 30, 2000 and December 31, 1999. We classify bonds as non-performing
when the payment of interest is sufficiently uncertain as to preclude accrual
of interest.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Assets Under Management. Assets under management, which include invested
assets, separate account assets, finance receivables, and mutual funds,
increased to $116 billion at June 30, 2000 from $100 billion at June 30, 1999.
The 16% increase over the prior year primarily related to growth in separate
account assets and invested assets. Mutual funds under management increased
$1.9 billion to $2.5 billion, primarily from our acquisition of the North
American Funds, a family of 16 sub-advised mutual funds, in first quarter
2000.
CAPITAL RESOURCES
Corporate Capital. The level of our corporate capital is determined primarily
by the required equity of our business divisions. The mix of corporate
capital between debt and equity is influenced by our overall corporate
strategy and structure. Our target capital structure consists of 25%
corporate debt, 15% redeemable equity, and 60% shareholders' equity. The
amount and mix of our corporate capital at June 30, 2000 and December 31, 1999
were as follows:
June 30, December 31,
2000 1999
Corporate capital* $13,055 $12,768
Corporate debt 24.3% 24.4%
Redeemable equity 15.1 15.1
Shareholders' equity 60.6 60.5
*Excludes fair value adjustment under SFAS 115.
Redeemable Equity. On June 27, 2000, we issued $300 million of 8-1/2%
preferred securities. Net proceeds of $295 million were used to reduce short-
term debt. On June 30, 2000, holders of approximately 5 million shares of our
6% convertible preferred securities converted their securities into 6.1
million shares of American General common stock.
Shareholders' Equity. On March 1, 2000, we redeemed all outstanding shares
of our mandatorily convertible preferred stock, with a stated value of
$85 million. Holders received .8264 share of our common stock for each share
of preferred stock redeemed, for a total of 1.9 million common shares.
We use share repurchases as a means of maintaining our target capital
structure. We repurchased 4.2 million shares for $243 million in the six
months ended June 30, 2000 and 2.4 million shares for $150 million in second
quarter 2000. Since 1987, American General has repurchased 126.7 million
common shares for an aggregate cost of $3.4 billion. Our future repurchase
activity will be based on the company's corporate development activities,
capital management strategy, and fluctuations in our common stock price.
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 our retirement services and life insurance
companies is principally a function of four factors: (1) quantity and quality
of assets invested to support insurance and annuity reserves, (2) mortality
and other insurance-related risks, (3) 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' risk-based capital (RBC) formula, used
to evaluate the adequacy of a life insurance company's statutory equity.
We currently manage the statutory equity of our principal retirement services
and life insurance companies to a target of 2.5 times the Company Action Level
RBC (or 5.0 times the Authorized Control Level RBC). We adjust dividends
from, or contributions to, these companies to maintain this target. At
June 30, 2000, our principal retirement services and life insurance companies
had statutory equity in a range of 2.1 to 3.2 times the Company Action Level
RBC, with a weighted-average of 2.6 times.
Consumer Finance. The capital of our consumer finance division varies
directly with the level of its finance receivables. This capital, totaling
$12.3 billion at June 30, 2000, consisted of $1.5 billion of equity and
$10.8 billion of consumer finance debt, which was not guaranteed by American
General.
The capital mix of consumer finance debt and equity is based upon maintaining
leverage at a level that supports cost-effective funding. The consumer finance
division's target ratio of debt to tangible net worth, a standard measure of
financial risk in the consumer finance industry, is currently 7.5 to 1. The
ratio was 7.7 to 1 at June 30, 2000 and 7.6 to 1 at December 31, 1999.
LIQUIDITY
Our overall liquidity is based on cash flows from the business divisions and
our ability to borrow in both the long-term and short-term markets at
competitive rates. At June 30, 2000, we had committed and unused credit
facilities of $5.6 billion, substantially all of which were to support the
company's commercial paper borrowings. We believe that our overall sources
of liquidity will continue to be sufficient to satisfy our foreseeable
financial obligations.
Corporate Operations. The primary sources of cash for corporate operations
include net dividends from our business divisions and the proceeds from
issuances of debt and redeemable equity. Corporate operations use cash to pay
dividends to shareholders, to pay aftertax interest on corporate debt and
dividends on preferred securities, to repurchase common stock, and to pay
other corporate expenses. We expect to fund future acquisitions and
maturities of debt and preferred securities through external sources, while
maintaining our capital structure.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Net dividends received from our business divisions were as follows:
Six Months Ended
June 30,
2000 1999
Dividends received
Retirement Services $ 70 $ 87
Life Insurance 194 246
Consumer Finance 27 134
Total received 291 467
Contributions paid
Retirement Services 43 -
Life Insurance 133 229
Total paid 176 229
Net dividends received $ 115 $ 238
Dividends received from both our retirement services and life insurance
divisions declined in 2000 since additional capital was required to support
their target capital levels and new business growth. Dividends received from
our consumer finance division also declined in 2000 because the division
retained capital to support its purchase of a non-real estate portfolio in
second quarter 2000. The life insurance division received contributions in
2000 and 1999 to partially fund the industrial life insurance litigation and
the market conduct litigation settlements, respectively.
Retirement Services. Principal sources of cash for our retirement services
division were as follows:
Six Months Ended
June 30,
2000 1999
Cash from operating activities $ 908 $ 852
Fixed policyholder account deposits,
net of withdrawals 420 703
Variable account deposits, net of
withdrawals 1,443 1,302
Mutual fund deposits, net of withdrawals 269 18
Short-term collateralized financings 1,260 267
The increase in net variable account and mutual fund deposits and the decline
in net fixed policyholder account deposits period over period resulted from
policyholders continuing to seek higher returns in equity-based investments,
as well as new variable product introductions. Because the investment risk
on variable accounts and mutual fund products lies predominately with the
policyholder, deposits and withdrawals related to separate accounts and mutual
funds are not included in the company's cash flow statement. The increase in
cash from short-term collateralized financings relates to the company's
expanded use of dollar rolls as part of our investment strategy.
The division's major use of cash was the net purchase of investments necessary
to support increases in insurance and annuity liabilities. The division also
paid net dividends of $27 million to the parent in the first six months of
2000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Life Insurance. Principal sources of cash for our life insurance division
were as follows:
Six Months Ended
June 30,
2000 1999
Cash from operating activities $ 36 $129
Fixed policyholder account deposits,
net of withdrawals (63) 169
Variable account deposits, net of
withdrawals 440 422
Short-term collateralized financings 795 10
The $232 million decline in net fixed policyholder account deposits and the
increase in net variable account deposits in the first six months of 2000,
compared to 1999, resulted from policyholders seeking higher returns from
equity-based investments, new variable product introductions, and the transfer
of lump sum fixed deposits to variable accounts. The increase in short-term
collateralized financings relates to our expanded use of dollar rolls.
The division's major use of cash was the net purchase of investments necessary
to support increases in insurance and annuity liabilities. In the first six
months of 2000, the division paid net dividends of $61 million to the parent.
Consumer Finance. Principal sources of cash for our consumer finance division
were as follows:
Six Months Ended
June 30,
2000 1999
Cash from operating activities $350 $283
Increase in debt 546 322
Net cash provided by operating activities increased $67 million in 2000
compared to 1999 due to the increase in finance charges from higher average
net receivables. Cash generated by borrowings increased due to higher growth
in finance receivables in 2000.
The division's major use of cash was to fund finance receivables growth. Net
cash used to fund finance receivables was $749 million in the first six months
of 2000, compared to $408 million in the first six months of 1999. The
division paid dividends of $27 million to the parent in 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information contained herein
relative to markets for our products and trends in our 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. We have made these forward-looking
statements based upon our current expectations and beliefs concerning future
developments and their potential effects on the company. There can be no
assurance that future developments affecting the company will be those that
we anticipated. 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, our products; (4) our ability to secure necessary regulatory approvals;
(5) adverse litigation or arbitration results or resolution of litigation or
arbitration, including proceedings related to industrial life insurance,
satellite dish financing, market conduct, and workers' compensation insurance;
and (6) the formation of strategic alliances or business combinations among
our competitors or business partners. Investors are also directed to other
risks and uncertainties discussed in documents we filed with the Securities
and Exchange Commission. We undertake no obligation to update or revise any
forward-looking information, whether as a result of new information, future
developments, or otherwise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Our exposure to market risk is primarily related to changes in interest rates.
Quantitative and qualitative disclosures about our market risk resulting from
changes in interest rates are included in the section titled "Asset/Liability
Management" of Management's Discussion and Analysis in our 1999 Annual Report
to Shareholders. There have been no material changes in such risks or our
asset/liability management program during the six months ended June 30, 2000.
See Note 4 of the financial statements for information about significant
derivative financial instrument activity during the year.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Refer to Note 10 of Notes to Consolidated Financial Statements included in
Part I of this Form 10-Q for the quarter ended June 30, 2000.
Item 4. Submission of Matters to a Vote of Security Holders.
On April 27, 2000, 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 249,094,817 votes. At the meeting, the company's
shareholders voted on the following matters: (1) election of eleven directors
constituting the company's entire board, for one-year terms; and
(2) ratification of the appointment of Ernst & Young LLP as independent
auditors for 2000. 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 199,057,784 5,245,160 -
Brady F. Carruth 202,160,174 2,142,770 -
W. Lipscomb Davis Jr. 202,460,915 1,842,029 -
Robert M. Devlin 184,584,608 19,718,336 -
J. Edward Easler II 202,384,864 1,918,080 -
Larry D. Horner 202,475,550 1,827,394 -
Richard J.V. Johnson 202,480,844 1,822,100 -
Michael E. Murphy 202,452,398 1,850,546 -
Michael J. Poulos 199,944,241 4,358,703 -
Robert E. Smittcamp 202,495,605 1,807,339 -
Anne M. Tatlock 200,277,876 4,025,068 -
Independent Auditors: 203,340,803 204,252 757,889
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 21, 2000 and incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
11 Computation of Earnings per Share (included in Note 3 of
Notes to Consolidated 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
b. Reports on Form 8-K.
The following reports on Form 8-K were filed after March 31, 2000:
1) Current Report on Form 8-K dated June 21, 2000, with respect to
proposed settlement by American General Life and Accident
Insurance Company to resolve its industrial life litigation,
including charge of approximately $265 million ($175 million
aftertax) to be recorded by the company in second quarter 2000.
2) Current Report on Form 8-K dated June 22, 2000, with respect to
the pricing of a public offering of 300,000 shares of 8-1/2%
Capital Trust Pass-through Securities of American General
Capital II, a subsidiary trust of the company, at $994.71 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 August 7, 2000.
AMERICAN GENERAL CORPORATION
(Registrant)
By: NICHOLAS R. RASMUSSEN
Nicholas R. Rasmussen
Executive Vice President, Chief Financial Officer
and Treasurer
(Duly Authorized Officer and Principal Financial Officer)
EXHIBIT INDEX
Exhibit
11 Computation of Earnings per Share (included in Note 3 of
Notes to Consolidated 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
