AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 1-7981
American General Corporation
(Exact name of registrant as specified in its articles of incorporation)
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)
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X . No .
As of October 30, 1998, there were 252,050,043 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.
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
INDEX TO FORM 10-Q
Page
Part I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Statement of Income for the nine
months and quarters ended September 30, 1998
and 1997 ......................................... 2
Consolidated Balance Sheet at September 30, 1998 and
December 31, 1997 ................................ 3
Consolidated Statement of Shareholders' Equity for
the nine months ended September 30, 1998 and
1997 ............................................. 4
Consolidated Condensed Statement of Cash Flows for
the nine months ended September 30, 1998 and
1997 ............................................. 5
Notes to Consolidated Financial Statements ......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............. 11
Part II. OTHER INFORMATION.
Item 1. Legal Proceedings .................................. 26
Item 6. Exhibits and Reports on Form 8-K ................... 26
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN GENERAL CORPORATION
Consolidated Statement of Income
(Unaudited)
(In millions, except per share data)
Nine Months Ended Quarter Ended
September 30, September 30,
1998 1997 1998 1997
Revenues
Premiums and other considerations. $ 2,685 $ 2,472 $ 916 $ 839
Net investment income ............ 3,790 2,983 1,284 1,010
Finance charges .................. 1,002 950 344 315
Realized investment gains ........ 6 25 1 11
Equity in earnings of Western
National Corporation ............ - 39 - 13
Other ............................ 141 134 44 47
Total revenues ............... 7,624 6,603 2,589 2,235
Benefits and expenses
Insurance and annuity benefits ... 3,847 3,197 1,337 1,074
Operating costs and expenses ..... 1,144 1,049 374 357
Commissions ...................... 783 648 279 224
Change in deferred policy
acquisition costs and cost of
insurance purchased ............. (150) (71) (66) (20)
Provision for finance receivable
losses .......................... 153 187 53 56
Interest expense
Corporate ....................... 138 117 46 40
Consumer Finance ................ 376 343 130 117
Other charges
Year 2000 costs ................. 37 9 20 3
Merger-related costs ............ - 272 - -
Losses on sale of non-strategic
assets ......................... - 113 - -
Litigation settlement ........... - 50 - -
Total benefits and expenses .. 6,328 5,914 2,173 1,851
Earnings
Income before income tax expense,
minority interest, and dividends
on preferred securities ......... 1,296 689 416 384
Income tax expense ............... 455 315 139 135
Income before minority interest
and dividends on preferred
securities ...................... 841 374 277 249
Minority interest in net income of
Western National Corporation .... 11 - - -
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Net dividends on preferred
securities of subsidiaries ...... 67 62 22 23
Net income ................... $ 763 $ 312 $ 255 $ 226
Net income per share
Basic ........................... $ 3.02 $ 1.27 $ 1.00 $ .92
Diluted ......................... $ 2.95 $ 1.27 $ .98 $ .91
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Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Balance Sheet
(Unaudited)
(In millions, except share data)
September 30, December 31,
1998 1997
Assets
Investments
Fixed maturity securities (amortized cost:
$58,855; $44,961) ........................... $ 63,346 $47,747
Mortgage loans on real estate ................. 3,335 3,272
Equity securities (cost: $96; $93) ............ 117 116
Policy loans .................................. 2,284 2,156
Investment real estate ........................ 239 233
Other long-term investments ................... 358 176
Short-term investments ........................ 1,370 306
Total investments ......................... 71,049 54,006
Assets held in Separate Accounts ............... 13,011 11,482
Finance receivables, net ....................... 8,442 7,639
Deferred policy acquisition costs .............. 3,033 2,718
Cost of insurance purchased .................... 868 680
Goodwill ....................................... 1,572 677
Other assets ................................... 4,222 2,835
Investment in Western National Corporation ..... - 583
Total assets .............................. $102,197 $80,620
Liabilities
Insurance and annuity liabilities .............. $ 61,651 $47,659
Liabilities related to Separate Accounts ....... 13,011 11,482
Debt (short-term)
Corporate ($1,440; $575) ...................... 2,567 1,916
Consumer Finance ($3,756; $3,255) ............. 8,083 7,266
Income tax liabilities ......................... 1,946 1,380
Other liabilities .............................. 3,742 1,608
Total liabilities ......................... 91,000 71,311
Redeemable equity
Company-obligated mandatorily redeemable
preferred securities of subsidiaries
holding solely company subordinated notes
Non-convertible ............................. 1,480 1,479
Convertible ................................. 248 247
Total redeemable equity ................... 1,728 1,726
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Shareholders' equity
Convertible preferred stock (shares issued
and outstanding: 2,317,701) ................... 85 85
Common stock (shares issued: 269,298,493;
259,135,053; outstanding: 252,331,985;
243,206,215)................................... 928 326
Cost of treasury stock ......................... (719) (621)
Retained earnings .............................. 7,102 6,624
Accumulated other comprehensive income ......... 2,073 1,169
Total shareholders' equity ................ 9,469 7,583
Total liabilities and equity .............. $102,197 $80,620
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Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Statement of Shareholders' Equity
(Unaudited)
(In millions, except per share data)
Nine Months Ended
September 30,
1998 1997
Compre- Compre-
hensive hensive
Total Income Total Income
Convertible preferred stock
Balance at beginning and end of
period ........................... $ 85 $ 85
Common stock
Balance at beginning of period .... 326 572
Issuance for Western National
Corporation acquisition .......... 580 -
Valuation of stock options issued
for acquisition .................. 37 -
Retirement of USLIFE treasury
shares ........................... - (346)
Issuance of treasury shares ....... (15) 92
Balance at end of period .......... 928 318
Cost of treasury stock
Balance at beginning of period .... (621) (860)
Share repurchases ................. (145) (363)
Retirement of USLIFE treasury
shares ........................... - 346
Issuance for acquisition .......... - 304
Issuance under employee benefit
plans and other .................. 47 52
Balance at end of period .......... (719) (521)
Retained earnings
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Balance at beginning of period .... 6,624 6,420 Net income ........................ 763 $ 763 312 $ 312 Cash dividends (per share) Preferred stock ($1.93; $1.93) ... (4) (4) Common stock ($1.13; $1.05) ...... (281) (244) Balance at end of period .......... 7,102 6,484 Accumulated other comprehensive income Balance at beginning of period.... 1,169 627 Change in net unrealized gains on securities, net of reclassification adjustment ..... 904 904 326 326 Balance at end of period ......... 2,073 953 Comprehensive income ............ $1,667 $ 638 Total shareholders' equity ...... $9,469 $7,319 |
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Condensed Statement of Cash Flows
(Unaudited)
(In millions)
Nine Months Ended
September 30,
1998 1997
Operating activities
Net cash provided by operating activities ... $ 1,652 $ 1,251
Investing activities
Investment purchases .............................. (8,578) (9,323)
Investment dispositions and repayments ............ 7,155 8,447
Finance receivable originations and purchases ..... (4,488) (3,481)
Finance receivable principal payments received .... 3,550 3,200
Disposition of non-strategic assets ............... - 1,020
Net decrease (increase) in short-term investments . (432) 213
Acquisitions ...................................... (591) (283)
Other, net ........................................ (174) (116)
Net cash used for investing activities ...... (3,558) (323)
Financing activities
Retirement Services and Life Insurance
Policyholder account deposits ................... 3,473 2,290
Policyholder account withdrawals ................ (3,361) (2,334)
Net policyholder account deposits
(withdrawals) ............................... 112 (44)
Short-term collateralized financings ............ 897 -
Total Retirement Services and Life Insurance. 1,009 (44)
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Consumer Finance
Net increase (decrease) in short-term debt ...... 501 (454)
Long-term debt issuances ........................ 1,129 485
Long-term debt redemptions ...................... (815) (808)
Total Consumer Finance ..................... 815 (777)
Corporate
Net increase (decrease) in short-term debt ...... 769 (79)
Long-term debt redemptions ...................... (354) -
Dividends on common and preferred stock ......... (285) (248)
Common stock repurchases ........................ (141) (365)
Issuance of preferred securities of subsidiaries. - 498
Other, net ...................................... 79 129
Total Corporate ............................ 68 (65)
Net cash provided by (used for)
financing activities ..................... 1,892 (886)
Net increase (decrease) in cash .................... (14) 42
Cash at beginning of period ........................ 263 176
Cash at end of period .............................. $ 249 $ 218
Supplemental disclosure of cash flow information:
Cash paid during the period for
Income taxes .................................... $ 258 $ 292
Interest
Corporate ...................................... 145 110
Consumer Finance ............................... 391 378
Dividends on preferred securities of
subsidiaries ................................... 82 74
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Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Notes to Consolidated Financial Statements September 30, 1998
1. Accounting Policies. The accompanying unaudited consolidated financial statements of American General Corporation and its subsidiaries (American General or the company) have been prepared in accordance with generally accepted accounting principles for interim periods. In the opinion of management, these statements include all adjustments that are necessary for a fair presentation of the company's consolidated financial position at September 30, 1998, the consolidated results of operations for the three months and nine months ended September 30, 1998 and 1997, and the consolidated shareholders' equity and cash flows for the nine months ended September 30, 1998 and 1997.
2. New Accounting Standards. During first quarter 1998, the company adopted Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. American General elected to report comprehensive income and its components in the consolidated statement of shareholders' equity, which is included herein. Application of this statement did not change
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
recognition or measurement of net income and, therefore, did not impact the company's consolidated results of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivative instruments to be recognized at fair value as either assets or liabilities in the balance sheet. Changes in the fair value of a derivative instrument are to be reported as earnings or other comprehensive income, depending upon the intended use of the derivative instrument. This statement is effective for years beginning after June 15, 1999. Adoption of SFAS 133 is not expected to have a material impact on the company's consolidated results of operations or financial position.
3. Acquisitions.
Western National. On February 25, 1998, the company acquired the remaining 54% equity interest of Western National Corporation (Western National) for $1.2 billion. The purchase price consisted of $580 million cash and 10.2 million shares of American General common stock. In addition, the company issued options to acquire 1.4 million shares of American General common stock to replace outstanding options to acquire Western National common stock. The fair value of these options, excluding options surrendered for $10 million cash pursuant to a pre- existing employment agreement, was $37 million.
Item 1. Financial Statements (continued).
Western National's results of operations and cash flows have been consolidated in the company's financial statements effective January 1, 1998. Earnings attributable to minority interests through February 25, 1998 have been reflected as a charge against consolidated income.
The acquisition was accounted for using the purchase method, and the purchase price has been allocated to Western National's specific assets and liabilities based on management's best estimate of their fair values at the date of acquisition. Evaluation of fair values assigned to Western National's assets and liabilities (primarily related to insurance and annuity liabilities) is continuing, and allocation of the purchase price may be adjusted when additional information is available. The difference between the aggregate purchase price and the net assets acquired is attributed to goodwill, which will be amortized on a straight-line basis over 40 years.
Non-cash activities related to the acquisition that are not reflected in the consolidated condensed statement of cash flows for the nine months ended September 30, 1998 were as follows:
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
(In millions)
Fair value of assets acquired $ 7,169 Liabilities assumed (5,961) Issuance of common stock (580) Fair value of stock options issued (37) Net cash paid $ 591 |
Western National is the parent of Western National Life Insurance Company, which changed its name to American General Annuity Insurance Company (American General Annuity) effective May 1, 1998.
Provident. Effective April 30, 1998, the Retirement Services division of the company completed the acquisition of substantially all of the in- force individual annuity business of Provident Companies, Inc. (Provident) in a coinsurance transaction with a ceding commission of approximately $32 million. The transaction increased insurance and annuity liabilities by $2.3 billion.
Item 1. Financial Statements (continued).
4. Calculation of Earnings Per Share. The calculation of basic and diluted earnings per share follows:
Nine Months Ended Quarter Ended
(In millions, September 30, September 30,
except share data) 1998 1997 1998 1997
Net income ........... $763 $312 $255 $226
Dividends on
convertible preferred
stock ............... (4) (4) (1) (1)
Earnings available
to common
shareholders (a)..... 759 308 254 225
Dividends on
dilutive securities
Convertible preferred
securities of
subsidiary, net of
tax ............... 8 - 3 3
Convertible preferred
stock ............. 4 - 1 1
Earnings available
to common
shareholders assuming
dilution (b) ........ $771 $308 $258 $229
Average shares
outstanding (a)...... 251,198,979 241,631,360 252,808,407 243,302,007
Dilutive securities
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Convertible preferred securities of subsidiary ........ 6,144,016 - 6,144,016 6,144,016 Convertible preferred stock ............. 2,317,701 - 2,317,701 2,317,701 Stock options ...... 1,498,886 934,163 2,163,928 1,012,090 Average shares outstanding assuming dilution (b) ........ 261,159,582 242,565,523 263,434,052 252,775,814 Net income per share Basic .............. $3.02 $1.27 $1.00 $ .92 Diluted ............ $2.95 $1.27 $ .98 $ .91 |
(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
Nine Months Ended Nine Months Ended
(In millions) September 30, September 30,
1998 1997 1998 1997
Fixed maturity securities $8,187 $9,047 $6,525 $7,563
Mortgage loans 238 220 541 595
Equity securities 2 2 39 70
Other 151 54 50 219
Total $8,578 $9,323 $7,155 $8,447
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6. Derivative Financial Instruments. The company purchases options to enter into interest rate swap agreements (swaptions) to limit its exposure to reduced spreads between investment yields and interest crediting rates should interest rates decline significantly over prolonged periods. During the nine months ended September 30, 1998, swaptions having a notional amount of $2.9 billion were purchased, and swaptions having a notional amount of $2.5 billion expired. Swaptions with a total notional amount of $3.4 billion and strike rates ranging from 4.00% to 5.00% were outstanding at September 30, 1998. These swaptions expire in 1998 and 1999.
During the nine months ended September 30, 1998, the company entered into interest rate swap agreements with a total notional amount of $255 million. In addition, American General Annuity had interest rate swap agreements with a total notional amount of $120 million outstanding at the acquisition date, of which $80 million is outstanding at September 30, 1998. These interest rate swap agreements were entered into to convert specific investment securities or debt from a floating rate to a
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
fixed rate basis.
In August 1998, the company entered into a treasury rate lock agreement with a notional amount of $123 million to hedge against the risk of rising interest rates on an anticipated debt issuance expected to occur within the next six months. During third quarter 1998, treasury rate lock agreements hedging anticipated debt issuances were settled, and related settlement costs of $19 million were deferred and are being recognized as an increase to interest expense over the terms of the related debt.
Derivative financial instruments did not have a material effect on net investment income, interest expense, or net income during the nine months ended September 30, 1998 or 1997.
Item 1. Financial Statements (continued).
7. Dollar Rolls. American General has entered into dollar roll agreements as part of its strategy to increase investment yields. 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. American General Annuity had outstanding dollar rolls of $520 million at the acquisition date. At September 30, 1998, the company had outstanding dollar roll agreements of $1.4 billion, which were collateralized by MBSs with approximately the equivalent fair value. The average amount outstanding and the weighted average interest rate on dollar rolls for the nine months ended September 30, 1998 were $977 million and 5.26%, respectively.
8. Comprehensive Income. The components of the comprehensive income for the nine months and quarter ended September 30, 1998 and 1997 were as follows:
Nine Months Ended Quarter Ended
(In millions) September 30, September 30,
1998 1997 1998 1997
Net income ................. $ 763 $ 312 $ 255 $ 226
Other comprehensive income -
change in net unrealized
gains on securities, net
of reclassification
adjustment ............... 904 326 573 420
Comprehensive income ... $1,667 $ 638 $ 828 $ 646
9. Legal Contingencies.
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
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 such purported class action lawsuits filed since 1996, asserting claims related to pricing and sales practices. American General believes it has substantial defenses to these alleged class actions and continues to assert them in courts where several of these cases are pending. At the same time, the Company is engaged in settlement discussions and related document and deposition discovery, directed toward resolving these matters expeditiously. Given the uncertain nature of litigation, the outcome of these asserted defenses and discussions cannot be predicted at this time. American General nevertheless believes that the ultimate outcome of all such pending litigation should not have a material adverse effect on American General's consolidated financial position. It is possible that settlements or adverse determinations in one or more of these actions could have a material adverse effect on American General's consolidated
Item 1. Financial Statements (continued).
results of operations for a given period. No provision for any adverse determinations in this pending litigation has been made in the consolidated financial statements because the amount of the loss, if any, from these actions cannot be reasonably estimated at this time.
Other. In addition to those lawsuits or proceedings disclosed herein, and in the company's 1997 annual report on Form 10-K, the company is a party to various other lawsuits and proceedings arising in the ordinary course of business. Many of these lawsuits and proceedings arise in jurisdictions that permit damage awards disproportionate to the actual economic damages incurred. Based upon information presently available, the company believes that the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on the company's consolidated results of operations and financial position. However, it should be noted that the frequency of large damage awards, including large punitive damage awards, that bear little or no relation to actual economic damages incurred by plaintiffs in certain jurisdictions continues to create the potential for an unpredictable judgment in any given suit.
10. Tax Return Examinations. American General and the majority of its subsidiaries file a consolidated federal income tax return. The Internal Revenue Service (IRS) has completed examinations of the company's tax returns through 1988 and has raised certain issues related to 1987 and 1988 that the company is currently contesting in the United States Tax Court. The IRS is currently examining the company's tax returns for 1989 through 1996. Although the final outcome of any issue raised is uncertain, the company believes that the ultimate liability, including interest, will not exceed amounts recorded in the consolidated financial statements.
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued).
OVERVIEW
American General reported financial highlights as follows:
Nine Months Ended Quarter Ended
(In millions, September 30, September 30,
except share data) 1998 1997 1998 1997
Net income $ 763 $ 312 $ 255 $ 226
Net income per share (diluted) 2.95 1.27 .98 .91
Revenues and deposits 13,579 10,306 4,703 3,416
Assets 102,197 79,416
Shareholders' equity 9,469 7,319
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As discussed below, the acquisitions of Home Beneficial Life on April 16, 1997 and American General Annuity on February 25, 1998 and charges recorded by the company for merger-related costs, losses on sale of non-strategic assets, and litigation settlement in second quarter 1997 affected the comparability of the company's year over year financial results. The reasons for any significant variations between the quarters ended September 30, 1998 and 1997 are the same as those discussed below for the respective nine month periods, unless otherwise noted.
BUSINESS DIVISIONS
To facilitate meaningful period-to-period comparisons, earnings of each business division include earnings from its business operations and earnings on that amount of equity considered necessary to support its business, and exclude non-recurring items and net realized investment gains. Division earnings were as follows:
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Nine Months Ended Quarter Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
Retirement Services $ 340 $ 186 $ 111 $ 59
Life Insurance 490 424 167 146
Consumer Finance 139 120 50 41
Division earnings $ 969 $ 730 $ 328 $ 246
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued).
Retirement Services
Retirement Services division results were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
Earnings $ 340 $ 186 $ 111 $ 59
Assets
Investments 40,052 23,224
Separate Accounts 11,896 10,194
Sales
Tax-qualified 1,292 1,137 506 393
Non-qualified 1,843 80 762 29
Deposits
Fixed
Tax-qualified 1,054 1,180 319 336
Non-qualified 1,719 - 693 -
Variable (mainly tax-qualified) 1,816 1,292 664 430
Operating expenses 167 115 60 4
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Earnings. Division earnings increased 83% for the nine months ended September 30, 1998 compared to the same period in 1997. American General Annuity's operations, which were included in the division's results effective January 1, 1998, increased division earnings by $88 million. Earnings attributable to minority interests through February 25, 1998 are reported in corporate operations. Asset growth, higher investment income from prepayment of investments, and management of fixed investment spread also contributed to the division's profitability. Asset growth, excluding $13.1 billion and $2.3 billion related to the acquisitions of American General Annuity and Provident, respectively, and the fair value adjustment related to the division's securities, was 14% from September 30, 1997 to September 30, 1998, and 12% from December 31, 1997. This growth was due to an increase in variable deposits, interest credited to fixed account deposits, and stock market appreciation on assets held in Separate Accounts.
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Sales and Deposits. American General Annuity, which markets non-qualified, single premium fixed annuities primarily through financial institutions, contributed $1.8 billion to sales and total deposits in the first nine months of 1998. Since these products are single premium annuities, sales and deposit amounts are the same. Excluding American General Annuity, 1998 year-to-date sales were 12% higher and third quarter 1998 sales were 26% higher than in the same periods in 1997. Total deposits, excluding American General Annuity, increased 14% for year-to-date 1998 and 23% in third quarter 1998, and variable account deposits increased 36% for year-to-date 1998 and 44% in third quarter 1998, compared to the same periods in 1997, as a result of new sales, including capital transfers. The division's Separate Account assets, which
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
relate to variable account options, increased $1.7 billion from September 30, 1997 to September 30, 1998 and $1.3 billion from December 31, 1997, reflecting mainly variable deposit growth. Separate Account assets declined $1.3 billion from June 30, 1998, due to $1.8 billion of stock market depreciation, partially offset by $.6 billion of variable account deposits during the quarter.
Fixed Investment Spread. Investment results and crediting rates on fixed accounts were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
Net investment income $2,037 $1,274 $ 704 $ 429
Investment yield 7.99% 7.92% 7.91% 7.90%
Average crediting rate 5.90 6.14 5.88 6.11
Fixed investment spread 2.09 1.78 2.03 1.79
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Net investment income increased 60% in 1998 as a result of growth in invested assets and an increase in investment yield, as well as the acquisition of American General Annuity in February 1998 and income on the Provident investments acquired in April 1998. The increase in yield relates to more active management of the company's investment portfolio and higher premium income on investments called or tendered before their maturity dates, partially offset by lower market rates on new investment purchases. In response to the effect of declining market rates on investment yield, the company adjusted the rates credited to policyholders. The higher yields and reduced crediting rates increased the investment spread on fixed accounts by 31 basis points in the nine months and 24 basis points in the quarter ended September 30, 1998 compared to the same periods in 1997.
Separate Account Fees. Separate Account fees include mortality, administrative, and investment advisory fees. These fees increased $37 million, or 47%, for the first nine months of 1998 compared to the same period in 1997, due to growth in Separate Account assets.
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Surrenders. Policyholder surrenders are influenced by both competition and market performance. The division's rate of policyholder surrenders for tax- qualified accounts was 5.70% of average reserves for the first nine months of 1998 (5.63% for the quarter) compared to 4.66% (4.81% for the quarter) for the same period in 1997. The higher level of surrenders in 1998 was primarily due to increased competition from other variable investment products. The policyholder surrender rate for non-qualified accounts, which relate to American General Annuity s fixed annuity business, was 11.39% of average reserves for the first nine months and 11.00% for the third quarter of 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued).
Operating Expenses. Operating expenses increased $52 million for the nine months and $20 million for the quarter ended September 30, 1998 compared to the same periods of 1997 due to the addition of American General Annuity's operating expenses and the increase in expenses to support the division's growth in deposits. The ratio of operating expenses to average assets decreased from .48% in 1997 to .43% in 1998, reflecting growth in assets in excess of growth in operating expenses and American General Annuity's lower overall expense ratio.
Life Insurance
Life Insurance division results were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
Earnings $ 490 $ 424 $ 167 $ 146
Premiums and other considerations 2,344 2,254 793 764
Net investment income 1,675 1,561 561 527
Insurance and annuity benefits 2,233 2,171 765 726
Operating expenses 532 541 163 185
Assets 35,914 34,656
Insurance and annuity liabilities 25,421 25,396
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Earnings. Division earnings for the nine months and quarter ended September 30, 1998 increased 16% and 15%, respectively, compared to the same periods in 1997. The increases were primarily due to higher investment income from improved investment margins, the acquisition of Home Beneficial Life in April 1997, and expense savings from consolidation of recently acquired companies, partially offset by higher death claims and startup costs for new product initiatives.
Premiums and Deposits. Premiums and other considerations, as well as sales and deposits of individual life insurance and annuities, were as follows:
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Nine Months Ended Quarter Ended
(In millions) September 30, September 30,
1998 1997 1998 1997
Premiums and other considerations $2,344 $2,254 $ 793 $ 764
Individual life insurance
Sales 456 390 136 133
Deposits 953 859 312 294
Annuities
Sales 358 308 113 114
Deposits 413 372 126 121
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued).
Premiums and other considerations increased 4% for the first nine months of 1998 compared to the same period of 1997 primarily due to the acquisition of Home Beneficial Life in April 1997 and growth in sales of group and credit insurance. Individual life insurance sales and deposits for the first nine months of 1998 exceeded comparable 1997 amounts by 17% and 11%, respectively, primarily due to sales of recently introduced variable and indexed universal life products, as well as the division s recent entry into the corporate executive benefits markets. Sales of corporate executive benefits products can fluctuate significantly quarter to quarter due to large case size.
Annuity sales increased 16% and decreased 1% for the nine months and quarter ended September 30, 1998, respectively, compared to the same periods in the prior year. Annuity deposits increased 11% and 4% for the comparable periods. The increases in year-to-date sales and deposits were primarily due to recently introduced variable annuity products, partially offset by a decrease in sales of fixed annuities.
Investment Spread. Investment results and interest crediting rates were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
1998 1997 1998 1997
Investment yield 8.48% 8.10% 8.53% 8.04%
Average crediting rate 5.98 6.05 5.99 6.05
Investment spread 2.50 2.05 2.54 1.99
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Net investment income increased 7% in the first nine months of 1998 compared to 1997, primarily due to more active management of the company s investment portfolio, lower investment expenses, asset growth from the Home Beneficial Life acquisition, and an increase in premiums on investments called or tendered before their maturity dates. Spreads increased due to higher investment yields, as well as management of crediting rates.
Mortality and Persistency. Death claims and premium termination rates were as follows:
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Nine Months Ended Quarter Ended
September 30, September 30,
1998 1997 1998 1997
Death claims (in millions) $ 751 $ 678 $ 247 $ 225
Death claims per $1,000
in force $ 3.63 $ 3.35 $ 3.58 $ 3.29
Premium termination rate 12.69% 13.37% 13.58% 13.76%
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued).
Death claims, included in insurance and annuity benefits, increased 11% in the first nine months of 1998 and 9% in the third quarter, compared to the same periods of 1997, reflecting the acquisition of Home Beneficial Life and less favorable mortality experience in 1998. Death claims per $1,000 in force also reflected the trend of marketing to older, more affluent policyholders. The lower premium termination rate in 1998 compared to 1997 reflected lower terminations in ancillary lines of business. Overall, mortality and persistency experience was within pricing assumptions.
Operating Expenses. Operating expenses decreased $9 million for the first nine months of 1998 and $22 million for the third quarter compared to the same periods in 1997, primarily due to cost savings from the ongoing consolidation and integration of acquired companies. These cost savings were partially offset by startup costs to introduce new products in 1998, as well as higher expenses to support increased group sales. In addition, 1998 results included Home Beneficial's operating expenses for nine months compared to five months in 1997. The ratio of operating expenses to direct premiums and deposits was 15.95% compared to 17.05% for the first nine months of 1998 and 1997, respectively, and 14.86% compared to 17.20% in third quarter 1998 and 1997, respectively. The lower ratios for 1998 reflected both decreases in operating expenses and increases in life insurance premiums and deposits. Operating expenses and the corresponding ratios, from period to period, may be affected by the amount and mix of products sold.
Consumer Finance
Consumer Finance division results were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
($ in millions) 1998 1997 1998 1997
Earnings $ 139 $ 120 $ 50 $ 41
Average finance receivables 8,308 7,483 8,679 7,447
Yield on finance receivables 16.11% 16.96% 15.75% 16.83%
Borrowing cost 6.62 6.80 6.55 6.90
Interest spread 9.49 10.16 9.20 9.93
Operating expenses $ 355 $ 335 $ 120 $ 110
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Earnings. Division earnings increased 16% for the nine months and 21% for the quarter ended September 30, 1998, compared to the same periods of 1997,
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
primarily due to improved credit quality and an increase in average finance receivables.
Finance Receivables. Average finance receivables increased 11% in the first nine months of 1998 compared to the same period of 1997 and 17% in the comparable third quarter periods. These increases were due to higher loan production and bulk purchases of real estate secured loans, which reflect the company's program to improve credit quality by increasing the proportion of real estate secured loans.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued).
Credit Quality. Charge offs, the allowance for finance receivable losses, and delinquencies were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
($ in millions) 1998 1997 1998 1997
Charge offs $ 161 $ 202 $ 53 $ 61
Annualized % of average
finance receivables 2.58% 3.59% 2.44% 3.27%
September 30, December 31,
1998 1997 1997
Allowance for finance
receivable losses $ 365 $ 380 $ 373
% of finance receivables 4.15% 5.05% 4.65%
Delinquencies $ 353 $ 312 $ 310
% of finance receivables 3.75% 3.83% 3.60%
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The decreases in the charge off and delinquency ratios in 1998 compared to the same periods in 1997 reflect the positive impact of the company's credit quality improvement program, which included an increase in the proportion of real estate secured loans and higher underwriting standards. The increase in the delinquency ratio from year-end 1997 was due to the effect of general economic conditions and the maturing of purchased real estate portfolios that were primarily new originations when purchased. The current allowance reflects the improvement in charge-off experience and credit quality, while also providing coverage for recent growth in receivables.
Interest Spread. The interest spread between yield and borrowing cost decreased 67 basis points for the nine months of 1998 and 73 basis points for the third quarter of 1998, compared to the same periods in 1997. The decline in spread reflected lower yields from the increased proportion of real estate secured loans, which generally have a higher level of credit quality and therefore lower yields, partially offset by reduced borrowing cost. Risk adjusted spreads have improved in both year-to-date and third quarter 1998.
Operating Expenses. Operating expenses as a percentage of average finance receivables decreased to 5.69% for the first nine months of 1998 from 6.00%
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
for the same period of 1997, and to 5.50% from 6.05% for the comparable third quarter periods, due to the increase in average finance receivables, which more than offset the increase in operating expenses.
INVESTMENTS
Invested assets consist primarily of fixed maturity securities, mortgage loans on real estate, and policy loans.
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued).
Fair Value of Securities. A decrease in interest rates and resulting increases in bond values in the first nine months of 1998 caused a $1.6 billion increase in the fair value adjustment to fixed maturity securities and a related $905 million positive adjustment to shareholders' equity from December 31, 1997. The components of the adjustment to report fixed maturity and equity securities at fair value at September 30, 1998 and December 31, 1997, and the 1998 change, were as follows:
September 30, December 31,
(In millions) 1998 1997 Change
Fair value adjustment to fixed
maturity securities $ 4,491 $ 2,844 $ 1,647
Decrease in deferred policy
acquisition costs and cost of
insurance purchased (1,305) (1,062) (243)
Increase in deferred income taxes (1,127) (628) (499)
Net unrealized gains
Fixed maturity securities 2,059 1,154 905
Equity securities 14 15 (1)
Net unrealized gains on
securities $ 2,073 $ 1,169 $ 904
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Fixed Maturity Securities. At September 30, 1998, fixed maturity securities included $47.1 billion of corporate bonds, $13.9 billion of mortgage-backed securities, and $2.2 billion of bonds issued by governmental agencies. The average credit rating of the fixed maturity securities was A+ at September 30, 1998 and December 31, 1997. Average credit ratings by category at September 30, 1998 were as follows:
September 30, Average Credit
(In millions) 1998 % Rating
Investment grade $46,108 72% A
Mortgage-backed 13,935 22 AAA
Below investment grade 3,303 6 BB-
Total fixed maturity
securities $63,346 100% A+
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Below Investment Grade. Below investment grade securities have credit ratings below BBB-. Below investment grade securities were 5% of invested assets at September 30, 1998 and 4% at December 31, 1997. The company invests in below investment grade securities to enhance the overall yield of the portfolio. Investment income from below investment grade securities was $228 million for the nine months ended September 30, 1998 and $126 million for the same period in 1997. Realized investment gains (losses) were immaterial.
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued).
Non-Performing. 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 September 30, 1998 and December 31, 1997.
Mortgage Loans. Mortgage loans on real estate, consisting primarily of loans on office and retail properties, represented 5% of invested assets at September 30, 1998 and 6% at December 31, 1997. Mortgage loan statistics at September 30, 1998 and December 31, 1997 were as follows:
September 30, December 31,
(In millions) 1998 1997
Mortgage loans $ 3,372 $ 3,326
Allowance for losses (37) (54)
Mortgage loans, net $ 3,335 $ 3,272
Allowance for losses 1.1% 1.6%
Delinquent loans (60+ days) $ 33 $ 20
% of mortgage loans 1.0% .6%
Restructured loans $ 87 $ 115
% of mortgage loans 2.6% 3.5%
Yield on restructured loans 8.0% 8.6%
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Watch List. At September 30, 1998, $85 million of mortgage loans were on the company's watch list, compared to $128 million at December 31, 1997. The decrease was due to loans that were no longer undercollateralized or were reinstated, refinanced, or repaid. While the watch list loans may be predictive of future delinquent loans, the company does not anticipate a significant effect on operations, liquidity, or capital from these loans.
CAPITAL RESOURCES
Corporate Capital. American General's target capital structure consists of 25% corporate debt, 15% redeemable equity, and 60% shareholders' equity. At September 30, 1998, corporate capital totaling $11.7 billion, excluding the fair value adjustment on securities, consisted of $2.6 billion corporate debt (22%), $1.7 billion redeemable equity (15%), and $7.4 billion shareholders' equity (63%).
On February 25, 1998, American General issued 10.2 million shares of common stock and paid $580 million cash to complete the $1.2 billion acquisition of Western National. The cash portion of the purchase price was financed through short-term borrowings. Additionally, the company issued options to acquire 1.4 million shares of American General common stock with an average exercise price of $24.75 to replace outstanding options to acquire Western National common stock. The fair value of these options, excluding options surrendered
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued).
for $10 million cash pursuant to a pre-existing employment agreement, was $37 million. In connection with the acquisition, the company assumed Western National's long-term debt of $148 million.
The ratings assigned by rating agencies serve as an indicator of an insurance company's financial strength and ability to meet its future obligations to policyholders. During third quarter 1998, Standard & Poor s (S&P) raised the financial strength rating for American General Annuity to AA+ from AA-, consistent with S&P s ratings for American General s other principal insurance companies.
Consumer Finance. The Consumer Finance division's capital varies directly with the amount of total finance receivables. The capital mix of consumer finance debt and equity is based primarily upon maintaining leverage at a level that supports cost-effective funding.
Consumer finance capital of $9.4 billion at September 30, 1998 included $8.1 billion of consumer finance debt, which was not guaranteed by the parent company, and $1.3 billion of equity. The Consumer Finance division's target ratio of debt to tangible net worth, a standard measure of financial risk in the consumer finance industry, is 7.50 to 1. The ratio was 7.56 and 7.52 at September 30, 1998 and December 31, 1997, respectively.
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 September 30, 1998, the company had committed and unused credit facilities of $5.0 billion. 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 $729 million of dividends, net of capital contributions, from subsidiaries during the nine months ended September 30, 1998 compared to $165 million (excluding dividends paid to USLIFE Corporation prior to its acquisition by the company) for the same period in 1997. Net dividends were low in 1997 because the company was re- evaluating the capital requirements for its business divisions. While the subsidiaries are restricted in the amount of dividends they may pay to the parent company, these restrictions are not expected to affect American General's ability to meet its cash obligations. In 1998, the company repurchased 2.2 million shares of its common stock for a total cost of $145 million, of which 1.0 million shares at a cost of $67 million were purchased in the third quarter.
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued).
Retirement Services and Life Insurance. Principal sources (uses) of cash for the Retirement Services and Life Insurance divisions were as follows:
Nine Months Ended
September 30,
(In millions) 1998 1997
Operating activities $1,639 $1,512
Fixed policyholder account deposits,
net of withdrawals 112 (44)
Variable account deposits, net of
withdrawals 2,090 1,501
Short-term collateralized financings 897 -
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Operating cash flows for the Retirement Services and Life Insurance divisions increased $127 million in the first nine months of 1998 compared to the same period of 1997, primarily due to the acquisition of American General Annuity in first quarter 1998 and Home Beneficial Life in second quarter 1997. The 1998 increase in net fixed policyholder account deposits was due to the acquisition of American General Annuity, which primarily markets fixed annuities, partially offset by an increase in the fixed account withdrawals in the Life Insurance division. The increase in net variable account deposits for 1998 compared to 1997 related to policyholders seeking higher returns in equity-based investments, including the company's Separate Accounts. Because the investment risk on variable accounts lies solely with the policyholder, deposits and withdrawals related to Separate Accounts are not included in the company's consolidated condensed statement of cash flows. Short-term collateralized financings relate to dollar roll agreements entered into in 1998.
Major uses of cash were the net purchase of investments necessary to support increases in insurance and annuity liabilities, and net dividends paid to the parent. The subsidiaries in these divisions paid dividends, net of capital contributions, of $572 million in the first nine months of 1998 and $221 million for the same period of 1997. The 1998 net dividends are net of $188 million of capital contributions made by an intermediate holding company to the Retirement Services division in second quarter 1998 to support the Provident acquisition.
Consumer Finance. Principal sources (uses) of cash for the Consumer Finance division were as follows:
Nine Months Ended
September 30,
(In millions) 1998 1997
Operating activities $ 350 $ 422
Increase (decrease) in borrowings 815 (777)
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Cash provided by operating activities decreased in the first nine months of 1998 since 1997 included operations related to non-strategic assets sold in
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued).
second quarter 1997. Cash provided by borrowings increased in the nine months ended September 30, 1998 compared to the same period in 1997 due to growth in receivables.
Other major uses of cash were to fund finance receivables and net dividends paid to the parent company. Net cash used to fund finance receivables was $938 million for the nine months ended September 30, 1998, up from $281 million for the same period in 1997. Net dividends paid to the parent company totaled $18 million in the first nine months of 1998 compared to $87 million for the same period in 1997.
YEAR 2000
Internal Systems. American General has numerous technology systems that are managed on a decentralized basis. The company's Year 2000 readiness efforts are therefore being undertaken by its key business units with centralized oversight. Each business unit has developed and is implementing a plan to minimize the risk of a significant negative impact on its operations.
While the specifics of the plans vary, the plans include the following activities: (1) perform an inventory of the company's information technology and non-information technology systems; (2) assess which items in the inventory may expose the company to business interruptions due to Year 2000 issues; (3) reprogram or replace systems that are not Year 2000 ready; (4) test systems to prove that they will function into the next century as they do currently; and (5) return the systems to operations. As of September 30, 1998, the inventory and assessment activities are substantially complete, and the company is progressing with activities (3) and (4). The company expects to substantially complete the remaining activities for critical systems by December 31, 1998. However, activities (3) through (5) for certain systems will continue in 1999.
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 Year 2000 readiness. The company has developed a plan to assess and attempt to mitigate the risks associated with the potential failure of third parties to achieve Year 2000 readiness. The plan includes the following activities: (1) identify and classify third party dependencies; (2) research, analyze, and document Year 2000 readiness for critical third parties; and (3) test critical hardware and software products and electronic interfaces. As of September 30, 1998, the
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
identification and classification activities are substantially complete.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued).
The company expects to substantially complete the research and analysis of critical third parties Year 2000 readiness by December 31, 1998. Due to the various stages of third parties Year 2000 readiness, the company s testing activities will extend through 1999.
Contingency Plans. The company has commenced contingency planning to reduce the risk of Year 2000-related business failures. The contigency plans, which address both internal systems and third party relationships, include the following activities: (1) evaluate the consequences of failure of business processes with significant exposure to Year 2000 risk; (2) determine the probability of a Year-2000 related failure for those processes that have a high consequence of failure; (3) develop an action plan to complete contingency plans for those processes that rank high in both consequence and probability of failure; and (4) complete the applicable action plans. The company has substantially completed evaluation activities as of September 30, 1998 and is proceeding with the subsequent activities. The company expects to substantially complete all contingency planning activities by April 30, 1999.
Risks and Uncertainties. Based on its plans to make internal systems ready for Year 2000, to deal with third party relationships, and to develop contingency actions, the company believes that it will experience at most isolated and minor disruptions of business processes following the turn of the century. Such disruptions are not expected to have a material effect on the company s future results of operations, liquidity, or financial condition. However, due to the magnitude and complexity of this project, risks and uncertainties exist and the company is not able to predict a most reasonably likely worst case scenario. If conversion of the company s internal systems is not completed on a timely basis (due to non-performance by significant third-party vendors, lack of qualified personnel to perform the Year 2000 work, or other unforseen circumstances in completing the company s plans), or if critical third parties fail to achieve Year 2000 readiness on a timely basis, the Year 2000 issues could have a material adverse impact on the company s operations following the turn of the century.
Costs. Through September 30, 1998, the company has incurred and expensed $53 million (pretax) related to Year 2000 readiness, including $37 million incurred during the first nine months of 1998. The company currently anticipates that it will incur future costs of approximately $30 million to $40 million (pretax) for additional internal staff, third-party vendors, and other expenses to achieve Year 2000 readiness. In addition, the company has elected to accelerate the planned replacement of certain systems as part of the 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. The total of such capitalizable costs is expected to be less than $10 million.
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
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 in this report and elsewhere (such as other filings by the company with the Securities and Exchange Commission, press releases, presentations by the company or its management, or oral statements) 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 to achieve Year 2000 readiness for critical systems and operations on a timely basis; (5) adverse litigation results or resolution of litigation, including market conduct litigation; and (6) the company's failure to achieve anticipated levels of earnings or operational efficiencies related to recently acquired companies, as well as other cost-saving initiatives. Investors are also directed to other risks and uncertainties discussed in other documents filed by the company with the Securities and Exchange Commission. The company undertakes no obligation to update or revise any forward-looking information, whether as a result of new information, future developments, or otherwise.
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 9 to the Registrant's Unaudited Consolidated Financial Statements in Part I of this Form 10-Q for the quarter ended September 30, 1998.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibit 10.1 American General Corporation Supplemental Executive
Retirement Plan
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
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b. Reports on Form 8-K.
None.
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 12, 1998.
AMERICAN GENERAL CORPORATION
(Registrant)
By: PAMELA J. PENNY
Pamela J. Penny
Vice President and Controller
(Duly Authorized Officer and
Chief Accounting Officer)
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
EXHIBIT INDEX
Exhibit
10.1 American General Corporation Supplemental Executive
Retirement Plan
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
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AMERICAN GENERAL CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective as of
February 1, 1998
Page
----
ARTICLE I. GENERAL 1
Section 1.1 Effective Date....................................... 1
Section 1.2 Defined Terms........................................ 1
Section 1.3 Eligibility.......................................... 2
ARTICLE II. RETIREMENT BENEFITS........................................ 2
Section 2.1 Normal Retirement Benefit............................ 2
Section 2.2 Early Retirement Benefit............................. 2
Section 2.3 Termination of Employment Prior to Early Retirement
Date and Normal Retirement Date...................... 3
Section 2.4 Disability........................................... 3
Section 2.5 Termination by Reason of Death....................... 3
Section 2.6 Change in Control Terminations....................... 3
Section 2.7 Vesting of Retirement Benefit........................ 4
Section 2.8 Time and Form of Payment............................. 5
ARTICLE III. ADMINISTRATION............................................. 6
Section 3.1 General.............................................. 6
Section 3.2 Administrative Rules................................. 6
Section 3.3 Duties............................................... 7
Section 3.4 Fees................................................. 7
ARTICLE IV. CLAIMS PROCEDURE........................................... 8
Section 4.1 General.............................................. 8
Section 4.2 Denials.............................................. 8
Section 4.3 Notice............................................... 8
Section 4.4 Appeals Procedure.................................... 8
Section 4.5 Review............................................... 8
Section 4.6 Arbitration.......................................... 9
ARTICLE V. MISCELLANEOUS PROVISIONS................................... 10
Section 5.1 Amendment and Termination............................ 10
Section 5.2 No Assignment........................................ 10
Section 5.3 Successors and Assigns............................... 11
Section 5.4 Governing Law........................................ 11
Section 5.5 No Guarantee of Employment........................... 11
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Section 5.6 Severability........................................ 11
Section 5.7 Notification of Addresses........................... 11
Section 5.8 Bonding............................................. 11
Section 5.9 Taxes............................................... 11
Section 5.10 No Funding.......................................... 12
ARTICLE VI. DEFINITIONS AND USAGE..................................... 12
Section 6.1 Definitions......................................... 12
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AMERICAN GENERAL CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS, American General Corporation, a Texas corporation (the "Company"), has established (and may establish in the future) one or more qualified retirement plans to provide defined benefit retirement benefits to the employees of the Company and its subsidiaries (the "Group") under such plan or plans; and
WHEREAS, the Company recognizes the unique qualifications of certain key management or highly compensated employees and the valuable services they provide, and desires to provide such employees with an appropriate level of retirement income payable from the Company by supplement ing, through an unfunded, nonqualified plan, such defined benefit retirement benefits; and
WHEREAS, the Company has determined that the implementation of such a plan will best serve its interest in attracting and retaining key employees for the Group;
NOW, THEREFORE, the Company hereby establishes the American General Corporation Supplemental Executive Retirement Plan as hereinafter provided:
ARTICLE I.
GENERAL
Section 1.1 Effective Date. This Plan shall be effective as of February 1, 1998 (the "Effective Date").
Section 1.2 Defined Terms. The definitions of capitalized terms used in this Plan (if not provided where a capitalized term initially appears) are provided in the last Article hereof.
Section 1.3 Eligibility. Each employee designated to participate in the Plan in a written statement by the Chief Executive Officer of the Company (with notification to the Personnel Committee) shall automatically become a participant (an "Executive") as of the date designated in such resolution or statement. The name of each Executive, the date the Executive was first employed by the Company, and the date of the Executive's initial participation hereunder shall be listed on Schedule A attached hereto, which shall be kept current and amended from time to time.
ARTICLE II.
RETIREMENT BENEFITS
Section 2.1 Normal Retirement Benefit. If an Executive retires on or after the Executive's Normal Retirement Date, the Retirement Benefit shall be an annual retirement benefit payable to the Executive for the Executive's lifetime, with a ten-year term certain (the "Normal Retirement Benefit"), in an annual amount equal to (X) minus (Y), calculated as follows:
(A) The amount of (X) equals (a) multiplied by (b):
(a) sixty percent (60.0%) of the Executive's Final Average Compensation; and
(b) the fraction equal to the Executive's Years of Service (not in excess of thirty (30) years) divided by thirty (30); and
(B) The amount of (Y) equals (e) plus (f) plus (g):
(e) the Social Security Benefit;
(f) the Qualified Plan Benefit; and
(g) the Restoration Plan Benefit.
Section 2.2 Early Retirement Benefit. If an Executive retires on or after the Executive's Early Retirement Date (but before the Executive's Normal Retirement Date), the Retirement Benefit shall be the annual Retirement Benefit computed under Section 2.1, reduced by five percent (5%) per year for each complete year between such commencement and the Executive's Normal Retirement Date; the reduction per year shall be pro-rated for incomplete years.
Section 2.3 Termination of Employment Prior to Early Retirement Date and
Normal Retirement Date. If an Executive incurs a termination of employment with
the Company after satisfying the vesting requirement under Section 2.7, but
before attaining either an Early Retirement Date or a Normal Retirement Date,
the Executive shall receive a Retirement Benefit determined under Section 2.1,
but, unless such termination is described in Section 2.6 hereof, such benefit
shall be calculated by using the Executive's actual Years of Service and Final
Average Compensation at the time of the Executive's termination and the actual
Social Security Benefit that the Executive is entitled to receive at the
Executive's Normal Retirement Date. Unless such termination is described in
Section 2.6 hereof, payment of such benefit shall commence after, but not more
than sixty (60) days after, the Executive's Normal Retirement Date.
Section 2.4 Disability. If an Executive is receiving either short-term or long-term disability benefits under any Company plan, then, during the period of payment of such disability benefits, the Executive shall be treated as employed for all purposes of the Plan, including, without limitation, attainment of the age, service and vesting requirements under the Plan. The parties hereto agree that such disability benefits will cease and the Executive will no longer be considered employed by the Company on the date on which the Executive attains the Executive's Normal Retirement Age. Payment of the Executive's Retirement Benefit shall commence after, but not more than sixty (60) days after, the Executive's Normal Retirement Date.
Section 2.5 Termination by Reason of Death. If an Executive dies (i)
while in the employment of the Company, (ii) after the attainment of age fifty-
five (55), (iii) having been credited with ten (10) Years of Service, and (iv)
prior to the commencement of the payment of the Retirement Benefit hereunder,
the Executive's surviving spouse, if any, shall receive for the lifetime of such
spouse an annual benefit equal to the fifty percent (50%) survivor annuity the
Executive 's spouse would have received had the Executive retired on the day
before the Executive's death, deeming the Executive, for purposes of this
Section 2.5 only, to have elected a joint and survivor annuity payable
immediately at a reduced amount with a fifty percent (50%) survivor annuity. The
payment of the spouse's benefit shall commence not later than sixty (60) days
after the Executive's death.
Section 2.6 Change in Control Terminations. Notwithstanding any other provision of this Plan, if an Executive has a Change in Control Severance Agreement with the Company (as it may be amended from time to time, the "Executive's Severance Agreement") in effect immediately prior to the occurrence of a Change in
Control (as defined therein), then, upon any termination of an Executive's employment which occurs upon the Change in Control or within the three-year period immediately following the Change in Control (or is deemed to occur within such period pursuant to the Executive's Severance Agreement), which termination is by the Company without Cause or by the Executive with Good Reason (as such terms are defined in the Executive's Severance Agreement), the Company shall pay the Executive within the five (5) business days immediately following such termination a lump sum amount, in cash, equal to the actuarial equivalent of the Normal Retirement Benefit which the Executive would have accrued, if the Executive had accumulated (after the Executive's termination of employment) thirty-six (36) additional months of service and age credit (but in no event shall the Executive be deemed to have accumulated additional service and age credit after the Executive's sixty-fifth birthday). For purposes of this Section 2.6, an "actuarial equivalent" shall be determined using the same assumptions utilized under the American General Retirement Plan (or any successor plan thereto) immediately prior to the Executive's termination of employment, or, if earlier and more favorable to the Executive, immediately prior to the Change in Control. The Retirement Benefit so calculated shall be based on a projected Social Security Benefit that is determined under the provisions of the Social Security Act as in effect on the date of such termination, using the estimated "primary insurance amount" the Executive would be entitled to under such Act at the Executive's Normal Retirement Date, assuming (i) the amount of income the Executive is receiving on the date such termination becomes effective which would be treated as wages for purposes of such Act would remain constant through the Executive's Normal Retirement Date, and (ii) an annual cost-of-living adjustment equal to four percent (4%).
Section 2.7 Vesting of Retirement Benefit. An Executive shall have a vested right to the Executive's Retirement Benefit upon the occurrence of any of the following while the Executive is employed by the Company:
(i) the Executive's completion of ten (10) Years of Service;
(ii) the attainment of the Executive's Normal Retirement Age;
(iii) the occurrence of a Change in Control at any time.
Section 2.8 Time and Form of Payment.
(A) Time of Payment. Except where specifically otherwise provided herein, the payment of any Retirement Benefit to which an Executive has become entitled shall commence after, but no more than sixty (60) days after, the Executive's date of retirement. The Executive shall give the Company reasonable advance notice in writing of the Executive's intention to retire (which shall be given at least one month before the Executive's intended retirement date).
(B) Normal Form of Payment. A life annuity with a ten-year term certain is the normal form of payment of the Retirement Benefit for each Executive and any actuarial equivalents to be calculated pursuant to this Plan will be based on the normal form of payment. If an Executive dies after payment of the Retirement Benefit in the normal form has commenced, payments shall continue for the remainder of the ten-year term certain to the beneficiary or beneficiaries designated by the Executive by written instruction delivered to the Administrator during the Executive's lifetime. The Executive may designate one or more primary and contingent beneficiaries to receive the remaining payments of the Retirement Benefit, and may designate the proportions in which such beneficiaries are to receive such payments. The Executive may change such designations from time to time, and the last written designation filed with the Administrator prior to the Executive's death shall control. If the Executive fails to specifically designate a beneficiary, or if no designated beneficiary survives the Executive, payment shall be made by the Administrator in the following order of priority:
(i) to the Executive's surviving spouse, or, if none,
(ii) to the Executive's children, or, if none,
(iii) to the Executive's estate.
(C) Election of Alternative Forms of Payment. Subject to Section 2.6 hereof, an Executive can elect that the Executive's Retirement Benefit be paid in any of the following forms by an irrevocable election in writing which is delivered to the Company within sixty (60) days after the Executive commences participation in the Plan, or, with the permission of the Committee, by an irrevocable election in writing which is delivered to the Company at any time before the Executive's retirement becomes effective:
(i) a joint and survivor annuity payable at a reduced amount for the life of the Executive with a survivor annuity for the life of the Executive's surviving spouse which shall be one hundred percent (100%) of the annuity payable during the joint lives of the Executive and the surviving spouse;
(ii) a joint and survivor annuity payable at a reduced amount for the life of the Executive with a survivor annuity for the life of the Executive's surviving spouse which shall be seventy-five percent (75%) of the annuity payable during the joint lives of the Executive and the surviving spouse;
(iii) a joint and survivor annuity payable at a reduced amount for the life of the Executive with a survivor annuity for the life of the Executive's surviving spouse which shall be fifty percent (50%) of the annuity payable during the joint lives of the Executive and the surviving spouse; or
(iv) a lump-sum payment of the actuarial present value of the normal form of payment of the Retirement Benefit.
In calculating an alternative form of payment for the Retirement Benefit, the Administrator shall use the same assumptions utilized under the American General Retirement Plan (or any successor plan thereto) immediately prior to the Executive's termination of employment, or, if a Change in Control shall have occurred prior to the Executive's termination of employment, the assumptions so utilized immediately prior to the Change in Control, if more favorable to the Executive.
ARTICLE III.
ADMINISTRATION
Section 3.1 General. The Administrator shall be responsible for administration of the Plan.
Section 3.2 Administrative Rules. The Administrator may adopt such rules of procedure as it deems desirable for the conduct of its affairs, except to the extent that such rules conflict with the provisions of the Plan.
Section 3.3 Duties. The Administrator shall have the following rights, powers and duties:
(A) The decision of the Administrator in matters within its jurisdiction shall be final, binding and conclusive upon the Company and upon any person affected by such decision, subject to the claims procedure hereinafter set forth.
(B) The Administrator shall have the duty and authority to interpret and construe the provisions of the Plan, to determine eligibility for a Retirement Benefit and the appropriate amount of any Retirement Benefit, to decide any question which may arise regarding the rights of an Executive hereunder and to exercise such powers as the Administrator may deem necessary for the administration of the Plan.
(C) The Administrator shall maintain full and complete records of its decisions. Its records shall contain all relevant data pertaining to each Executive and the Executive's rights and duties under the Plan. The Administrator shall maintain a bookkeeping account with respect to payment of any Retirement Benefit.
(D) Notwithstanding any other provision of this Plan, upon and after the occurrence of a Change in Control and within the six-month period immediately preceding a Change in Control, the Administrator's authority and powers shall not be used to interpret or construe the provisions hereof in any way (or to take any other action) which would adversely affect any vested right given an Executive by this Plan or any right given an Executive by this Plan which would become vested upon a Change in Control.
Section 3.4 Fees. No fee or compensation shall be paid to any person for services as the Administrator.
ARTICLE IV.
CLAIMS PROCEDURE
Section 4.1 General. Any claim for a Retirement Benefit under the Plan shall be filed by an Executive or beneficiary (either of which is referred to in this Article as the "claimant") in the manner prescribed by the Administrator.
Section 4.2 Denials. If a claim for a Retirement Benefit under the Plan is wholly or partially denied, notice of the decision shall be furnished to the claimant by the Administrator within a reasonable period of time after receipt of the claim by the Administrator.
Section 4.3 Notice. Any claimant who is denied a claim for Retirement Benefits shall be furnished written notice setting forth:
(i) the specific reason or reasons for the denial;
(ii) specific reference to the pertinent provision of the Plan upon which the denial is based;
(iii) a description of any additional material or information necessary of the claimant to perfect the claim; and
(iv) an explanation of the claims review procedure under the Plan.
Section 4.4 Appeals Procedure. In order that a claimant may appeal a denial of a claim, the claimant or the claimant's duly authorized representative may:
(i) request a review by written application to the Committee, no later than sixty (60) days after receipt by the claimant of written notification of denial of a claim;
(ii) review pertinent documents; and
(iii) submit issues and comments in writing.
Section 4.5 Review. A decision on review of a denied claim shall be made by the Committee not later than sixty (60) days after receipt of a request for review, unless special circumstances require an extension of time for processing, in which
case a decision shall be rendered within a reasonable period of time, but not later than one-hundred-and-twenty (120) days after receipt of a request for a review. The decision on review shall be in writing and shall include the specific reason(s) for the decision and the specific references(s) to the pertinent provisions of the Plan on which the decision is based.
Section 4.6 Arbitration. Any further dispute or controversy arising under or in connection with this Plan which is not resolved by agreement pursuant to Sections 4.1 through 4.5 hereof shall be resolved by binding arbitration pursuant to the Federal Arbitration Act in accordance with the Employment Dispute Resolution Rules then in effect with the American Arbitration Association. The arbitration proceeding shall be conducted in Houston, Texas. This agreement to arbitrate shall be enforceable in either federal or state court.
The enforcement of this arbitration provision and all procedural aspects of this arbitration provision, including but not limited to, the construction and interpretation of this arbitration provision, the issues subject to arbitration (i.e., arbitrability), the scope of the arbitrable issues, allegations of waiver, delay or defenses to arbitrability, and the rules governing the conduct of the arbitration, shall be governed by and construed pursuant to the Federal Arbitration Act and shall be decided by the arbitrators. In deciding the substance of any such claims, the arbitrators shall apply the substantive laws of the State of Texas (excluding Texas choice-of-law principles that might call for the application of some other state's law); provided, however, the arbitrators shall have no authority to award treble, exemplary, or punitive damages under any circumstances regardless of whether such damages may be available under Texas law.
The arbitration may be initiated by the Executive or the Company by providing to the other a written notice of arbitration specifying the claims. Within thirty (30) days of the notice of initiation of the arbitration procedure, (1) the Executive shall denominate one arbitrator and (2) the Company shall denominate one arbitrator. The two arbitrators shall select a third arbitrator failing agreement on which within sixty (60) days of the original notice, either the Executive or the Company shall apply to the Senior Active United States District Judge for the Southern District of Texas, who shall appoint a third arbitrator. While the third arbitrator shall be neutral, the two party-appointed arbitrators are not required to be neutral and it shall not be grounds for removal of either of the two party-appointed arbitrators or for vacating the arbitrators' award that either of such arbitrators has past or present minimal relationships with the party that appointed such arbitrator. Evident partiality on the
part of an arbitrator exists only where the circumstances are such that a reasonable person would have to conclude there in fact existed actual bias and a mere appearance or impression of bias will not constitute evident partiality or otherwise disqualify an arbitrator.
The three arbitrators shall by majority vote resolve all disputes between the parties. There shall be no transcript of the hearing before the arbitrators. The arbitrators' decision shall be in writing, but shall be as brief as possible. The arbitrators shall not assign the reasons for their decision. The arbitrators shall certify in their award that they have faithfully applied the terms and conditions of this Agreement and that no part of their award includes any amount for exemplary or punitive damages. All proceedings conducted hereunder and the decision of the arbitrators shall be kept confidential by the parties, e.g., the arbitrators' award shall not be released to the press or published in any of the various arbitration reporters. Judgment upon any award rendered in any such arbitration proceeding may be entered by any federal or state court having jurisdiction.
ARTICLE V.
MISCELLANEOUS PROVISIONS
Section 5.1 Amendment and Termination. This Plan may be modified, amended or terminated by the Board at any time, provided, however, that no such modification, amendment or termination shall impair the vested rights of any Executive participating in the Plan without the written consent of such Executive and during the six-month period immediately preceding a Change in Control, no such modification, amendment or termination shall impair the rights of any Executive participating in the Plan which would become vested upon the occurrence of a Change in Control without the written consent of such Executive.
Section 5.2 No Assignment. An Executive shall not have the power to pledge, transfer, assign, anticipate, mortgage or otherwise encumber or dispose of in advance any interest in amounts payable hereunder of any of the payments provided for herein, nor shall any interest in amounts payable hereunder or in any payments be subject to seizure for payments of any debts, judgments, alimony or separate maintenance, or be reached or transferred by operation of law in the event of bankruptcy, insolvency or otherwise.
Section 5.3 Successors and Assigns. The provisions of the Plan are binding upon and inure to the benefit of each Company, its successors and assigns, and each Executive, and such Executive's beneficiaries, heirs and legal representatives.
Section 5.4 Governing Law. The Plan shall be subject to and construed in accordance with the laws of the State of Texas to the extent not preempted by the provisions of ERISA.
Section 5.5 No Guarantee of Employment. Nothing contained in the Plan shall be construed as a contract of employment or deemed to give an Executive the right to be retained in the employ of an Company or any equity or other interest in the assets, business or affairs of an Company.
Section 5.6 Severability. If any provision of the Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of the Plan, but the Plan shall be construed and enforced as if such illegal or invalid provision had never been included herein.
Section 5.7 Notification of Addresses. Each Executive and each beneficiary shall file with the Administrator, from time to time, in writing, the post office address of the Executive, the post office address of each beneficiary, and each change of post office address. Any communication, statement or notice addressed to the last post office address filed with the Administrator (or if no such address was filed with the Administrator, then to the last post office address of the Executive or beneficiary as shown on the Company's records) shall be binding on the Executive and each beneficiary for all purposes of the Plan and neither the Administrator nor the Company shall be obliged to search for or ascertain the whereabouts of any Executive or beneficiary.
Section 5.8 Bonding. The Administrator and all agents and advisors employed by it shall not be required to be bonded, except as may otherwise be required by ERISA.
Section 5.9 Taxes. The Company shall have the right to withhold from any cash or other amounts due or to become due from the Company to an Executive (including by reducing the amount of any Retirement Benefit payable in the future) the amount of any federal, state and local taxes required to be withheld or otherwise deducted and paid by the Company with respect to the vesting or payment of any Retirement Benefit hereunder.
Section 5.10 No Funding. There shall be no funding of the benefit amounts to be paid pursuant to this Plan. The Plan shall not confer upon an Executive (or beneficiary or any other person) any security interest or any other right, title or interest of any kind in or to any property of the Company. The Plan shall constitute merely the unsecured promise of the Company to make the benefit payments provided for herein. Notwithstanding the foregoing provisions of this Section 5.10, the Company, in its discretion, may establish a trust to pay the benefit amounts hereunder, which trust shall be subject to the claims of the Company's general creditors in the event of the Company's bankruptcy or insolvency. If such a trust is established, the Company shall remain responsible for the payment of any benefit amounts provided hereunder which are not paid in accordance with the provisions hereof by such trust.
ARTICLE VI.
DEFINITIONS AND USAGE
Section 6.1 Definitions. Wherever used in the Plan, the following words and phrases shall have the meaning set forth below, unless the context plainly requires a different meaning:
"Administrator" means the Company, acting through the Personnel Committee of the Board, or other person or persons designated by the Personnel Committee.
"Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.
"Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act.
"Board" means the Board of Directors of the Company.
"Change in Control" means a change in the control of the Company, which shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred:
(I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing thirty
percent (30%) or more of the combined voting power of the Company's
then outstanding securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in clause
(i) of paragraph (III) below; or
(II) the following individuals cease for any reason to
constitute a majority of the number of directors then serving:
individuals who, on February 1, 1998, constitute the Board and any new
director (other than a director whose initial assumption of office is
in connection with an actual or threatened election contest, including
but not limited to a consent solicitation, relating to the election of
directors of the Company) whose appointment or election by the Board
or nomination for election by the Company's shareholders was approved
or recommended by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors on February 1, 1998 or
whose appointment, election or nomination for election was previously
so approved or recommended; or
(III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation (or a share exchange between shareholders of the Company or any direct or indirect subsidiary of the Company and another corporation or entity pursuant to Article 5.02 (or any successor provision thereto) of the Texas Business Corporation Act), other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least fifty-one percent (51%) of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; or
(IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least fifty-one percent (51%) of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions.
"Code" means the Internal Revenue Code of 1986, as amended from time to time. Any reference to a particular Code section shall include any provision which modifies, replaces or supersedes it.
"Committee" shall mean the Personnel Committee of the Board until six
months prior to the occurrence of a Change in Control and thereafter shall mean
(i) the individuals (not fewer than three in number) who, on the date six months
before a Change in Control, constitute the Personnel Committee of the Board,
plus (ii) in the event that fewer than three individuals are available from the
group specified in clause (i) above for any reason, such individuals as may be
appointed by the individual or individuals so available (including for this
purpose any individual or individuals previously so appointed under this clause
(ii)); provided, however, that the maximum number of individuals constituting
the Committee shall not exceed five.
"Company" means American General Corporation, a Texas corporation, and, except in determining under the definition of Change in Control herein whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Plan by operation of law, or otherwise.
"Early Retirement Date" means the first date on which an Executive (i) has completed ten (10) Years of Service and (ii) has attained the age of fifty-five (55).
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. Any reference to a particular ERISA section shall include any provision which modifies, replaces, or supersedes it.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time.
"Executive" means an employee who is designated to participate in the Plan pursuant to Section 1.3 hereof.
"Final Average Compensation" means the following sum divided by three (3):
the sum of the base salary received by an Executive from the Group during, and
the incentive payments received by the Executive pursuant to any annual bonus,
annual incentive compensation or similar annual plan maintained by the Group
(which does not include any payments or awards under any long-term incentive
plan maintained by the Group) with respect to, the three (3) calendar years
(whether or not consecutive) ending within the last sixty (60) months of the
Executive's employment with the Group which produce the highest total of such
base salary and incentive payments (for purposes of this sentence, any amount of
such base salary or incentive payment which is deferred by the Executive shall
be included in the calculation of amounts received). Notwithstanding the
immediately preceding sentence, if the Executive shall have been employed by the
Group for fewer than three calendar years, the Executive's Final Average
Compensation shall be determined by adding the Executive's "Final Salary" and
"Final Bonus" calculated as follows: Final Salary equals (i) the average base
salary received during the Executive's calendar years of such employment divided
by the number of those years, or (ii) if the Executive has been employed by the
Group for less than one calendar year, the Executive's annual base salary at the
date of the Executive's termination of employment; and Final Bonus equals (i)
the average annual bonus received by the Executive with respect to the
Executive's calendar years of such employment divided by the number of those
years, or (ii) if the Executive has been so recently hired by the Group that the
Executive has not earned any annual bonus which can be used to calculate a Final
Bonus pursuant to the foregoing provision, the Executive shall be deemed to have
earned a Final Bonus determined by multiplying the Executive's Final Salary by a
fraction, the numerator of which is the total of the annual bonuses paid to all
Executives with respect to the most recent calendar year ending immediately
prior to the
Executive's date of termination and the denominator of which is the total of the base salaries paid to all Executives during such calendar year. Notwithstanding the immediately preceding two sentences, if the Executive's termination of employment is described in Section 2.6 hereof and the Executive receives (pursuant to any employment or severance agreement between the Executive and the Company or an Affiliate, and in lieu of any further salary or bonus payments) a lump sum amount (the "Severance Amount"), Final Average Compensation shall mean the Severance Amount divided by three (3).
"Normal Retirement Age" means age sixty-two (62).
"Normal Retirement Date" means the date on which the Executive attains the Executive's Normal Retirement Age.
"Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company.
"Plan" means the American General Corporation Supplemental Executive Retirement Plan.
"Qualified Plan" means the American General Retirement Plan, together with any other defined benefit retirement plan intended to be qualified under Section 401(a) of the Code which is adopted and maintained by the Company and under which an Executive is entitled to a retirement benefit at the date of the Executive's retirement or other termination of employment.
"Qualified Plan Benefit" means the aggregate annual retirement benefit to which an Executive (at the date of the Executive's retirement or other termination of employment) is entitled under the plan or plans which comprise the Qualified Plan (expressed in the form of a single life annuity with a ten- year term certain commencing payment on the date payment of the Retirement Benefit hereunder commences).
"Restoration Plan Benefit" means the annual retirement benefit to which an Executive (at the date of the Executive's retirement or other termination of employment) is entitled under the American General Corporation Restoration of Retirement Income Plan (expressed in the form of a single life annuity with a ten-year term certain commencing payment on the date payment of the Retirement Benefit hereunder commences).
"Retirement Benefit" means the benefit payable under this Plan, as determined under Article II.
"Social Security Benefit" means one-half of the annual benefit payable under the Social Security Act, relating to Old-Age and Disability benefits, as of an Executive's Normal Retirement Date, or upon actual retirement, if later.
"Years of Service" means the total number of years (measured in full and partial years, in increments of one-twelfth years) of active employment with the Company during which substantial services were rendered as an employee, commencing on the date an Executive was first employed by the Company and ending on the date the Executive ceases to perform services for the Company (including employment before the Executive commenced to participate in the Plan), but in no event shall more than thirty (30) years be credited to any Executive regardless of the Executive's actual period of service with the Company.
SCHEDULE A
EXECUTIVES WHOSE PARTICIPATION IN THE PLAN
BEGAN ON THE PLAN'S EFFECTIVE DATE, FEBRUARY 1,1998:
1 ATNIP, MICHAEL G. 02/03/75 2 BERG, MARK S. 04/21/97 3 BICKLER, JAMES 03/22/90 4 BUCKLEY, MICHAEL J. 08/12/96 5 DIETZ, DAVID J. 09/15/97 6 FRAVEL, DAVID A. 11/18/96 7 GEISSINGER, FREDERICK W. 02/02/94 8 GRAF, JOHN A. 11/02/87 9 HENDRIX, BEN D. 03/25/69 10 HOLLAR, RICHARD 05/21/90 11 JACOBS, SUSAN A. 08/11/86 12 KEELER, WILLIAM M. 05/09/94 13 KELLEY, JOE 05/02/94 14 LUTHER, BILLY B. 05/30/60 15 MARTIN, RODNEY O. 11/27/95 16 MASTERSON, ELLEN H. 08/18/97 17 MRLIK, ROBERT D. 03/06/89 18 POLKINGHORN, PHILIP K. 12/09/96 19 RASMUSSEN, NICHOLAS R. 07/15/74 20 REDDICK, GARY D. 09/22/86 21 RODBY, CRAIG R. 02/15/97 22 SANTILLO, CARL J. 08/26/96 23 SCOTT, RICHARD W. 02/10/94 24 SIMPSON, WILLIAM A. 04/16/90 25 TUCKER, JULIA S. 06/04/84 26 TUTERS, PETER V. 11/09/92 27 WEST, THOMAS L. 04/15/94 |
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Unaudited)
($ in millions)
Nine Months Ended
September 30,
1998 1997
Consolidated operations:
Income before income tax expense, minority interest,
and dividends on preferred securities ............. $1,296 $ 689
Undistributed income of Western National ............ - (35)
Fixed charges deducted from income
Interest expense .................................. 514 485
Implicit interest in rents ........................ 14 15
Total fixed charges deducted from income ........ 528 500
Earnings available for fixed charges........... $1,824 $1,154
Fixed charges per above ............................. $ 528 $ 500
Capitalized interest ................................ - 5
Total fixed charges ............................. 528 505
Dividends on preferred stock and securities ..... 110 102
Combined fixed charges and preferred
stock dividends ............................. $ 638 $ 607
Ratio of earnings to fixed charges .......... 3.45 2.28
Ratio of earnings to combined fixed charges
and preferred stock dividends ............. 2.86 1.90
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense, minority
interest, and dividends on preferred securities . $1,296 $ 689
Undistributed income of Western National .......... - (35)
Corporate fixed charges deducted from income -
corporate interest expense ...................... 158 136
Earnings available for fixed charges ............ $1,454 $ 790
Total corporate fixed charges per above ........... $ 158 $ 136
Capitalized interest related to real estate
operations ...................................... - 5
Total corporate fixed charges ................... 158 141
Dividends on preferred stock and securities ..... 110 102
Combined corporate fixed charges and
preferred stock dividends ................... $ 268 $ 243
Ratio of earnings to corporate fixed charges 9.22 5.61
Ratio of earnings to combined corporate
fixed charges and preferred stock
dividends ................................. 5.43 3.26
|
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Exhibit 12 (continued)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Unaudited)
($ in millions)
Nine Months Ended
September 30,
1998 1997
American General Finance, Inc.:
Income before income tax expense .................... $ 218 $ 148
Fixed charges deducted from income
Interest expense .................................. 376 366
Implicit interest in rents ........................ 8 8
Total fixed charges deducted from income ........ 384 374
Earnings available for fixed charges .......... $ 602 $ 522
Ratio of earnings to fixed charges .......... 1.57 1.39
|
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Exhibit 12 (continued)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Unaudited)
($ in millions)
Quarter Ended
September 30,
1998 1997
Consolidated operations:
Income before income tax expense, minority interest,
and dividends on preferred securities ............. $ 416 $ 384
Undistributed income of Western National ............ - (12)
Fixed charges deducted from income
Interest expense .................................. 176 159
Implicit interest in rents ........................ 4 5
Total fixed charges deducted from income ........ 180 164
Earnings available for fixed charges........... $ 596 $ 536
Fixed charges per above ............................. $ 180 $ 164
Capitalized interest ................................ - -
Total fixed charges ............................. 180 164
Dividends on preferred stock and securities ..... 37 37
Combined fixed charges and preferred
stock dividends ............................. $ 217 $ 201
Ratio of earnings to fixed charges .......... 3.31 3.27
Ratio of earnings to combined fixed charges
and preferred stock dividends ............. 2.75 2.67
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense, minority
interest, and dividends on preferred securities . $ 416 $ 384
Undistributed income of Western National .......... - (12)
Corporate fixed charges deducted from income -
corporate interest expense ...................... 54 49
Earnings available for fixed charges ............ $ 470 $ 421
Total corporate fixed charges per above ........... $ 54 $ 49
Capitalized interest related to real estate
operations ...................................... - -
Total corporate fixed charges ................... 54 49
Dividends on preferred stock and securities ..... 37 37
Combined corporate fixed charges and
preferred stock dividends ................... $ 91 $ 86
Ratio of earnings to corporate fixed charges 8.80 8.72
Ratio of earnings to combined corporate
fixed charges and preferred stock
dividends ................................. 5.22 4.95
|
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1998
Exhibit 12 (continued)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Unaudited)
($ in millions)
Quarter Ended
September 30,
1998 1997
American General Finance, Inc.:
Income before income tax expense .................... $ 74 $ 65
Fixed charges deducted from income
Interest expense .................................. 130 117
Implicit interest in rents ........................ 2 3
Total fixed charges deducted from income ........ 132 120
Earnings available for fixed charges .......... $ 206 $ 185
Ratio of earnings to fixed charges .......... 1.56 1.54
|
| ARTICLE 7 |
| 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. |
| MULTIPLIER: 1,000,000 |
| PERIOD TYPE | 9 MOS |
| FISCAL YEAR END | DEC 31 1998 |
| PERIOD START | JAN 01 1998 |
| PERIOD END | SEP 30 1998 |
| DEBT HELD FOR SALE | 63,346 1 |
| DEBT CARRYING VALUE | 0 |
| DEBT MARKET VALUE | 0 |
| EQUITIES | 117 |
| MORTGAGE | 3,335 |
| REAL ESTATE | 239 |
| TOTAL INVEST | 71,049 |
| CASH | 249 |
| RECOVER REINSURE | 0 |
| DEFERRED ACQUISITION | 3,901 2 |
| TOTAL ASSETS | 102,197 |
| POLICY LOSSES | 58,571 3 |
| UNEARNED PREMIUMS | 189 3 |
| POLICY OTHER | 417 3 |
| POLICY HOLDER FUNDS | 2,474 3 |
| NOTES PAYABLE | 10,650 |
| PREFERRED MANDATORY | 1,728 4 |
| PREFERRED | 85 5 |
| COMMON | 928 |
| OTHER SE | 8,456 6 |
| TOTAL LIABILITY AND EQUITY | 102,197 |
| PREMIUMS | 2,685 7 |
| INVESTMENT INCOME | 3,790 |
| INVESTMENT GAINS | 6 |
| OTHER INCOME | 1,143 8 |
| BENEFITS | 3,847 |
| UNDERWRITING AMORTIZATION | 498 9 |
| UNDERWRITING OTHER | (648) 10 |
| INCOME PRETAX | 1,296 11 |
| INCOME TAX | 455 12 |
| INCOME CONTINUING | 763 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 763 |
| EPS PRIMARY | 3.02 |
| EPS DILUTED | 2.95 |
| RESERVE OPEN | 0 |
| PROVISION CURRENT | 0 |
| PROVISION PRIOR | 0 |
| PAYMENTS CURRENT | 0 |
| PAYMENTS PRIOR | 0 |
| RESERVE CLOSE | 0 |
| CUMULATIVE DEFICIENCY | 0 |
| 1 | MOST FIXED MATURITY SECURITIES ARE CLASSIFIED AS AVAILABLE FOR SALE AND RECORDED AT FAIR VALUE. |
| 2 | INCLUDES COST OF INSURANCE PURCHASED (CIP). |
| 3 | THE SUM OF POLICY LOSSES, UNEARNED PREMIUMS, POLICY OTHER, AND POLICYHOLDER FUNDS COMPRISES INSURANCE AND ANNUITY LIABILITIES. |
| 4 | CONSISTS OF NON CONVERTIBLE AND CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES. |
| 5 | CONSISTS OF CONVERTIBLE PREFERRED STOCK. |
| 6 | CONSISTS OF NET OF THE FOLLOWING: COST OF TREASURY STOCK; RETAINED EARNINGS; AND ACCUMULATED OTHER COMPREHENSIVE INCOME. |
| 7 | INCLUDES INSURANCE CHARGES. |
| 8 | INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES. |
| 9 | CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET OF ACCRETION OF INTEREST. |
| 10 | CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP. |
| 11 | EXCLUDES $17 MILLION OF MINORITY INTEREST AND $103 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. |
| 12 | EXCLUDES $6 MILLION TAX BENEFIT FOR MINORITY INTEREST AND $36 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES. |