0000005103-95-000078.txt : 19950811 0000005103-95-000078.hdr.sgml : 19950811 ACCESSION NUMBER: 0000005103-95-000078 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950810 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN GENERAL CORP /TX/ CENTRAL INDEX KEY: 0000005103 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 740483432 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07981 FILM NUMBER: 95560701 BUSINESS ADDRESS: STREET 1: 2929 ALLEN PKWY CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135221111 10-Q 1 AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to _____________________ Commission file number 1-7981 American General Corporation (Exact name of registrant as specified in its articles of incorporation) Texas 74-0483432 (State of Incorporation) (I.R.S. Employer Identification No.) 2929 Allen Parkway, Houston, Texas 77019-2155 (Address of principal executive offices) (Zip Code) (713) 522-1111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . The number of shares outstanding of the registrant's common stock at July 31, 1995 was 204,859,515 (excluding shares held in treasury and by a subsidiary). AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 INDEX TO FORM 10-Q Page Part I. FINANCIAL INFORMATION. Item 1. Financial Statements. Consolidated Statement of Income for the six months and quarter ended June 30, 1995 and 1994 ........... 2 Consolidated Balance Sheet at June 30, 1995 and December 31, 1994 .................................. 3 Consolidated Condensed Statement of Cash Flows for the six months ended June 30, 1995 and 1994 ........ 4 Notes to Consolidated Financial Statements ........... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................ 12 Part II. OTHER INFORMATION. Item 1. Legal Proceedings .................................... 26 Item 4. Submission of Matters to a Vote of Security Holders .. 26 Item 5. Other Information .................................... 26 Item 6. Exhibits and Reports on Form 8-K ..................... 27 -1- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AMERICAN GENERAL CORPORATION Consolidated Statement of Income (Unaudited) (In millions, except share data) Six Months Ended Quarter Ended June 30, June 30, 1995 1994 1995 1994 Revenues Premiums and other considerations. $ 842 $ 587 $ 439 $ 298 Net investment income ............ 1,494 1,238 772 617 Finance charges .................. 729 583 370 302 Realized investment gains ........ 3 4 1 1 Equity in earnings of Western National Corporation ............ 21 - 12 - Other ............................ 56 34 33 14 Total revenues ............... 3,145 2,446 1,627 1,232 Benefits and expenses Insurance and annuity benefits ... 1,416 1,088 739 551 Policyholder dividends ........... 41 4 25 2 Operating costs and expenses ..... 476 387 242 196 Commission expense ............... 260 195 134 99 Provision for finance receivable losses .......................... 147 88 75 45 Change in deferred policy acquisition costs and cost of insurance purchased ............. (89) (63) (46) (34) Interest expense Corporate ....................... 83 54 44 26 Consumer Finance ................ 255 193 130 100 Total benefits and expenses .. 2,589 1,946 1,343 985 Earnings Income before income tax expense.. 556 500 284 247 Income tax expense ............... 199 181 102 89 Income before net dividends on preferred securities of subsidiaries .................... 357 319 182 158 Net dividends on preferred securities of subsidiaries ...... 2 - 2 - Net income ................... $ 355 $ 319 $ 180 $ 158 Net income per share .............. $ 1.73 $ 1.50 $ .88 $ .75 Dividends paid per common share ... $ .62 $ .58 $ .31 $ .29 -2- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Average fully diluted shares outstanding (in thousands) ...... 206,279 211,810 207,363 210,312 -3- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Balance Sheet (Unaudited) (In millions, except share amounts) June 30, December 31, 1995 1994 Assets Investments Fixed maturity securities (amortized cost: $33,751; $27,087) ............................... $35,246 $25,700 Mortgage loans on real estate .................... 3,174 2,651 Equity securities (cost: $185; $202) ............. 233 224 Policy loans ..................................... 1,563 1,197 Investment real estate ........................... 554 564 Other long-term investments ...................... 173 152 Short-term investments ........................... 65 209 Total investments .............................. 41,008 30,697 Cash .............................................. 38 45 Finance receivables, net .......................... 8,079 7,694 Investment in Western National Corporation ........ 345 274 Deferred policy acquisition costs ................. 1,895 2,563 Cost of insurance purchased ....................... 639 168 Acquisition-related goodwill ...................... 587 597 Other assets ...................................... 1,759 1,356 Assets held in Separate Accounts .................. 4,074 2,901 Total assets ................................... $58,424 $46,295 Liabilities Insurance and annuity liabilities ................. $36,827 $29,623 Debt (short-term) Corporate ($1,167; $1,000) ....................... 2,190 1,836 Consumer Finance ($2,309; $2,777) ................ 7,445 7,090 Income tax liabilities ............................ 1,136 721 Other liabilities ................................. 898 620 Liabilities related to Separate Accounts .......... 4,074 2,901 Total liabilities .............................. 52,570 42,791 Redeemable equity Company-obligated mandatorily redeemable non-convertible preferred securities of subsidiary (shares issued and outstanding: 11,500,000) ..... 277 - Company-obligated mandatorily redeemable convertible preferred securities of subsidiary (shares issued and outstanding: 5,000,000) ...... 244 - Common stock subject to put contracts ............. 25 47 Total redeemable equity ........................ 546 47 Shareholders' equity -4- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Common stock (shares issued: 220,122,120; outstanding: 203,932,775; 203,051,907) .......... 365 364 Net unrealized gains (losses) on securities ....... 662 (935) Retained earnings ................................. 4,724 4,495 Cost of treasury stock ............................ (443) (467) Total shareholders' equity ..................... 5,308 3,457 Total liabilities and equity ................... $58,424 $46,295 -5- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Condensed Statement of Cash Flows (Unaudited) (In millions) Six Months Ended June 30, 1995 1994 Operating activities Net cash provided by operating activities ... $ 1,005 $ 664 Investing activities Investment purchases .............................. (3,978) (3,727) Investment calls, maturities, and sales ........... 2,560 2,992 Finance receivable originations or acquisitions ... (3,081) (2,762) Finance receivable principal payments received .... 2,448 2,176 Finance receivables sold through securitization ... 100 - Net decrease (increase) in short-term investments.. 168 (259) Purchase of Franklin Life ......................... (920) - Other, net ........................................ (95) 9 Net cash used for investing activities ...... (2,798) (1,571) Financing activities Retirement Annuities and Life Insurance Policyholder account deposits ................... 1,626 1,262 Policyholder account withdrawals ................ (942) (597) Total Retirement Annuities and Life Insurance. 684 665 Consumer Finance Net increase (decrease) in short-term debt ...... (468) 30 Long-term debt issuances ........................ 1,340 645 Long-term debt redemptions ...................... (519) (210) Total Consumer Finance ....................... 353 465 Corporate Net increase in short-term debt ................. 167 68 Long-term debt issuances ........................ 286 - Long-term debt redemptions ...................... (100) (11) Issuance of preferred securities of subsidiary, net of commissions paid Non-convertible ............................... 277 - Convertible ................................... 244 - Common share purchases .......................... - (143) Dividend payments ............................... (127) (123) Other, net ...................................... 2 1 Total Corporate .............................. 749 (208) Net cash provided by financing activities ... 1,786 922 Net increase (decrease) in cash .................... (7) 15 Cash at beginning of period ........................ 45 6 Cash at end of period .............................. $ 38 $ 21 -6- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Supplemental disclosure of cash flow information: Cash paid during the period for Income taxes .................................... $ 91 $ 258 Interest Corporate ..................................... 84 55 Consumer Finance .............................. 238 190 -7- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Notes to Consolidated Financial Statements June 30, 1995 1. Accounting Policies. The accompanying unaudited consolidated financial statements of American General Corporation ("American General" or "the company") and its subsidiaries have been prepared in accordance with generally accepted accounting principles for interim periods. In the opinion of management, these statements include all adjustments, consisting only of normal recurring accruals, that are necessary for a fair presentation of the company's consolidated financial position at June 30, 1995, the consolidated results of operations for the three months and six months ended June 30, 1995 and 1994, and consolidated cash flows for the six months ended June 30, 1995 and 1994. To conform with the 1995 presentation, certain items in the prior period have been reclassified. 2. New Accounting Standards. In January 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts," and the American Institute of Certified Public Accountants issued Statement of Position (SOP) 95-1, "Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises." SOP 95-1 establishes accounting for certain participating life insurance contracts. SFAS 120 permits, but does not require, stock life insurance companies to apply the provisions of SOP 95-1. If adopted, the standards must be implemented by March 31, 1996. American General has not determined if, or when, the new standards would be adopted and has not determined the effect on net income, liquidity, or capital related to adoption of these standards. In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement establishes accounting standards for 1) the impairment of long- lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used in the business, and 2) long-lived assets and certain identifiable intangibles to be disposed of. This standard, which must be adopted by March 31, 1996, will require the company to report certain investment real estate at fair value, rather than at net realizable value as previously required. American General has not determined when SFAS 121 will be adopted. The company does not anticipate a material effect on net income, liquidity, or capital related to adoption of this standard. -8- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 1. Financial Statements (continued). 3. Acquisitions. On January 31, 1995, American General, through its wholly- owned subsidiary, AGC Life Insurance Company (AGC Life), acquired American Franklin Company (AFC), the holding company of The Franklin Life Insurance Company (Franklin Life), pursuant to a stock purchase agreement dated as of November 29, 1994, between American General and American Brands, Inc. (American Brands). The purchase price was $1.17 billion, consisting of $920 million in cash paid at closing and a $250 million cash dividend paid by AFC to American Brands prior to closing. The dividend was paid on January 30, 1995. The permanent financing of this acquisition will be finalized in 1995 and is expected to consist of a mix of short-term debt, long-term debt, and company-obligated mandatorily redeemable preferred securities. As of August 10, 1995, $287.5 million of non-convertible company-obligated mandatorily redeemable preferred securities (non-convertible preferred securities) and $300 million of senior long-term fixed-rate debt, totaling $587.5 million, were issued to refinance a portion of short-term debt relating to the acquisition (see notes 4 and 5). The acquisition was accounted for using the purchase method, and the results of operations of Franklin Life were included in the consolidated statement of income from the date of acquisition. The assets and liabilities of Franklin Life were reflected in American General's consolidated balance sheet as of January 31, 1995, at management's best estimate of their fair values. Evaluation of fair values for acquired assets and liabilities, including investments, cost of insurance purchased, and insurance and annuity liabilities, is continuing and allocation of the purchase price may be adjusted. On December 23, 1994, American General, through AGC Life, acquired a 40% interest in Western National Corporation (WNC), the holding company of Western National Life Insurance Company, through the acquisition of 24,947,500 shares of WNC common stock from Conseco, Inc. for $274 million in cash. For accounting purposes, the acquisition was recorded on an equity basis, using the purchase method. The following unaudited pro forma information presents the consolidated results of operations of American General and AFC and reflects American General's 40% equity in the earnings of WNC for the first six months of each year, as if the acquisitions had been effective at the beginning of the periods presented, after giving effect to adjustments to reflect the acquisitions and the permanent financing of the AFC acquisition. -9- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 1. Financial Statements (continued). (In millions, except share data) Pro Forma Six Months Ended June 30, 1995 1994 Total revenues $3,225 $2,956 Income before income tax expense 564 578 Income before net dividends on preferred securities of subsidiaries 362 368 Net income 353 360 Net income per share $ 1.71 $ 1.70 Average fully diluted shares outstanding (thousands) 206,279 211,810 Included in net income above are net realized gains of $2 million for the six months ended June 30, 1995 and 1994. The above unaudited pro forma information is intended for informational purposes only and may not necessarily be indicative of American General's future results of operations. 4. Long-Term Debt. Corporate. In March 1995, the company issued $150 million of senior long-term debt due April 1, 2005, which pays interest at 7.75%. Proceeds from this issuance were used to repay short-term corporate debt. In June 1995, American General issued $150 million of senior long-term debt due June 15, 2005, which pays interest at 6.75%. In July 1995, American General issued $150 million of senior long-term debt due July 15, 2025, which pays interest at 7.5%. The proceeds from both issuances were used to refinance short-term debt related to the Franklin Life acquisition. Consumer Finance. During the six months ended June 30, 1995, American General Finance Corporation (AGFC) issued $1 billion of senior long-term debt with interest rates ranging from 7.25% to 8.25% and maturity dates ranging from 1998 to 2005. During the same period, AGFC also issued $304.2 million of medium-term notes maturing from 1997 through 2000, with interest rates ranging from 6.10% to 8.42%. Proceeds from all the issuances were used to refinance consumer finance debt or support the growth in finance receivables. -10- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 1. Financial Statements (continued). 5. Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries (Preferred Securities). In June 1995, two special purpose subsidiaries of the company completed the public offering of two issues of preferred securities totaling $537.5 million, with net proceeds of $521 million. Convertible Preferred Securities of Subsidiary. On June 1, 1995, American General Delaware, L.L.C. issued 5,000,000 shares, or $250 million, of convertible preferred securities. Net proceeds of $244 million were used to refinance short-term real estate debt. The convertible preferred securities pay monthly cash dividends at an annual rate of 6%. Each security is convertible at the option of the holder into 1.2288 shares of American General common stock, based on a conversion price of $40.69 per security. This issue is subject to redemption at the option of American General Delaware, L.L.C. after eight years at a redemption price of $50 per security plus accumulated and unpaid dividends. The issue is mandatorily redeemable for cash on May 31, 2025. American General may cause American General Delaware, L.L.C. to defer the payment of dividends for up to 60 months. During any such period, dividends on the convertible preferred securities would compound monthly, and American General could not declare or pay dividends on its common or preferred stock. The failure to pay dividends on the convertible preferred securities for 15 consecutive months would trigger the rights of the holders of the convertible preferred securities to convert the convertible preferred securities to American General Series A Preferred Stock. The Series A Preferred Stock would have dividend, conversion, and liquidation preference, optional redemption, and certain other terms substantially similar to the terms of the convertible preferred securities, except that the holders of the Series A Preferred Stock would have the right to elect two additional directors of American General whenever dividends are in arrears for 18 or more consecutive months and the Series A Preferred Stock would not be subject to mandatory redemption. Non-Convertible Preferred Securities of Subsidiary. On June 5, 1995, American General Capital, L.L.C. issued 11,500,000 shares, or $287.5 million, of non-convertible preferred securities. Net proceeds of $277 million were used to refinance short-term debt related to the Franklin Life acquisition. The non-convertible preferred securities pay monthly cash dividends at an annual rate of 8.45%. This issue is subject to redemption at the option of American General Capital, L.L.C. after five years at a redemption price equal to $25 per security plus accumulated and unpaid dividends. Subject to possible extension up to June 5, 2044, the issue is mandatorily redeemable for cash on June 30, 2025. -11- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 1. Financial Statements (continued). American General may cause American General Capital, L.L.C. to defer the payment of dividends for up to 60 months. During any such period, dividends on the non-convertible preferred securities would compound monthly, and American General could not declare or pay dividends on its common or preferred stock. The failure to pay dividends on the non- convertible preferred securities for 18 consecutive months would trigger the rights of the holders of the non-convertible preferred securities to appoint a special trustee to enforce the obligations to the holders of the non-convertible preferred securities. 6. Derivative Financial Instruments. American General makes very limited use of derivative financial instruments to manage the cost of debt and investment transactions and does not use derivatives for speculative purposes. In the six months ended June 30, 1995, the company had no significant derivative activity related to investment securities. During that period, in anticipation of future debt issuances, the company executed several interest rate swap agreements to reduce its exposure to future increases in interest rates. Because interest rates declined in mid-1995, the debt was subsequently issued at lower rates than anticipated, and the company made cash payments to settle the swaps. The company's use of swap agreements to effectively convert debt to a fixed rate did not have a material effect on the weighted-average borrowing rate or reported interest expense in the first six months of 1995. Corporate Activity. In February 1995, the company entered into an interest rate swap agreement with a notional amount of $100 million as an anticipatory hedge of ten-year, fixed-rate debt. In June 1995, the company issued $150 million of such debt and terminated the interest rate swap agreement. The termination of the swap agreement resulted in settlement costs of $10.9 million, which are being deferred and recognized as an increase to interest expense over the ten-year term of the debt. In March 1995, the company issued $150 million of fixed-rate debt and terminated two interest rate swap agreements with a total notional amount of $150 million. Settlement costs of $.9 million are being deferred and recognized as an increase to interest expense over the ten-year term of the debt. In June 1995, the company entered into a forward contract to hedge interest rate risk associated with the anticipated issuance of $150 million of thirty-year, fixed-rate debt. In July 1995, the company issued such debt and settled the forward contract in cash. Total settlement costs of $1.7 million will be recognized as an increase to interest expense over the thirty-year term of the debt. -12- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 1. Financial Statements (continued). Consumer Finance Activity. During the six months ended June 30, 1995, AGFC entered into five interest rate swap agreements with terms of two to three years and with a total notional amount of $200 million. These swap agreements effectively convert short- and medium-term floating-rate debt to a fixed-rate basis. At June 30, 1995, outstanding interest rate swaps totaled $590 million of notional amount, with an average fixed pay rate of 8.07% and an average floating receive rate of 6.14%. 7. Deferred Income Taxes. Lower market interest rates and resulting increases in bond values resulted in a deferred tax liability related to unrealized gains on fixed maturity securities of $349 million at June 30, 1995 as compared to a deferred tax asset of $351 million at December 31, 1994. The deferred tax asset at December 31, 1994 was net of a valuation allowance of $315 million, recorded through shareholders' equity. Due to the unrealized gains and resulting deferred tax liability at June 30, 1995, no valuation allowance was required. The resulting reduction in the valuation allowance was recorded through shareholders' equity. 8. Legal Contingencies. Two real estate subsidiaries of the company were defendants in a lawsuit that alleged damages based on lost profits and related claims arising from certain loans and joint venture contracts. On July 16, 1993, a judgment was entered against the subsidiaries jointly for $47.3 million in compensatory damages and against one of the subsidiaries for $189.2 million in punitive damages. On September 17, 1993, a Texas state district court reduced the previously-awarded punitive damages by $60.0 million, resulting in a reduced judgment in the amount of $176.5 million plus post-judgment interest. An appeal on numerous legal grounds has been filed. The company is continuing to contest the matter vigorously through the appeals process; and the company believes, based on advice of legal counsel, that plaintiffs' claims are without merit. Accordingly, no provision has been made in the consolidated financial statements related to this contingency. In April 1992, the Internal Revenue Service (IRS) issued Notices of Deficiency in the amount of $12.4 million for the 1977-1981 tax years of certain insurance subsidiaries. The basis of the dispute was the tax treatment of modified coinsurance agreements. The company elected to pay all related assessments plus associated interest, totaling $59 million. A claim for refund of tax and interest was disallowed by the IRS in January 1993. On June 30, 1993, a suit for refund was filed in the Court of Federal Claims. A decision is expected to be rendered during 1995. The company believes that the IRS's claims are without merit and is continuing to vigorously pursue refund of the amounts paid. Accordingly, no provision has been made in the consolidated financial statements related to this contingency. -13- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 1. Financial Statements (continued). American General and certain of its subsidiaries are defendants in various other lawsuits and proceedings arising in the normal course of business. Some of these lawsuits and proceedings arise in jurisdictions such as Alabama that permit punitive damages disproportionate to the actual damages alleged. Although no assurances can be given and no determination can be made at this time as to the outcome of any particular lawsuit or proceeding, American General and its subsidiaries believe that there are meritorious defenses for all of these claims and are defending them vigorously. The company also believes that the total amounts that would ultimately be paid, if any, arising from these claims would have no material effect on the company's consolidated results of operations and financial position. 9. Status of Federal Tax Return Examinations. The company and its subsidiaries file a consolidated federal income tax return. The IRS is currently examining the company's tax returns for 1986 through 1992. One issue from prior tax returns is currently being litigated, as described in Note 8. 10. Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. The ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends were as follows: Six Months Ended Quarter Ended June 30, June 30, 1995 1994 1995 1994 Ratio of Earnings to Fixed Charges: Consolidated operations ......... 2.5X 2.9X 2.5X 2.8X Consolidated operations, corporate fixed charges only ... 6.3X 8.2X 6.0X 8.2X American General Finance, Inc. .. 1.7X 1.9X 1.7X 2.0X Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends: Consolidated operations ......... 2.5X 2.9X 2.5X 2.8X Consolidated operations, corporate fixed charges and preferred stock dividends only.. 6.1X 8.2X 5.7X 8.2X -14- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 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 results of operations, capital resources, and liquidity for the periods reflected in the interim financial statements filed with this report. The reader is presumed to have read or have access to the company's 1994 Annual Report to Shareholders, including the Management's Discussion and Analysis on pages 16 through 25 thereof, and the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. 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. STATEMENT OF INCOME Comparison of Six Months Ended June 30, 1995 and June 30, 1994 Operating Revenues. Total revenues increased $699 million, or 29%, for the six months ended June 30, 1995 compared to the same period in 1994, due to increases in premiums and other considerations, net investment income, and finance charges. The increases in premiums and other considerations of $255 million, or 43%, and in net investment income of $256 million, or 21%, are primarily due to the acquisition of Franklin Life. Excluding Franklin Life, premiums and other considerations increased $61 million, or 10%, due to higher credit insurance premiums and the introduction of a new life insurance product in the Consumer Finance segment, and due to premiums of Financial Life Assurance Company of Canada (Financial Life), which was excluded from segment reporting in 1994 and reported as held for sale. Excluding Franklin Life, net investment income increased $49 million, or 4%, reflecting growth in invested assets since June 30, 1994, partially offset by a decline in investment yield. The decline in yield largely relates to the prepayment of higher yielding bonds and mortgage-backed securities through mid-1994 and subsequent reinvestment of the proceeds at lower interest rates. The $146 million, or 25%, increase in finance charges resulted from an increase in average finance receivables and higher yields on those receivables. Realized Investment Gains. Realized investment gains for the six months ended June 30, 1995 included $9 million of gains due to early redemption of fixed maturity securities at the election of the issuer (calls) and $14 million of net gains from sales of real estate joint ventures and investment real estate, partially offset by $13 million of losses on the sale of fixed maturity securities and additions to reserves of $11 million, related primarily to investment real estate. -15- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). For the same period in 1994, gains of $22 million on calls and $23 million from sales of real estate joint ventures, investment real estate, and equity securities were partially offset by $11 million of losses on the sale of fixed maturity securities and a $31 million increase in reserves, primarily related to investment real estate. Equity in Earnings of WNC. Revenues for 1995 include the company's 40% equity in earnings of WNC. This amount includes purchase accounting adjustments and reflects a one quarter lag in reporting. Other Revenues. Other revenues increased $22 million for the six months ended June 30, 1995 compared to the same period in 1994, primarily due to the acquisition of Franklin Life. Insurance and Annuity Benefits. Insurance and annuity benefits increased $328 million, or 30%, for the first six months of 1995 compared to the same period in 1994, including $241 million due to the acquisition of Franklin Life. Excluding Franklin Life, the increase was due to higher interest credited to policyholders in the Retirement Annuities and Life Insurance segments, higher than expected mortality in 1995 versus favorable mortality experience in 1994, and the reporting of Financial Life as held for sale in 1994. Policyholder Dividends. Dividends paid to policyholders on participating life insurance policies increased $37 million due to the acquisition of Franklin Life. Operating Costs and Expenses. Operating costs and expenses increased $89 million, or 23%, for the six months ended June 30, 1995 compared to the same period in 1994, primarily due to a $39 million increase in salaries and other expenses related to an increase in the number of branch offices and customer accounts in the Consumer Finance segment, and $42 million of operating expenses for Franklin Life. Commission Expense. Commission expense increased $65 million, or 34%, for 1995 compared to 1994, of which $53 million was due to the acquisition of Franklin Life. The remaining increase was due to higher insurance product sales in the Retirement Annuities segment. Provision for Finance Receivable Losses. The provision for finance receivable losses increased $59 million, or 66%, for the six months ended June 30, 1995 compared to the same period in 1994; the allowance for finance receivable losses increased $30 million compared to December 31, 1994. These increases reflect the higher level of finance receivables outstanding, higher levels of delinquencies and net charge offs due to a change in the portfolio mix, and the economic climate. -16- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Change in Deferred Policy Acquisition Costs (DPAC) and Cost of Insurance Purchased (CIP). The change reported in the income statement represents capitalization of DPAC during the period, net of DPAC and CIP amortization. The change in DPAC and CIP increased $26 million, or 43%, for the six months ended June 30, 1995 compared to the same period in 1994, primarily due to the acquisition of Franklin Life and additional capitalized costs related to higher Retirement Annuities segment sales. Interest Expense. Interest expense on corporate debt increased $29 million, or 53%, for the six months ended June 30, 1995 compared to the same period in 1994, due to an increase in average short-term borrowings primarily resulting from financing the Franklin Life acquisition and higher average short-term interest rates. The increase in interest expense on short-term debt was partially offset by a decrease in interest expense on long-term debt resulting from a decrease in average borrowings of long-term debt. Interest expense on consumer finance debt increased $62 million, or 32%, due to higher average borrowings to support finance receivable growth and higher short-term rates, partially offset by lower long-term borrowing cost. -17- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). BUSINESS SEGMENTS To facilitate meaningful period-to-period comparisons of business segment results, operating earnings of each segment include income from its business operations and earnings on that amount of equity considered necessary to support its business, and exclude net realized investment gains, non-recurring items, and the effect of accounting changes. Earnings on equity not allocated to the business segments are included in earnings on corporate assets. Six Months Ended Quarter Ended June 30, June 30, 1995 1994 1995 1994 (In millions) Revenues Retirement Annuities ............. $ 806 $ 759 $ 408 $ 380 Consumer Finance ................. 880 696 449 361 Life Insurance ................... 1,422 954 749 477 Total business segments ......... 3,108 2,409 1,606 1,218 Corporate Operations Realized investment gains ....... 3 4 1 1 Equity in earnings of WNC ....... 21 - 12 - Other ........................... 13 33 8 13 Total corporate operations ..... 37 37 21 14 Total consolidated revenues .. $3,145 $2,446 $1,627 $1,232 Policyholder Account Deposits Retirement Annuities ............. $1,281 $1,149 $ 644 $ 562 Life Insurance ................... 753 544 392 277 Total deposits ............... $2,034 $1,693 $1,036 $ 839 Earnings Retirement Annuities ............. $ 108 $ 103 $ 54 $ 50 Consumer Finance ................. 122 114 62 61 Life Insurance ................... 170 127 86 63 Total business segments ......... 400 344 202 174 Corporate Operations Net interest on corporate debt .. (56) (37) (29) (18) Net dividends on preferred securities of subsidiaries .... (2) - (2) - Expenses not allocated to segments ...................... (17) (15) (8) (9) Earnings on corporate assets .... 14 25 8 10 Net equity in earnings of WNC ... 14 - 8 - Net realized investment gains ... 2 2 1 1 Total corporate operations ..... (45) (25) (22) (16) Total consolidated net income. $ 355 $ 319 $ 180 $ 158 -18- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Retirement Annuities. Revenues for the first six months of 1995 compared to 1994 increased $47 million, or 6%, primarily due to a 6% increase in net investment income, reflecting growth in invested assets, partially offset by a decrease in the average investment yield. Invested assets increased $1.3 billion (excluding the effect of SFAS 115), or 7%, from June 30, 1994 to June 30, 1995, primarily due to fixed premium deposits and reinvestment of investment income over the last twelve months. Segment earnings increased $5 million, or 5%, reflecting growth in net investment income which exceeded the increase in interest credited to policyholders. The ratio of operating expenses to average assets increased slightly to .53% for the six months ended June 30, 1995 from .52% for the same period in 1994. The ratio of policyholder surrenders to average deferred policy reserves declined to 3.99% for the first six months of 1995 compared to 4.97% for the same period in 1994, primarily due to a free bailout provision (surrender without charge) on certain accounts in first quarter 1994 and participants seeking higher returns in equity-based investments, both due to low market interest rates in 1994. While customer interest in equity-based investments has continued, resulting in a $86 million increase in variable account deposits, fixed deposits increased $46 million in the first six months of 1995 compared to the same period of 1994, due to the higher interest rate environment in 1995. Consumer Finance. Revenues for the first six months of 1995 compared to 1994 increased $184 million, or 26%, primarily from increased finance charges due to growth in finance receivables, through business development efforts and branch expansion, and improved yields. Yields improved due to increased emphasis on non-real estate secured consumer loans and higher yields on the expanded retail sales finance and credit card portfolios. Segment earnings increased $8 million, or 7%, due to growth in average receivables and yield, partially offset by increases in the provision for finance receivable losses, cost of borrowings, and operating expenses. The charge off ratio increased to 2.9% for the first six months of 1995 from 2.2% for the same period of 1994, and delinquencies increased to 3.0% at June 30, 1995 from 2.5% at June 30, 1994. The increase in charge offs and delinquencies resulted from rapid growth in the finance receivables and the change in portfolio mix to emphasize lower credit quality receivables with higher yields. Life Insurance. The Life Insurance segment includes five months of activity of Franklin Life, acquired January 31, 1995. The acquisition increased segment revenues $423 million, deposits $181 million, and earnings $44 million in the first six months of 1995. -19- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Excluding Franklin Life, revenues for the Life Insurance segment increased $45 million, or 5%, for the six months ended June 30, 1995 compared to 1994, primarily due to Financial Life, excluded from 1994 segment reporting, and higher investment income. The increase in investment income resulted from growth in invested assets, partially offset by lower yields. Excluding Franklin Life, deposits increased 5% due to the introduction of structured settlement annuity products and growth in interest-sensitive life deposits. Segment earnings excluding Franklin Life decreased $1 million in the first six months of 1995 compared to the same period of 1994, primarily due to higher insurance and annuity benefit expenses, offset by increases in premiums and net investment income. Corporate Operations. Corporate operations include net interest on corporate debt, net dividends on preferred securities of subsidiaries, expenses not allocated to the business segments, earnings on corporate assets, the net equity in earnings of WNC, and net realized investment gains. For reporting purposes, corporate assets include assets representing equity of the subsidiaries not considered necessary to support their businesses. Corporate debt is that debt incurred primarily to fund acquisitions, share purchases, and capital needs of subsidiaries. Net interest on corporate debt increased $19 million, or 51%, due to higher short-term debt, resulting from the acquisition of Franklin Life, and higher short-term interest rates, partially offset by a decrease in average borrowings of long-term debt. Earnings on corporate assets decreased $11 million for the six months ended June 30, 1995 compared to 1994, primarily due to operating earnings of companies held for sale, reported in corporate operations during 1994. Included in 1995 were the net dividends on preferred securities of subsidiaries issued to partially refinance short-term real estate debt and short-term debt from the Franklin Life acquisition. The company's 40% equity in the earnings of WNC, net of the company's related deferred taxes, was also included in 1995. Comparison of Quarters Ended June 30, 1995 and June 30, 1994 The nature of and reasons for any significant variations between the quarters ended June 30, 1995 and 1994 are the same as those discussed above for the respective six month periods, except where otherwise noted herein. BALANCE SHEET Effect of SFAS 115. Decreases in market interest rates and resulting increases in bond values during 1995 caused the adjustment to shareholders' equity related to fixed maturity securities under SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," to decrease from a net unrealized loss of $950 million at December 31, 1994 to a net unrealized gain of $631 million at June 30, 1995. -20- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). The components of the fair value adjustment to report securities in accordance with SFAS 115 at June 30, 1995 and December 31, 1994 were as follows: June 30, December 31, 1995 1994 Change (In millions) Fair value adjustment to fixed maturity securities $ 1,495 $(1,387) $ 2,882 Adjusted by: Increase (decrease) in DPAC/CIP (566) 401 (967) Decrease (increase) in deferred income taxes (349) 351 (700) Valuation allowance on deferred tax asset - (315) 315 Equity in WNC's unrealized gains 51 - 51 Net unrealized gains (losses) on fixed maturity securities 631 (950) 1,581 Net unrealized gains on equity securities 31 15 16 Net unrealized gains (losses) on securities $ 662 $ (935) $ 1,597 SFAS 115 requires that the carrying value of most fixed maturity securities be adjusted for changes in market value, primarily caused by interest rates. However, the insurance liabilities supported by these securities are not adjusted under SFAS 115, thereby creating volatility in shareholders' equity as interest rates change. Therefore, care should be exercised in drawing conclusions based on balance sheet amounts that include the SFAS 115 effect. SFAS 115 does not affect results of operations. Assets. At June 30, 1995, consolidated assets of $58 billion were distributed as follows: 70% in investments, principally supporting insurance and annuity liabilities, 14% in net finance receivables, 5% in intangible assets, and 11% in other assets. Investments. From December 31, 1994 to June 30, 1995, investments increased $6.0 billion due to the acquisition of Franklin Life and $2.9 billion due to the effect of SFAS 115. For more information on the investment portfolio at June 30, 1995, see "INVESTMENTS" beginning on page 20. Finance Receivables. Net finance receivables increased $385 million, or 5%, from December 31, 1994 to June 30, 1995, primarily due to growth resulting from business development efforts and branch expansion in the Consumer Finance segment. This growth is net of a $100 million sale of credit card and private label finance receivables through securitization, completed in the quarter ended June 30, 1995. -21- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Deferred Policy Acquisition Costs (DPAC). The $668 million decrease in DPAC was primarily due to a decline in the reinstatement of DPAC under SFAS 115 at June 30, 1995 compared to December 31, 1994 (see "Effect of SFAS 115" on page 17) and amortization of DPAC, partially offset by deferral of acquisition costs. Cost of Insurance Purchased (CIP). The $471 million increase in CIP was due to the acquisition of Franklin Life, net of a $199 million decrease due to the effect of SFAS 115. Other Assets. The $403 million increase in other assets was primarily due to the acquisition of Franklin Life, the establishment of an IRS tax bond, an increase in due from brokers for investment transactions, and an increase in accrued investment income. Separate Account Assets and Liabilities. The $1.2 billion increase in assets and liabilities related to Separate Accounts from December 31, 1994 to June 30, 1995 reflects increased sales of variable annuity products, primarily in the Retirement Annuities segment, the transfer of a $218 million group account from fixed to variable, and $120 million due to the acquisition of Franklin Life. Liabilities and Equity. At June 30, 1995, consolidated liabilities and equity were distributed as follows: 63% in insurance and annuity liabilities, 13% in consumer finance debt, 10% in equity (including redeemable equity), 4% in corporate debt, and 10% in other liabilities. Insurance and Annuity Liabilities. The $7.2 billion increase in insurance and annuity liabilities from December 31, 1994 to June 30, 1995 was primarily due to the acquisition of Franklin Life, which added $6 billion of insurance reserves, as well as fixed annuity deposits and interest credited in the Retirement Annuities segment. Corporate Debt. Corporate debt increased $354 million from December 31, 1994 to June 30, 1995 primarily due to a $920 million increase in short- term debt to finance the Franklin Life acquisition. This increase was partially offset by the issuance of $537.5 million of preferred securities, of which $287.5 million was used to refinance a portion of the Franklin Life short-term acquisition debt and $250 million was used to refinance short-term real estate debt. As a result of the Franklin Life acquisition and subsequent financing activities, the ratio of corporate debt (including real estate debt) to corporate capital (excluding the effect of SFAS 115) was 29.5% at June 30, 1995, compared to 37.2% at March 31, 1995 and 29.2% at December 31, 1994. Management expects to decrease the ratio to approximately 25% by year-end 1995, through the issuance of additional preferred securities and/or through an increase in retained earnings. -22- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Consumer Finance Debt. Consumer finance debt increased $355 million from December 31, 1994 to June 30, 1995, to support the growth in finance receivables. Income Tax Liabilities. The liability for income taxes increased $415 million from December 31, 1994 to June 30, 1995, primarily due to the change in the effect of SFAS 115, partially offset by the elimination of a valuation allowance on deferred tax assets at December 31, 1994. There was no SFAS 115-related deferred tax asset, and therefore no valuation allowance, at June 30, 1995 due to the reversal in the effect of SFAS 115 from an unrealized loss at December 31, 1994 to an unrealized gain at June 30, 1995. Other Liabilities. Other liabilities increased $278 million primarily due to the acquisition of Franklin Life and increases in amounts due to brokers for investment transactions. Redeemable Equity. Redeemable equity increased from $47 million at December 31, 1994 to $546 million at June 30, 1995, primarily due to the net proceeds from the issuances of $250 million of convertible preferred securities on June 1, 1995 and $287.5 million of non-convertible preferred securities on June 5, 1995. Shareholders' Equity. Shareholders' equity increased from $3.5 billion at December 31, 1994 to $5.3 billion at June 30, 1995, primarily due to the $1.6 billion increase in net unrealized gains. Due to the requirements of SFAS 115, shareholders' equity will be subject to future volatility from the effects of interest rate fluctuations on the fair value of securities (see "Effect of SFAS 115" on page 17). INVESTMENTS Invested assets consist primarily of fixed maturity securities, mortgage loans on real estate, and investment real estate, which are discussed below. The company reviews invested assets on a regular basis and records write-downs for declines in fair value below cost that are considered other than temporary. -23- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Fixed Maturity Securities. Fixed maturity securities represented 86% of invested assets at June 30, 1995. Fixed maturity securities are carried at fair value in accordance with SFAS 115 (see "Effect of SFAS 115" on page 17). Information regarding the fixed maturity securities portfolio at June 30, 1995, which included bonds and redeemable preferred stocks, was as follows: Average Credit (In millions) Fair Value % Rating Mortgage-backed $11,461 32% AAA Other investment grade 22,449 64 A Below investment grade 1,336 4 BB- Total fixed maturities $35,246 100% AA- Collateralized mortgage obligations (CMOs) are purchased to diversify the portfolio risk characteristics from primarily corporate credit risk to a mix of credit and cash flow risk. CMOs represented 92% of mortgage-backed securities at June 30, 1995 and December 31, 1994. At December 31, 1994, below investment grade fixed maturity securities, those rated below BBB-, were $886 million, or 3%, of total fixed maturity securities. The $450 million increase from December 31, 1994 to June 30, 1995 was primarily due to the acquisition of Franklin Life and the purchase of $223 million of below investment grade fixed maturity securities during second quarter 1995. Net income from below investment grade fixed maturity securities, including realized investment gains and losses, was $35 million and $24 million for the first six months of 1995 and 1994, respectively. Non-performing fixed maturity securities, defined as securities for which payment of interest is sufficiently uncertain as to preclude accrual of interest, were $45 million at June 30, 1995 compared to $50 million at December 31, 1994. These securities represented .1% and .2% of total fixed maturity securities at June 30, 1995 and December 31, 1994, respectively. Mortgage Loans. Mortgage loans on real estate totaled 8% of invested assets at June 30, 1995. Information regarding the mortgage loan portfolio at June 30, 1995 was as follows: Book Non-Performing Loans (In millions) Value Amount % Commercial $3,184 $213 6.7% Residential 77 4 4.7% Allowance for losses (87) (43) Total mortgage loans $3,174 $174 -24- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Non-performing (impaired) mortgage loans include loans delinquent 60 days or more and commercial loans that have been restructured. These loans represented 6.7% of total commercial loans at June 30, 1995, compared to 5.8% at December 31, 1994. The increase resulted primarily from watch list loans becoming non-performing as of June 30, 1995. At June 30, 1995, $207 million of performing commercial mortgage loans were included on the company's watch list if they were delinquent 30-59 days, the borrower was in bankruptcy, or the loan was determined to be under- collateralized. This amount compares to $239 million at year-end 1994. The decrease in the watch list amount was primarily due to loans which became non- performing during the first six months of 1995, partially offset by additions of under-collateralized loans resulting from the Franklin Life acquisition. The company does not anticipate a significant effect on operations, liquidity, or capital from these loans. Investment Real Estate. Investment real estate totaled 1.4% of invested assets at June 30, 1995, compared to 1.8% at December 31, 1994. The breakdown of investment real estate was as follows: (In millions) June 30, December 31, 1995 1994 Land development projects $ 607 $ 613 American General Center, Houston 119 120 Income-producing real estate 93 96 Foreclosed real estate 49 56 Allowance for losses (314) (321) Total investment real estate $ 554 $ 564 With the adoption of SFAS 121 (see Note 2 on page 5), the carrying value of certain land development projects will be permanently reduced by the amount of the related allowance for losses. CASH FLOWS Management believes that the overall sources of cash and liquidity available to the company and its subsidiaries will continue to be sufficient to satisfy its foreseeable financial obligations. -25- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Cash Flows of the Parent Company. Net operating cash flows generated by the parent company were $65 million and $189 million for the six months ended June 30, 1995 and 1994, respectively. The decrease related to lower dividends from subsidiaries and increased interest expense due to the Franklin Life acquisition, partially offset by higher interest income on intercompany receivables. Dividends from subsidiaries are the primary source of cash for operating requirements of the company and are used to fund interest obligations, dividends to shareholders, and to buy back common stock. The company's insurance subsidiaries are restricted by state insurance laws as to the amounts they may pay as dividends without prior notice to, or in some cases prior approval from, their respective state insurance departments. Certain non-insurance subsidiaries are similarly restricted by long-term debt agreements. These restrictions have not affected, and are not expected to affect, the ability of the company to meet its cash obligations. During the first six months of 1995, the companies in the Life Insurance and Retirement Annuities segments paid cash dividends of $117 million to AGC Life Insurance Company (AGC Life), a subsidiary of American General, to reduce intercompany borrowings. During the first six months of 1994, the Life Insurance and Retirement Annuities segments paid $152 million of dividends to American General. Cash dividends paid to American General by the Consumer Finance segment totaled $70 million in the first six months of 1995, compared to $104 million for the same period of 1994, which included $48 million of dividends accrued in 1993. Additionally, the real estate operations paid dividends of $23 million to American General in second quarter 1995. The increase in short-term debt during the first six months of 1995 primarily resulted from financing the Franklin Life acquisition. A portion of this short-term debt increase and $244 million of short-term real estate debt were refinanced by issuances of $300 million of long-term debt and $537.5 million of preferred securities as of June 30, 1995. Segment Cash Flows. Net cash flows generated by the Life Insurance and Retirement Annuities segments in the first six months of 1995 included $767 million provided by operating activities and $684 million provided by the increase in fixed policyholder account deposits, net of withdrawals. This compared to $541 million and $665 million, respectively, during the first six months of 1994. The $226 million increase in cash provided by operating activities was primarily due to cash flows of Franklin Life, and a $31 million tax refund in 1995 from the 1994 capital gains offset program and a $32 million tax payment in first quarter 1994, both in the Retirement Annuities segment. The increase in fixed policyholder account deposits, net of withdrawals, was primarily due to increased flow premiums, capital transfers, and deposits from the Franklin Life acquisition, partially offset by -26- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). policyholders' increased demand for variable accounts. Variable account deposits, related to Separate Accounts which are not included in the consolidated statement of cash flows, increased to $555 million in the first six months of 1995 from $386 million in the same period of 1994. The Consumer Finance segment's operating cash flows were $377 million during the first six months of 1995, compared to $281 million during the first six months of 1994. This increase is due to $1.3 billion, or 18%, growth in finance receivables during the twelve months ended June 30, 1995. Consolidated Operating Activities. Net cash flows from operating activities on a consolidated basis increased $341 million in the first six months of 1995 compared to the same period in 1994, primarily due to the increases in segment operating cash flows. Investing Activities. The source of cash flow from investment calls, maturities, and sales was as follows: Six Months Ended (In millions) June 30, 1995 1994 Fixed maturity securities Sales $1,270 $ 558 Calls 396 596 Repayments of mortgage-backed securities 281 1,349 Maturities 206 167 Mortgage loans 174 207 Equity securities 105 15 Other 128 100 Total $2,560 $2,992 Repayments of mortgage-backed securities in 1994 were unusually high due to the low interest rate environment in the first half of 1994. Credit Facilities. Committed credit facilities are maintained by American General and certain of its subsidiaries to support the issuance of commercial paper and to provide an additional source of cash for operating requirements. On June 9, 1995, American General reduced unsecured committed bank credit facilities by $1 billion. This reduction reflected the lower commercial paper outstanding due to the net proceeds from issuances of preferred securities totaling $537.5 million and expected issuances of long-term debt which totaled $300 million through August 10, 1995. At June 30, 1995, committed credit facilities totaled $3.3 billion; there were no outstanding borrowings under these facilities. -27- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Form S-3 Shelf Registration. In May 1995, a Form S-3 shelf registration statement filed with the Securities and Exchange Commission by the company and certain subsidiaries to register $1.25 billion of debt and equity securities became effective. As of August 10, 1995, the company and certain subsidiaries have issued a total of $837.5 million of debt and preferred securities under this shelf registration. OTHER FACTORS Environmental. American General's principal exposure to environmental regulations arises from its ownership of investment real estate. Probable costs related to environmental clean-up are estimated to be $3 million, and appropriate liabilities have been recorded to reflect these costs. The company is continuing to review these costs, as well as the cost of compliance with federal, state, and local environmental laws and regulations. Guaranty Associations. The company's life insurance and annuity subsidiaries were assessed $11.8 million by state guaranty associations during the first six months of 1995, of which $6.0 million had been accrued at December 31, 1994. Assessments during the first six months of 1994 were $4.3 million, of which $2.7 million was accrued at December 31, 1993. The assessments for 1995 and 1994 were offset by $4.0 million and $1.2 million, respectively, considered recoverable against future premium taxes. At June 30, 1995, the accrued liability for anticipated unrecoverable assessments was $19 million, compared to $21 million at December 31, 1994. -28- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 PART II. OTHER INFORMATION Item 1. Legal Proceedings. Other than those lawsuits or proceedings disclosed previously, American General and certain of its subsidiaries are defendants in various lawsuits and proceedings arising in the normal course of business. Some of these lawsuits and proceedings arise in jurisdictions such as Alabama that permit punitive damages disproportionate to the actual damages alleged. Although no assurances can be given and no determination can be made at this time as to the outcome of any particular lawsuit or proceeding, American General and its subsidiaries believe that there are meritorious defenses for all of these claims and are defending them vigorously. The company also believes that the total amounts that would ultimately be paid, if any, arising from these claims would have no material effect on the company's consolidated results of operations and financial position. Item 4. Submission of Matters to a Vote of Security Holders. Election of Directors. American General's Annual Meeting of Shareholders was held on April 27, 1995. The following directors, constituting American General's entire board, were elected to terms ending in 1996: Number of Number of Name Votes For Votes Withheld J. Evans Attwell 179,504,951 1,064,518 Brady F. Carruth 180,170,251 399,218 W. Lipscomb Davis Jr. 180,090,351 479,118 Robert M. Devlin 179,603,786 965,683 Harold S. Hook 179,457,999 1,111,470 Larry D. Horner 180,126,311 443,158 Richard J. V. Johnson 180,196,835 372,634 Robert E. Smittcamp 180,187,579 381,890 Anne M. Tatlock 180,130,257 439,212 James R. Tuerff 179,510,639 1,058,830 Independent Auditors. The appointment of Ernst & Young LLP as Independent Auditors was ratified with 179,808,328 votes for, 363,229 votes against, and 397,912 abstentions. Item 5. Other Information. The company's common stock buyback program is currently suspended, and there were no company purchases of shares during second quarter 1995. -29- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 PART II. OTHER INFORMATION (continued) Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. Exhibit 11 Computation of Earnings per Share. Exhibit 12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. Exhibit 27 Financial Data Schedule. b. Reports on Form 8-K. 1) Current Report on Form 8-K dated April 14, 1995, with respect to the pro forma financial statements of the company including the acquisition of American Franklin Company as of and for the year ended December 31, 1994. 2) Current Report on Form 8-K dated May 9, 1995, with respect to the pro forma financial statements of the company including the acquisition of American Franklin Company as of and for the three months ended March 31, 1995, and for the year ended December 31, 1994. 3) Current Report on Form 8-K dated June 21, 1995, with respect to the authorization of issuance by the company of a public offering of $150 million aggregate principal amount of 6-3/4% Notes Due 2005. 4) Current Report on Form 8-K dated July 14, 1995, with respect to the authorization of issuance by the company of a public offering of $150 million aggregate principal amount of 7-1/2% Notes Due 2025. -30- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN GENERAL CORPORATION (Registrant) By: PAMELA J. PENNY Pamela J. Penny Vice President and Controller (Duly Authorized Officer and Chief Accounting Officer) Date: August 10, 1995 -31- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 EXHIBIT INDEX Exhibit 11 Computation of Earnings per Share. 12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. 27 Financial Data Schedule. -32- EX-11 2 AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1995 Exhibit 11 COMPUTATION OF EARNINGS PER SHARE (Unaudited) ($ in millions, except share data) Six Months Ended June 30, 1995 1994 Primary: Net income available to common stock ....... $ 355 $ 319 Average shares outstanding Common shares ............................ 204,797,065 211,497,388 Assumed exercise of stock options ........ 396,104 310,388 Total .................................. 205,193,169 211,807,776 Net income per share ....................... $1.73 $1.50 Fully Diluted: Net income ................................. $ 355 $ 319 Plus: Net dividends on convertible preferred securities of subsidiary ....... 1 - Net income available to common stock ... $ 356 $ 319 Average shares outstanding Common shares ............................ 204,797,065 211,497,388 Assumed exercise of stock options ........ 463,313 312,913 Assumed conversion of preferred securities of subsidiary ............... 1,018,345 - Total .................................. 206,278,723 211,810,301 Net income per share ....................... $1.73 $1.50 EX-12 3 Exhibit 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Unaudited) ($ in millions) Six Months Ended June 30, 1995 1994 Consolidated operations: Income before income tax expense and dividends on preferred securities ............................. $ 556 $ 500 Fixed charges deducted from income Interest expense ................................. 339 246 Implicit interest in rents ....................... 9 8 Total fixed charges deducted from income ..... 348 254 Earnings available for fixed charges........ $ 904 $ 754 Fixed charges per above ............................ $ 348 $ 254 Capitalized interest relating to real estate operations ....................................... 9 8 Total fixed charges .............................. 357 262 Dividends on preferred securities ................ 3 - Total fixed charges and dividends on preferred securities ..................... $ 360 $ 262 Ratio of earnings to fixed charges ......... 2.5X 2.9X Ratio of earnings to combined fixed charges and preferred stock dividends ............ 2.5X 2.9X Consolidated operations, corporate fixed charges and preferred stock dividends only: Income before income tax expense and dividends on preferred securities ............................. $ 556 $ 500 Corporate fixed charges deducted from income Corporate interest expense ....................... 94 60 Earnings available for fixed charges ....... $ 650 $ 560 Total corporate fixed charges per above ............ $ 94 $ 60 Capitalized interest related to real estate operations ....................................... 9 8 Total fixed charges .............................. 103 68 Dividends on preferred securities ................ 3 - Total fixed charges and dividends on preferred securities ..................... $ 106 $ 68 Ratio of earnings to corporate fixed charges 6.3X 8.2X Ratio of earnings to combined corporate fixed charges and preferred stock dividends 6.1X 8.2X American General Finance, Inc.: Income before income tax expense ................... $ 195 $ 184 Fixed charges deducted from income Interest expense ................................. 255 193 Implicit interest in rents ....................... 6 5 Total fixed charges .......................... 261 198 Earnings available for fixed charges ....... $ 456 $ 382 Ratio of earnings to fixed charges ......... 1.7X 1.9X 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 June 30, 1995 1994 Consolidated operations: Income before income tax expense and dividends on preferred securities ............................. $ 284 $ 247 Fixed charges deducted from income Interest expense.................................. 174 126 Implicit interest in rents ....................... 5 4 Total fixed charges deducted from income ..... 179 130 Earnings available for fixed charges........ $ 463 $ 377 Fixed charges per above ............................ $ 179 $ 130 Capitalized interest relating to real estate operations ....................................... 4 4 Total fixed charges .............................. 183 134 Dividends on preferred securities ................ 3 - Total fixed charges and dividends on preferred securities ..................... $ 186 $ 134 Ratio of earnings to fixed charges ......... 2.5X 2.8X Ratio of earnings to combined fixed charges and preferred stock dividends ............ 2.5X 2.8X Consolidated operations, corporate fixed charges and preferred stock dividends only: Income before income tax expense and dividends on preferred securities ............................. $ 283 $ 246 Corporate fixed charges deducted from income Corporate interest expense ....................... 52 30 Earnings available for fixed charges ....... $ 335 $ 276 Total corporate fixed charges per above ............ $ 52 $ 30 Capitalized interest relating to real estate operations ....................................... 4 4 Total fixed charges .............................. 56 34 Dividends on preferred securities ................ 3 - Total fixed charges and dividends on preferred securities ..................... $ 59 $ 34 Ratio of earnings to corporate fixed charges 6.0X 8.2X Ratio of earnings to combined corporate fixed charges and preferred stock dividends 5.7X 8.2X American General Finance, Inc.: Income before income tax expense ................... $ 99 $ 98 Fixed charges deducted from income Interest expense ................................. 130 100 Implicit interest in rents ....................... 3 2 Total fixed charges .......................... 133 102 Earnings available for fixed charges ....... $ 232 $ 200 Ratio of earnings to fixed charges ......... 1.7X 2.0X EX-27 4
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. 1,000,000 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 35,246 0 0 233 3,174 554 41,008 38 0 2,534 58,424 34,727 159 172 1,769 9,635 365 521 0 4,943 58,424 842 1,494 3 806 1,457 121 (210) 553 198 355 0 0 0 355 1.73 1.73 0 0 0 0 0 0 0 ALL FIXED MATURITY SECURITIES ARE CURRENTLY CLASSIFIED AS AVAILABLE- FOR-SALE AND ARE RECORDED AT FAIR VALUE. INCLUDES COST OF INSURANCE PURCHASED (CIP). THE SUM OF POLICY LOSSES, UNEARNED PREMIUMS, POLICY-OTHER, AND POLICYHOLDER FUNDS COMPRISES INSURANCE AND ANNUITY LIABILITIES. CONSISTS OF NON-CONVERTIBLE AND CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES. CONSISTS OF NET OF THE FOLLOWING: NET UNREALIZED GAINS (LOSSES) ON SECURITIES; RETAINED EARNINGS; AND COST OF TREASURY STOCK. INCLUDES TOTAL INSURANCE CHARGES. INCLUDES FINANCE CHARGES AND EQUITY IN EARNINGS OF WESTERN NATIONAL CORPORATION. CONSISTS OF THE FOLLOWING: AMORTIZATION OF POLICY ORIGINATION COSTS AND AMORTIZATION OF CIP, NET. CONSISTS OF THE FOLLOWING: CAPITALIZATION AND OTHER. NET OF GROSS DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES. NET OF TAX BENEFIT OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES.