-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JAZvcW1HGrOIjJOwFgOER+5vAKUkiEzk6nlsiVdkowFf0QqYM3h1sLQuivq82lJz uZLgNS/aRQmlgAVfLNCynA== 0000005103-97-000060.txt : 19970815 0000005103-97-000060.hdr.sgml : 19970815 ACCESSION NUMBER: 0000005103-97-000060 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97660467 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, 1997 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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to _____________________ Commission file number 1-7981 American General Corporation (Exact name of registrant as specified in its articles of incorporation) Texas 74-0483432 (State of Incorporation) (I.R.S. Employer Identification No.) 2929 Allen Parkway, Houston, Texas 77019-2155 (Address of principal executive offices) (Zip Code) (713) 522-1111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . As of July 31, 1997, there were 243,235,436 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 June 30, 1997 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, 1997 and 1996 ......................................... 2 Consolidated Balance Sheet at June 30, 1997 and December 31, 1996 ................................ 3 Consolidated Condensed Statement of Cash Flows for the six months ended June 30, 1997 and 1996 ...... 4 Notes to Consolidated Financial Statements ......... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 11 Part II. OTHER INFORMATION. Item 1. Legal Proceedings .................................. 30 Item 4. Submission of Matters to a Vote of Security Holders ................................... 32 Item 6. Exhibits and Reports on Form 8-K ................... 33 -1- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 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, 1997 1996 1997 1996 Revenues Premiums and other considerations. $ 1,633 $ 1,604 $ 832 $ 824 Net investment income ............ 1,973 1,869 1,002 945 Finance charges .................. 635 734 315 363 Realized investment gains ........ 14 31 20 3 Equity in earnings of Western National Corporation ............ 26 17 13 9 Other ............................ 87 72 44 36 Total revenues ............... 4,368 4,327 2,226 2,180 Benefits and expenses Insurance and annuity benefits ... 2,076 2,075 1,059 1,046 Policyholder dividends ........... 47 47 24 24 Operating costs and expenses ..... 698 692 349 360 Commissions ...................... 424 420 214 218 Change in deferred policy acquisition costs and cost of insurance purchased ............. (51) (30) (26) (1) Provision for finance receivable losses .......................... 131 211 63 102 Merger-related costs ............. 272 - 272 - Losses on assets held for sale and litigation .................. 163 - 163 - Interest expense Corporate ....................... 77 81 41 41 Consumer Finance ................ 226 247 113 121 Total benefits and expenses .. 4,063 3,743 2,272 1,911 Earnings Income (loss) before income tax expense...................... 305 584 (46) 269 Income tax expense ............... 180 206 56 97 Income (loss) before net dividends on preferred securities of subsidiaries .................... 125 378 (102) 172 Net dividends on preferred securities of subsidiaries ...... 39 19 22 9 Net income (loss) ............ $ 86 $ 359 $ (124) $ 163 -2- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Net income (loss) per share ....... $ .36 $ 1.44 $ (.49) $ .65 Dividends paid per common share ... $ .70 $ .65 $ .35 $ .325 Average fully diluted shares outstanding (in thousands) ...... 250,666 252,746 251,616 254,099 -3- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Balance Sheet (Unaudited) (In millions, except share amounts) June 30, December 31, 1997 1996 Assets Investments Fixed maturity securities (amortized cost: $44,673; $42,867) ............................ $45,985 $44,355 Mortgage loans on real estate ................. 3,389 3,228 Equity securities (cost: $89; $111) ........... 110 137 Policy loans .................................. 2,105 2,011 Investment real estate ........................ 587 626 Other long-term investments ................... 166 210 Short-term investments ........................ 365 265 Total investments ......................... 52,707 50,832 Cash ........................................... 289 176 Finance receivables, net ....................... 7,022 7,230 Investment in Western National Corporation ..... 510 535 Deferred policy acquisition costs .............. 3,114 2,954 Cost of insurance purchased .................... 813 755 Acquisition-related goodwill ................... 658 605 Other assets ................................... 2,559 2,517 Assets held for sale ........................... - 667 Assets held in Separate Accounts ............... 9,715 7,863 Total assets .............................. $77,387 $74,134 Liabilities Insurance and annuity liabilities .............. $47,393 $46,022 Debt (short-term) Corporate ($766; $631) ........................ 2,238 2,102 Consumer finance ($2,783; $3,131) ............. 6,734 7,630 Income tax liabilities ......................... 950 1,078 Other liabilities .............................. 1,886 1,368 Liabilities related to Separate Accounts ....... 9,715 7,863 Total liabilities ......................... 68,916 66,063 Redeemable equity Company-obligated mandatorily redeemable preferred securities of subsidiaries holding solely company subordinated notes Non-convertible .............................. 1,479 982 Convertible .................................. 246 245 Total redeemable equity .................... 1,725 1,227 Shareholders' equity Convertible preferred stock (shares issued -4- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 and outstanding: 2,317,701; 2,323,722) ........ 85 85 Common stock (shares issued: 259,135,053; 283,738,546; outstanding: 243,069,549; 241,170,903) .................................. 321 572 Net unrealized gains on securities ............. 533 627 Retained earnings .............................. 6,344 6,420 Cost of treasury stock ......................... (537) (860) Total shareholders' equity ................ 6,746 6,844 Total liabilities and equity .............. $77,387 $74,134 -5- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Condensed Statement of Cash Flows (Unaudited) (In millions) Six Months Ended June 30, 1997 1996 Operating activities Net cash provided by operating activities ... $ 910 $ 1,096 Investing activities Investment purchases .............................. (6,969) (5,341) Investment dispositions and repayments ............ 6,489 4,767 Finance receivable originations and purchases ..... (2,256) (2,403) Finance receivable principal payments received .... 2,146 2,530 Sale of finance receivables ....................... 733 - Net increase in short-term investments ............ (44) (74) Acquisition of Home Beneficial Life ............... (283) - Acquisition of Independent Life ................... - (106) Other, net ........................................ (15) (97) Net cash used for investing activities ...... (199) (724) Financing activities Retirement Services and Life Insurance Policyholder account deposits ................... 1,602 1,527 Policyholder account withdrawals ................ (1,460) (1,424) Total Retirement Services and Life Insurance . 142 103 Consumer Finance Net decrease in short-term debt ................. (348) (48) Long-term debt issuances ........................ 163 31 Long-term debt redemptions ...................... (711) (358) Total Consumer Finance ....................... (896) (375) Corporate Net increase in short-term debt ................. 135 212 Long-term debt redemptions ...................... - (50) Issuance of preferred securities of subsidiaries. 498 - Dividends on common and preferred stock ......... (162) (151) Common stock repurchases ........................ (365) (90) Other, net ...................................... 50 (2) Total Corporate .............................. 156 (81) Net cash used for financing activities ...... (598) (353) Net increase in cash ............................... 113 19 Cash at beginning of period ........................ 176 227 Cash at end of period .............................. $ 289 $ 246 Supplemental disclosure of cash flow information: Cash paid during the period for Income taxes .................................... $ 222 $ 202 -6- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Interest Corporate ..................................... 67 83 Consumer Finance .............................. 254 249 Dividends on preferred securities of subsidiaries ................................... 28 28 -7- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Notes to Consolidated Financial Statements June 30, 1997 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, consisting only of normal recurring accruals, that are necessary for a fair presentation of the company's consolidated financial position at June 30, 1997, the consolidated results of operations for the three months and six months ended June 30, 1997 and 1996, and the consolidated cash flows for the six months ended June 30, 1997 and 1996. All prior period consolidated financial statements of American General have been restated to include the results of operations, financial position, and cash flows of USLIFE Corporation (USLIFE) under the pooling of interests method of accounting in conjunction with the acquisition of USLIFE (See Note 2). 2. Acquisitions. Home Beneficial Life. On April 16, 1997, American General completed the acquisition of Home Beneficial Corporation, the holding company of Home Beneficial Life Insurance Company (Home Beneficial Life), for $665 million. The purchase price consisted of $283 million cash and 9.5 million shares of American General common stock. The acquisition was accounted for using the purchase method, and the results of operations and cash flows of Home Beneficial Life were included in the company's consolidated statements of income and cash flows from the date of acquisition. The acquired assets and liabilities were reflected in American General's consolidated balance sheet as of April 16, 1997, at management's best estimate of their fair values. Evaluation of fair values assigned to Home Beneficial Life's assets and liabilities, primarily related to insurance and employee benefit liabilities, is continuing, and allocation of the purchase price may be adjusted when additional information is available. -8- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 1. Financial Statements (continued). Noncash investing and financing activities related to the acquisition of Home Beneficial Life that are not reflected in the consolidated condensed statement of cash flows for the six months ended June 30, 1997 were as follows: (In millions) Fair value of assets acquired $1,433 Liabilities assumed (768) Issuance of common treasury shares (382) Net cash paid for acquisition of Home Beneficial Life $ 283 USLIFE. On June 17, 1997, American General completed its largest acquisition, the $1.8 billion merger of USLIFE in an all-stock transaction. American General issued 39.0 million shares of common stock, or 1.1069 shares in exchange for each USLIFE common share. The exchange ratio was based on the transaction price of $49 per USLIFE common share divided by an average trading price of American General common stock prior to closing. In addition to the issuance of common stock, American General assumed USLIFE's debt of approximately $600 million. The acquisition was accounted for using the pooling of interests method and, accordingly, American General's consolidated financial statements for all periods prior to the acquisition have been restated to include the results of operations, financial position, and cash flows of USLIFE. Revenues and net income for the individual entities were as follows: Six Months Quarter Ended June 30, Ended June 30, (In millions) 1997 1996 1997 1996 Revenues American General $3,471 $3,431 $1,779 $1,719 USLIFE 897 896 447 461 Total $4,368 $4,327 $2,226 $2,180 Net income (loss) American General (a) $ 205 $ 337 $ 24 $ 167 USLIFE (b) (119) 22 (148) (4) Total $ 86 $ 359 $ (124) $ 163 (a) Includes aftertax merger-related costs of $81 million and losses on assets held for sale and litigation of $106 million in the 1997 periods. (b) Includes aftertax merger-related costs of $166 million in the 1997 periods and write-down of group business of $32 million in the 1996 periods. -9- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 1. Financial Statements (continued). 3. Merger-Related Costs. The company recorded the following costs in second quarter 1997 related to the merger with USLIFE: (In millions) Pretax Aftertax Change in control costs $179 $155 Transaction costs 22 22 Restructuring costs 71 46 Deferred tax asset valuation allowance - 24 Total $272 $247 Change in control costs consist primarily of severance and supplemental retirement plan payments to USLIFE executives, payable under various USLIFE plans in effect prior to the merger. A substantial portion of these payments are considered excess parachute payments for tax purposes and are not tax deductible by the company. Transaction costs include expenses for investment bankers, attorneys, accountants, and proxy printing costs. Restructuring costs consist primarily of severance and the elimination of redundant facilities in connection with the merger and the concurrent development of a divisional structure (the Independent Producer division and the Career Agency division) within the Life Insurance segment. This new divisional structure will utilize shared products and administrative services in the Independent Producer division while retaining the distinct marketing attributes of individual subsidiaries. Severance and related costs of $34 million relate to the elimination of approximately 1,200 positions beginning in third quarter 1997. The positions to be eliminated relate to USLIFE's corporate operations and to administrative service functions that will be centralized within the Independent Producer division. Costs of $37 million to eliminate redundant facilities relate to contractual payments under lease obligations for facilities to be vacated, primarily those utilized by USLIFE's corporate operations, and the write-off of mainframe computer equipment and related software at various locations that will be centralized. A valuation allowance for the deferred tax asset related to a portion of USLIFE's net operating loss carryforward was required as a result of the USLIFE acquisition in second quarter 1997 since it is more likely than not that some portion of the deferred tax asset will not be realized. -10- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 1. Financial Statements (continued). 4. Losses on Assets Held for Sale. In June 1997, American General recorded a loss of $113 million ($73 million aftertax) related to disposition of non-strategic assets, consisting of a loss on the sale of underperforming credit card and private label finance receivable portfolios, and a charge relating to the planned sale of American General's land development operations and its small Canadian life insurance subsidiary. The loss on the sale of receivables primarily resulted from establishing a liability for estimated future payments to the purchaser of the credit card portfolio under a five-year loss sharing arrangement. 5. Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary (Preferred Securities). In March 1997, American General Institutional Capital B, a subsidiary trust of American General, issued 500,000 shares, or $500 million, of non-convertible preferred securities. These securities pay semi-annual cash dividends at an annual rate of 8- 1/8%. The sole assets of the subsidiary trust are Junior Subordinated Debentures (Subordinated Debentures) issued by American General. The subsidiary trust has no independent operations. The Subordinated Debentures are eliminated in the consolidated financial statements. The interest terms and other payment dates of the company's Subordinated Debentures held by the subsidiary trust correspond to those of the subsidiary trust's preferred securities. American General's obligations under the Subordinated Debentures and related agreements, when taken together, constitute a full and unconditional guarantee of payments due on the preferred securities. The Subordinated Debentures are redeemable at the option of the company. Upon such event, the preferred securities are redeemable on a proportionate basis. 6. Share Repurchase. On April 15, 1997, American General purchased 6.4 million shares of its common stock in an accelerated share repurchase transaction. The shares were purchased from an investment bank for $234 million based on the April 14, 1997 closing price of $36.50 per share, subject to a market price adjustment provision. In order to complete the transaction, the investment bank borrowed American General common stock and will purchase replacement shares in the open market. The ultimate price per share will be adjusted for changes in the market price of American General common stock prior to settlement and a reimbursement for dividends paid on the borrowed shares. The final purchase price is expected to be determined during third quarter 1997, and settled in either cash or shares of American General common stock at the company's option in fourth quarter 1997. The settlement cost, currently estimated at $88 million, will increase the cost of treasury stock as of the date the final purchase price is determined. This transaction, combined with 3.0 million shares repurchased since the announcement of the definitive agreement to acquire Home Beneficial Life, has the effect of repurchasing substantially all of the shares issued in the Home Beneficial Life acquisition. -11- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 1. Financial Statements (continued). 7. New Accounting Standards. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 128, "Earnings per Share." This statement, which changes certain requirements for computing and disclosing earnings per share, is effective for interim and annual periods ending after December 15, 1997. Earlier application is not permitted. Restatement for all periods presented will be required upon adoption. Application of this statement will change the company's disclosures related to earnings per share, but will not have a material impact on reported per share amounts. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. This statement is effective for interim and annual periods beginning after December 15, 1997. Reclassification of financial statements for all periods presented will be required upon adoption. Application of this statement will not change recognition or measurement of net income and, therefore, will not impact the company's consolidated results of operations or financial position. In June 1997, the FASB also issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," which changes the way companies report segment information. This statement is effective for years beginning after December 15, 1997, but need not be applied to interim financial statements in the initial year of application. Restatement of comparative information for all periods presented will be required upon adoption. Adoption of this statement will result in more detailed segment disclosures but will not have an impact on the company's consolidated results of operations or financial position. 8. Legal Contingencies. Two real estate subsidiaries of American General 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 for $47 million in compensatory damages and for $189 million in punitive damages. On September 17, 1993, a Texas state district court reduced the previously awarded punitive damages by $60 million, resulting in a reduced judgment in the amount of $176 million plus post-judgment interest of 10% from July 16, 1993. On January 29, 1996, the Texas First Court of Appeals rendered a decision that affirmed the trial court judgment and held both companies liable to pay the punitive damages. Pursuant to court-ordered mediation, the parties have agreed to a settlement of approximately $50 million as a final resolution of this lawsuit. As a result, American General recorded an aftertax charge of $33 million in second quarter 1997. -12- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 1. Financial Statements (continued). In April 1992, the Internal Revenue Service (IRS) issued Notices of Deficiency 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. In June 1993, a representative suit for refund was filed in the United States Court of Federal Claims. In February 1996, the court ruled in favor of the company on all legal issues related to this contingency, and the judgment entered in favor of the company for the portion of the contingency related to the representative case was appealed by the government. On July 9, 1997, the U.S. Court of Appeals for the Federal Circuit ruled in favor of the company. It is unknown whether the government will pursue any further appeal; however, the company intends to pursue a full refund of the amounts paid. Accordingly, no provision has been made in the company's consolidated financial statements related to this contingency. 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 in 1996 and 1997, asserting claims related to pricing and sales practices. These claims are being defended vigorously by the subsidiaries. Given the uncertain nature of litigation and the early stages of this litigation, the outcome of these actions 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; however, it is possible that settlements or adverse determinations in one or more of these actions or other future proceedings could have a material adverse effect on American General's consolidated results of operations for a given period. No provision has been made in the consolidated financial statements related to this pending litigation because the amount of loss, if any, from these actions cannot be reasonably estimated at this time. 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, such as Alabama, 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 jurisdictions like Alabama continues to increase and creates the potential for an unpredictable judgment in any given suit. -13- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 1. Financial Statements (continued). 9. Status of Federal Tax Return Examinations. The company and the majority of its subsidiaries file a consolidated federal income tax return. The IRS is currently examining the company's tax returns for 1988 through 1992. The 1988 tax year has been settled with the exception of two issues which may be pursued in the United States Tax Court. One issue from tax returns prior to 1988 has been the subject of litigation, as described in Note 8. In addition, certain of the tax returns of recently acquired companies are also being examined. Although the final outcome of these examinations is uncertain, the company believes that the ultimate liability, including interest, will not exceed amounts recorded in the consolidated financial statements. 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. SIGNIFICANT CORPORATE EVENTS Home Beneficial Life Acquisition. On April 16, 1997, the company acquired Home Beneficial Life for $665 million, consisting of $283 million cash and 9.5 million shares of American General common stock. The acquisition was accounted for using the purchase method and, accordingly, Life Insurance segment results for the six months and quarter ended June 30, 1997 presented herein include Home Beneficial Life's results from the date of acquisition. -14- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Share Repurchase. On April 15, 1997, American General purchased 6.4 million shares of its common stock in an accelerated share repurchase transaction. The shares were purchased from an investment bank for $234 million based upon the April 14, 1997 closing price of $36.50 per share, subject to a market price adjustment provision. The final purchase price is expected to be determined during third quarter 1997, and settled in either cash or shares of American General common stock at the company's option in fourth quarter 1997. The settlement cost, currently estimated at $88 million, will increase the cost of treasury stock as of the date the final purchase price is determined. This transaction, combined with 3.0 million shares repurchased since the announcement of the definitive agreement to acquire Home Beneficial Life, has the effect of repurchasing substantially all of the shares issued in the Home Beneficial Life acquisition. USLIFE Acquisition. On June 17, 1997, American General completed its largest acquisition, the $1.8 billion merger of USLIFE in an all-stock transaction. American General issued 39.0 million shares of common stock, or 1.1069 shares in exchange for each USLIFE common share. The merger was accounted for on a pooling of interests basis and, accordingly, American General's consolidated financial statements for prior periods presented in this Form 10-Q have been restated to present the combined operations of American General and USLIFE as if the acquisition had been in effect for all periods presented. Life Insurance Divisional Realignment. Following completion of the USLIFE merger, the company realigned its Life Insurance segment into two divisions based on distribution systems and market focus. The new divisions are the Independent Producer division and the Career Agency division. The divisional structure is designed to support the company's expanded distribution system while achieving operating efficiencies, improved product development, and enhanced customer service. Merger-Related Costs. In conjunction with the USLIFE acquisition and the Life Insurance segment divisional realignment, the company recorded an aftertax charge of $247 million in second quarter 1997, consisting of the following: (In millions) Pretax Aftertax Change in control costs $179 $155 Transaction costs 22 22 Restructuring costs 71 46 Deferred tax asset valuation allowance - 24 Total $272 $247 -15- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Change in control costs consist primarily of severance and supplemental retirement plan payments to USLIFE executives, payable under various USLIFE plans in effect prior to the merger. A substantial portion of these payments are considered excess parachute payments for tax purposes and are not tax deductible by the company. Transaction costs include expenses for investment bankers, attorneys, accountants, and proxy printing costs. Restructuring costs consist primarily of severance and the elimination of redundant facilities in connection with the merger and the concurrent development of a divisional structure (the Independent Producer division and the Career Agency division) within the Life Insurance segment. This new divisional structure will utilize shared products and administrative services in the Independent Producer division while retaining the distinct marketing attributes of individual subsidiaries. Severance and related costs of $34 million relate to the elimination of approximately 1,200 positions beginning in third quarter 1997. The positions to be eliminated relate to USLIFE's corporate operations and to administrative service functions that will be centralized within the Independent Producer division. Costs of $37 million to eliminate redundant facilities relate to contractual payments under lease obligations for facilities to be vacated, primarily those utilized by USLIFE's corporate operations, and the write-off of mainframe computer equipment and related software at various locations that will be centralized. The integration of USLIFE is expected to be completed within twelve months and should result in a reduction in operating expenses of approximately $50 million. A valuation allowance for the deferred tax asset related to a portion of USLIFE's net operating loss carryforward was required as a result of the USLIFE acquisition in second quarter 1997 since it is more likely than not that some portion of the deferred tax asset will not be realized. Disposition of Non-Strategic Assets. On July 10, 1997, American General announced the disposition of certain non-strategic assets including underperforming credit card and private label finance receivable portfolios, its land development business, and a small Canadian life insurance company. In conjunction with the sale or planned sale of these non-strategic assets, the company recorded an aftertax charge of $73 million in second quarter 1997. Settlement of Litigation. In June 1997, the company agreed to a settlement of approximately $50 million as final resolution of a lawsuit with an outstanding judgment of $176 million plus post-judgment interest of 10% from July 16, 1993. As a result, the company recorded a $33 million aftertax charge in second quarter 1997. -16- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). CONSOLIDATED RESULTS OF OPERATIONS Six Months Ended Quarter Ended (In millions, June 30, June 30, except share data) 1997 1996 1997 1996 Net income (loss) $ 86 $ 359 $ (124) $ 163 Net income (loss) per share .36 1.44 (.49) .65 Net income (loss) for the quarter and six months ended June 30, 1997 reflected aftertax non-recurring charges totaling $353 million ($1.41 per share). The charges included merger-related costs of $247 million in conjunction with the USLIFE acquisition and the Life Insurance segment divisional realignment, $73 million in losses on non-strategic assets sold or held for sale, and $33 million for settlement of pending litigation by a real estate subsidiary of American General. Net income for the prior year's quarter and six months ended June 30, 1996 reflected a $32 million ($.13 per share) aftertax charge to recognize revised assumptions reflecting current experience on USLIFE's traditional indemnity group major medical business. Excluding the non-recurring charges in 1997 and 1996, net income increased $48 million, or 12%, and $34 million, or 17%, for the first six months and second quarter of 1997, respectively, compared to the same periods in 1996, primarily due to improved business segment earnings in both periods and realized gains from the sale of invested assets in second quarter 1997. BUSINESS SEGMENTS The company reports its business operations in three segments. To facilitate meaningful period-to-period comparisons, earnings of each business segment include earnings from its business operations and earnings on that amount of equity considered necessary to support its business, and exclude net realized investment gains (losses) and other non-recurring items. -17- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Segment earnings were as follows: Six Months Ended Quarter Ended June 30, June 30, (In millions) 1997 1996 1997 1996 Retirement Services $127 $118 $ 64 $ 58 Life Insurance (a) 285 267 143 140 Consumer Finance (b) 79 59 40 31 Segment earnings $491 $444 $247 $229 (a) Excludes aftertax charges of $46 million for restructuring costs in the 1997 periods and $32 million for write-down of USLIFE group business in the 1996 periods. (b) Excludes aftertax losses on assets held for sale of $27 million in the 1997 periods. A discussion of each segment's results follows. The reasons for any significant variations between the quarters ended June 30, 1997 and 1996 are the same as those discussed below for the respective six month periods, unless otherwise noted. Retirement Services The Retirement Services segment offers retirement products and planning services to employees of educational, health care, public sector, and other not-for-profit organizations. Asset growth through sales and deposits, as well as management of the investment spread and operating expenses, contribute to the segment's profitability. Segment results were as follows: Six Months Ended Quarter Ended June 30, June 30, (In millions) 1997 1996 1997 1996 Segment earnings $ 127 $ 118 $ 64 $ 58 Assets Investments 22,703 21,352 22,703 21,352 Separate Accounts 8,902 5,829 8,902 5,829 Sales 795 576 347 269 Deposits Fixed 844 811 419 384 Variable 862 593 441 311 -18- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Segment earnings for the six months ended June 30, 1997, compared to the same period of 1996, increased 7%, primarily due to asset growth over the past twelve months. Asset growth, excluding the fair value adjustment to securities, was $4.4 billion, or 16%, from June 30, 1996 to June 30, 1997 and $2.6 billion, or 9%, from December 31, 1996, reflecting strong sales, an increase in total deposits, and market appreciation in Separate Accounts. Sales for the six months ended June 30, 1997 increased $219 million, or 38%, compared to the same period in 1996, primarily due to increased sales of the Portfolio Director annuity product, which accounted for 72% of total deposits for the first six months of 1997 compared to 56% in the comparable 1996 period. Variable deposits increased 45% for the six months ended June 30, 1997, compared to the same period in 1996, as a result of policyholders' demand for equity investments due to the strong performance of the stock market. The segment's Separate Account assets, which relate to variable account options, increased $3.1 billion from June 30, 1996 to June 30, 1997 and $1.8 billion from December 31, 1996, reflecting both the increased sales and the strong market appreciation. Investment results and crediting rates on fixed accounts were as follows: Six Months Ended Quarter Ended June 30, June 30, ($ in millions) 1997 1996 1997 1996 Net investment income $ 845 $ 822 $ 425 $ 411 Investment yield 7.91% 8.08% 7.89% 8.05% Average crediting rate 6.13 6.24 6.09 6.22 Investment spread on fixed accounts 1.78 1.84 1.80 1.83 Net investment income, the primary component of revenues, increased 3% for the first six months of 1997 compared to the same period of 1996, reflecting growth in invested assets, partially offset by a decrease in investment yield. Investment yield for the six months ended June 30, 1997 decreased 17 basis points compared to the same period in 1996. In response to the declining yield, the company adjusted the rates credited to its policyholders during 1997. As a result, the investment spread on fixed accounts declined only 6 basis points in comparison to the first six months of 1996 and 3 basis points for second quarter 1997 compared to second quarter 1996. The rate of policyholder surrenders of fixed accounts was 5.39% of average reserves for the first six months of 1997 compared to 5.31% for the same period in 1996. The surrender rate for second quarter 1997 of 5.05% was an improvement over both the first quarter 1997 and second quarter 1996 rates of 5.74% and 5.18%, respectively. -19- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). The ratio of operating expenses to average assets improved to .48% for the first half of 1997 from .51% for the same period of 1996 due to an increase in average assets, which more than offset an increase in operating expenses primarily related to data processing expenses. Life Insurance The Life Insurance segment provides traditional and interest-sensitive life insurance and annuities to three defined markets, based on household income and product needs. In second quarter 1997, the segment was aligned into two divisions, the Independent Producer division and the Career Agency division, based on distribution system and market focus. Recent acquisitions of companies that complement the segment's existing markets and distribution systems have contributed to growth and profitability. Segment profitability is a function of premiums, investment spread, mortality, and operating expenses. Segment results were as follows: Six Months Ended Quarter Ended June 30, June 30, (In millions) 1997 1996 1997 1996 Segment earnings * $ 285 $ 267 $ 143 $ 140 Premiums and other considerations 1,490 1,467 760 754 Assets 34,087 32,074 34,087 32,074 Net investment income 1,034 1,000 524 508 * Excludes aftertax charges of $46 million for restructuring costs in the 1997 periods and $32 million for write-down of USLIFE group business in the 1996 periods. Segment earnings for the first six months of 1997 increased 7% compared to the same period of 1996 and increased 2% for the comparable quarter-to-date periods. The increase was due to additional earnings in the Career Agency division, generated by the acquisition of Home Beneficial Life (acquired April 16, 1997) and Independent Life (acquired February 29, 1996), and growth in policyholder funds through increased life insurance sales in the Independent Producer division. The earnings from acquisitions and growth, which increased premiums and net investment income, were partially offset by higher amortization of deferred policy acquisition costs related to growth in the interest-sensitive life insurance business. Asset growth, excluding the fair value adjustment to securities, was $1.7 billion, or 5%, from June 30, 1996 to June 30, 1997 and $1.4 billion, or 4%, from December 31, 1996, primarily due to the acquisition of Home Beneficial Life, increased sales, and additional deposits. -20- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Net investment income increased $34 million for the first six months of 1997 compared to the same period in 1996, primarily due to growth in average assets including Home Beneficial Life. Year-to-date investment yields decreased in both divisions, primarily due to lower interest rates on new investment purchases. Information regarding sales and deposits was as follows: Six Months Ended Quarter Ended June 30, June 30, (In millions) 1997 1996 1997 1996 Life Insurance Sales $ 257 $ 240 $ 141 $ 126 Deposits 565 531 284 264 Annuities Sales 194 202 98 99 Deposits 251 242 117 124 Life insurance sales and deposits for the first six months of 1997 exceeded comparable 1996 amounts by 7%, due to a number of new marketing initiatives and the acquisition of Home Beneficial Life. Annuity sales for the six months ended June 30, 1997 were 4% below comparable prior year sales, primarily due to increasingly competitive market conditions. Annuity deposits for such periods increased 4% primarily due to increased structured settlement sales. Death claims, included in insurance and annuity benefits, increased 4% from 1996 to 1997, primarily due to the acquisitions of Independent Life and Home Beneficial Life. Death claims per $1,000 of in force were $3.37 for the first six months of 1997 compared to $3.38 for the same period in 1996. Overall, mortality experience was within product pricing assumptions. The ratio of operating expenses to direct premiums and deposits increased to 16.49% for the first six months of 1997, compared to 15.73% for the same period in 1996. The increase was primarily due to Home Beneficial Life's and Independent Life's expense ratios exceeding those of the company's other life insurance subsidiaries. While anticipated expense savings from consolidation of these acquired companies' operations are proceeding as expected, the expense savings have not been fully realized to date. In addition, the segment experienced higher technology and marketing expenses. The expense ratios for second quarter 1997 declined slightly compared to the same period of 1996, due to expense reductions at Independent Life and higher life insurance deposits. -21- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Consumer Finance The Consumer Finance segment provides consumer and home equity loans and other credit-related products. Segment results are influenced by the amount and mix of finance receivables, credit quality, borrowing cost, and operating expenses. Segment results were as follows: Six Months Ended Quarter Ended June 30, June 30, ($ in millions) 1997 1996 1997 1996 Segment earnings * $ 79 $ 59 $ 40 $ 31 Finance receivables 7,407 8,053 7,407 8,053 Yield on finance receivables 17.02% 18.13% 16.95% 18.13% Borrowing cost 6.76 6.91 6.82 6.89 Spread 10.26 11.22 10.13 11.24 * Excludes aftertax losses on assets held for sale of $27 million in the 1997 periods. Segment earnings were above prior period levels, primarily due to an improvement in credit quality during the first half of 1997. Segment earnings for the six months ended June 30, 1997 increased $20 million, or 34%, compared to the same period of 1996. For second quarter 1997, segment earnings were up $9 million, or 31%, compared to second quarter 1996. The company's strategy in prior years of emphasizing higher-yielding receivables, with higher credit risk, resulted in higher than anticipated levels of delinquencies and charge offs beginning in third quarter 1995. The company responded by initiating an action program to improve credit quality, beginning with a comprehensive review of the consumer finance operations in fourth quarter 1995. This review indicated a need for an increase in the allowance for losses on finance receivables. As a result, the company increased the allowance $216 million ($140 million aftertax) in fourth quarter 1995. Other components of the action program included raising underwriting standards, slowing branch expansion, increasing collection efforts, and rebalancing the finance receivable portfolio to increase the proportion of real estate-secured receivables. During the last six months of 1996, the company purchased real estate-secured receivables totaling $553 million, which increased the proportion of these receivables to 52% at June 30, 1997, compared to 39% at June 30, 1996. -22- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Total finance receivables decreased $218 million from December 31, 1996 to June 30, 1997 and $646 million during the twelve months ended June 30, 1997. All lines of receivables, except for real estate-secured consumer loans, decreased compared to December 31, 1996 and June 30, 1996. The decreases were due to management's action program to improve credit quality, and the reclassification of certain finance receivable portfolios to assets held for sale in December 1996. These portfolios consisted of $520 million of bank credit card receivables and $355 million of private label finance receivables at December 31, 1996. The company recognized an aftertax charge of $93 million in fourth quarter 1996 related to the assets held for sale. In April 1997, the company repurchased $100 million of private label and credit card receivables that previously had been sold through securitization, and offered $70 million of that portfolio for sale with the company's other finance receivables held for sale. In June 1997, the company sold all of the assets held for sale (with a remaining balance of $658 million) and $81 million of other private label finance receivables. In connection with these sales, the company took an aftertax charge of $27 million in second quarter 1997. This additional loss primarily resulted from establishing a liability for estimated future payments to the purchaser of the credit card portfolio under a five-year loss sharing arrangement. Finance charge revenues decreased $99 million for the first six months of 1997 and $48 million for the second quarter of 1997, compared to the same periods in 1996, due to lower average receivables, combined with a decline in the yield on finance receivables. The yield on finance receivables declined 111 basis points for the first six months of 1997 and declined 118 basis points for the second quarter of 1997, compared to the same periods in 1996. The yield decline resulted from the change in the portfolio mix to a higher proportion of real estate-secured loans, which generally have lower yields, partially offset by the decreased proportion of non-accrual delinquent finance receivables during 1997. The spread between yield and borrowing cost decreased 96 basis points and 111 basis points for the first six months of 1997 and the second quarter of 1997, respectively, compared to the same periods of 1996. These declines resulted from a decrease in yield, partially offset by lower borrowing costs. -23- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Charge offs, delinquencies, and the allowance for finance receivable losses were as follows: Six Months Ended Quarter Ended June 30, June 30, ($ in millions) 1997 1996 1997 1996 Charge offs $ 141 $ 221 $ 68 $ 107 % of average finance receivables 3.76% 5.41% 3.68% 5.33% June 30, 1997 1996 Delinquencies $ 300 $ 350 % of finance receivables 3.73% 3.99% Allowance for finance receivable losses $ 385 $ 482 % of finance receivables 5.20% 5.99% The charge off, delinquency, and allowance ratios decreased for the six months ended June 30, 1997 compared to the same period in 1996, primarily due to improved credit quality related to the increased proportion of real estate- secured receivables and the reclassification and sale of non-strategic, underperforming finance receivable portfolios. Excluding the portfolios held for sale, the charge off and delinquency ratios were 4.61% and 3.77%, respectively, for the six months ended June 30, 1996. The delinquency ratio decreased 10 basis points from 3.83% at December 31, 1996, to 3.73% at June 30, 1997. Excluding the receivable portfolios reclassified to assets held for sale, the charge off ratio decreased from 5.03% for fourth quarter 1996 and 3.83% for first quarter 1997 to 3.68% for second quarter 1997. These decreases resulted from the positive impact of management's action program to improve credit quality. The allowance ratio increased 2 basis points from 5.18% at December 31, 1996 to 5.20% at June 30, 1997 due to a decrease in average finance receivables, partially offset by a $10 million decrease in the allowance for finance receivable losses in 1997 resulting from improved credit quality of the receivables portfolio. Operating expenses decreased $27 million, or 11%, for the six months ended June 30, 1997, compared to the same period in 1996. As a percentage of average finance receivables, operating expenses were 6.06% and 6.29% for the six months ended June 30, 1997 and 1996, respectively. The decrease in operating expenses was primarily due to exclusion of the operating expenses associated with servicing the portfolios held for sale, decreased collection expenses, and lower expenses due to workforce reduction, partially offset by a decrease in deferral of finance receivable origination costs. -24- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). INVESTMENTS Invested assets consist primarily of fixed maturity securities, mortgage loans on real estate, policy loans, and investment real estate. 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. Fair Value of Securities (SFAS 115). The components of the adjustment to report securities at fair value at June 30, 1997 and December 31, 1996, and the change, were as follows: June 30, December 31, (In millions) 1997 1996 Change Fair value adjustment to securities $ 1,333 $ 1,514 $ (181) Adjusted by: Decrease in DPAC/CIP (510) (598) 88 Increase in deferred income taxes (301) (348) 47 Equity in WNC's unrealized gains 11 59 (48) Net unrealized gains on securities $ 533 $ 627 $ (94) Accounting rules do not permit adjustment to fair value of the insurance liabilities supported by these securities, thereby creating volatility in shareholders' equity as interest rates change. Care should be exercised in drawing conclusions based on balance sheet amounts that are only partially adjusted to fair value. Fixed Maturity Securities. Fixed maturity securities represented 87% of invested assets at June 30, 1997. Information regarding the fixed maturity securities portfolio, which included bonds and redeemable preferred stocks, at June 30, 1997 was as follows: June 30, Average Credit (In millions) 1997 % Rating Investment grade $34,869 76% A Mortgage-backed 9,308 20 AAA Below investment grade 1,808 4 BB- Total fixed maturities $45,985 100% A+ -25- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Mortgage-backed securities (MBSs), consisting principally of collateralized mortgage obligations, are purchased to diversify the portfolio risk characteristics from primarily corporate credit risk to a mix of credit and cash flow risk. MBSs represented 20% and 24% of fixed maturity securities at June 30, 1997 and December 31, 1996, respectively. The reduction represents the company's actions to reduce its exposure to cash flow risk associated with these investments. Below investment grade fixed maturity securities, those rated below BBB-, were $1.8 billion at June 30, 1997 and $1.7 billion at December 31, 1996. These investments represented 4% of total fixed maturity securities at both balance sheet dates. Net investment income from below investment grade fixed maturity securities, including realized investment gains and losses, was $58 million and $53 million for the first six months of 1997 and 1996, respectively. Non-performing fixed maturity securities, defined as securities for which payment of interest is sufficiently uncertain as to preclude accrual of interest, represented less than .01% of total fixed maturity securities at June 30, 1997 and December 31, 1996. Mortgage Loans. Mortgage loans on real estate represented 6% of invested assets at June 30, 1997. Information regarding the mortgage loan portfolio at June 30, 1997 was as follows: June 30, Non-Performing Loans (In millions) 1997 Amount % Commercial loans $ 3,460 $ 184 5.3% Allowance for losses (71) (30) Total mortgage loans $ 3,389 $ 154 Non-performing mortgage loans include loans delinquent 60 days or more and commercial loans that have been restructured and are currently performing under the modified terms. These loans represented 5.3% of total commercial loans at June 30, 1997, compared to 5.1% at December 31, 1996. At June 30, 1997, $197 million of performing commercial mortgage loans were included on the company's watch list because they were either delinquent 30-59 days, the borrower was in bankruptcy, or the loan was determined to be under- collateralized. This amount compares to $282 million at December 31, 1996. The decrease in the watch list amount was primarily due to loans that are no longer undercollaterized or were reinstated, refinanced, or repaid. While the watch list loans may be predictive of higher non-performing loans in the future, the company does not anticipate a significant effect on operations, liquidity, or capital from these loans. -26- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Realized Investment Gains (Losses). Realized investment gains (losses) were as follows: Six Months Ended June 30, (In millions) 1997 1996 Sales Fixed maturity securities $ (14) $(16) Equity securities 4 40 Real estate and other long-term investments 19 8 Write-downs/reserve changes 6 (3) Other (1) 2 Total realized investment gains (losses) $ 14 $ 31 The 1997 write-downs/reserve changes resulted from the reversal of allowances on mortgage loans due to improved credit quality. The 1996 write- downs/reserve changes related to fixed maturity securities and mortgage loans. Investment Real Estate. Investment real estate consists of land development projects, income-producing real estate, foreclosed real estate, and the American General Center, an office complex in Houston. In June 1997, the company signed a definitive agreement to sell the majority of its land development projects; the sale is expected to close in August 1997. In conjunction with the sale of these non-strategic assets, the company recognized an aftertax loss of approximately $45 million, including expenses associated with the sale, in second quarter 1997. CAPITAL RESOURCES Corporate Debt. Corporate debt is incurred primarily to fund acquisitions, share repurchases, and capital needs of subsidiaries. Corporate debt increased $136 million from December 31, 1996 to June 30, 1997, primarily due to an increase in borrowings to fund repurchases of American General's common stock and the Home Beneficial Life acquisition, partially offset by the net proceeds from the March 1997 issuance of 8-1/8% preferred securities. Interest expense on corporate debt decreased $4 million, or 3%, for the six months ended June 30, 1997 compared to the same period in 1996. The decrease relates to lower average short-term borrowings from the use of the proceeds of preferred securities issued in December 1996 and March 1997 to reduce short- term debt. -27- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). The ratio of corporate debt to corporate capital (excluding the fair value adjustment to securities) was 22.0% at June 30, 1997 and December 31, 1996. Management expects to maintain the ratio at or below 25% during the remainder of 1997. Consumer Finance Debt. The capital of American General's Consumer Finance segment varies directly with the amount of finance receivables outstanding. The mix of capital between debt and equity is based primarily on maintaining leverage at a level that supports cost-effective funding. Consumer finance debt decreased $896 million from December 31, 1996 to June 30, 1997, primarily due to the decline in finance receivables and management's actions to return the Consumer Finance segment's debt to tangible net worth ratio to the target level of 7.5 to 1. Interest expense on Consumer Finance debt decreased $21 million, or 9%, for the six months ended June 30, 1997 compared to the same period in 1996, primarily due to the reclassification of interest expense to assets held for sale. Redeemable Equity. Redeemable equity increased $498 million from December 31, 1996 to June 30, 1997, due to the March 1997 issuance of 8-1/8% preferred securities. Net proceeds from this issuance were used to reduce short-term debt. Shareholders' Equity. Shareholders' equity decreased from $6.8 billion at December 31, 1996 to $6.7 billion at June 30, 1997, primarily due to the $94 million decrease in net unrealized gains on securities. Due to the requirements of certain accounting rules, shareholders' equity will be subject to future volatility from the effects of interest rate fluctuations on the fair value of securities (see "Investments - Fair Value of Securities (SFAS 115)" on page 22). Rating Agencies. As a result of the acquisition of USLIFE, Standard & Poor's (S&P), Duff & Phelps (D&P), Moody's, and A.M. Best conducted reviews of the debt, preferred securities, and claims-paying ability ratings of American General and its subsidiaries. Based on these reviews, several ratings changed and all ratings were subsequently removed from review by the rating agencies. -28- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). As of August 12, 1997, the ratings were as follows: S&P D&P Moody's A.M. Best Debt and preferred securities ratings: American General Corporation Commercial paper A-1+ D-1+ P-1 Long-term debt AA- AA- A2 Preferred securities A+ A a2 American General Finance Corporation Commercial paper A-1 D-1+ P-1 Long-term debt A+ A+ A2 Claims-paying ability ratings: All American Life AA+ Aa3 A+ American General Life and Accident AA+ AAA A++ American General Life AA+ AAA Aa3 A++ Franklin Life AA+ AAA Aa3 A++ Old Line Life AA+ Aa3 A+ United States Life AA+ Aa3 A+ VALIC AA+ AAA Aa2 A++ LIQUIDITY Management believes that the overall sources of cash and liquidity available to the company will continue to be sufficient to satisfy its foreseeable financial obligations. Dividends from subsidiaries are one of the primary sources of cash for the parent company's operating requirements and are used to fund debt repayments, dividends to shareholders, acquisitions, and repurchases of American General's common stock. American General'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. -29- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Parent Company Cash Flows Six Months Ended June 30, (In millions) 1997 1996 Net cash provided by operating activities $ 251 $ 187 Dividends paid by Life Insurance and Retirement Services segments 210 163 Dividends paid by Consumer Finance segment 106 57 Net cash provided by operating activities increased in the first half of 1997 compared to the same period in 1996 primarily due to dividends paid to American General by its subsidiaries. During the first six months of 1997, the Life Insurance and Retirement Services segments paid $353 million of cash dividends to subsidiaries of American General, of which $210 million was dividended to the parent company. Segment Cash Flows Six Months Ended June 30, (In millions) 1997 1996 Life Insurance and Retirement Services Net cash provided by operating activities $1,021 $ 927 Net cash provided by policyholder account deposits, net of withdrawals Fixed 142 103 Variable 911 908 Consumer Finance Net cash provided by operating activities 283 335 Net cash flows generated by the Life Insurance and Retirement Services segments include cash provided by operating activities and fixed policyholder account deposits, net of withdrawals. Cash flows from these sources in the first half of 1997 compared to 1996 increased by $133 million due to increases in premiums and net investment income. These increases were partially offset by an increase in operating expenses due to the addition of Independent Life's and Home Beneficial Life's operating expenses in 1997. Variable account deposits (including transfers from fixed accounts), net of withdrawals, increased $3 million in the first six months of 1997 compared to the prior year period. These net deposits, which relate to Separate Accounts and are excluded from the company's consolidated condensed statement of cash flows, were relatively flat due to an increase in variable deposits of $269 million, offset by an increase in withdrawals of $78 million and a decrease in transfers from fixed accounts of $188 million. -30- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). The Consumer Finance segment's cash provided by operating activities decreased $52 million in the first six months of 1997 compared to the first six months of 1996 primarily due to decreased finance charge revenues attributable to lower average net receivables. Consolidated Operating Activities. Net cash flows from operating activities on a consolidated basis decreased $186 million in the six months ended June 30, 1997 compared to the same period in 1996. This decrease primarily related to the payment of change in control costs by an intermediate holding company, partially offset by the increases in parent company and segment operating cash flows discussed above. Investing Activities. Cash flows related to investing activities were as follows: Calls, Maturities, Purchases and Sales Six Months Ended Six Months Ended (In millions) June 30, June 30, 1997 1996 1997 1996 Fixed maturity securities $6,728 $5,049 $5,848 $4,317 Mortgage loans 198 237 433 224 Equity securities 2 1 65 145 Other 41 54 143 81 Total $6,969 $5,341 $6,489 $4,767 Credit Facilities. American General and certain of its subsidiaries use commercial paper to meet short-term funding requirements. Unsecured bank credit facilities are used to support commercial paper borrowings. At June 30, 1997, committed credit facilities totaled $3.8 billion, and there were no borrowings under these facilities. -31- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). FORWARD-LOOKING STATEMENTS The statements contained in this filing on Form 10-Q that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. 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: changes in general economic conditions, including the performance of financial markets, interest rates, and the level of personal bankruptcies; customer responsiveness to both new products and distribution channels; competitive, regulatory, or tax changes that affect the cost of or demand for the company's products; adverse litigation results; and 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. The Consumer Finance segment's future results also could be adversely affected if finance receivable delinquencies and net charge offs increase or fail to achieve levels anticipated by management, despite the company's initiatives to improve credit quality. Investors are also directed to other risks and uncertainties discussed in documents filed by the company with the Securities and Exchange Commission. -32- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 PART II. OTHER INFORMATION Item 1. Legal Proceedings. As reported initially in the company's Report on Form 8-K dated March 5, 1993 and in subsequent reports, two real estate subsidiaries of American General were defendants in a lawsuit, Avia Development Group et al. v. American General Realty Investment Corp., et al. (filed in the 61st District Court of Harris County, Texas, September 23, 1991), 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 for $47 million in compensatory damages and for $189 million in punitive damages. On September 17, 1993, a Texas state district court reduced the previously awarded punitive damages by $60 million, resulting in a reduced judgment in the amount of $176 million plus post-judgment interest of 10% from July 16, 1993. On January 29, 1996, the Texas First Court of Appeals rendered a decision that affirmed the trial court judgment and held both companies liable to pay the punitive damages. Pursuant to court-ordered mediation, the parties have agreed to a settlement of approximately $50 million as a final resolution of this lawsuit. As a result, American General recorded an aftertax charge of $33 million in second quarter 1997. In April 1992, the IRS issued Notices of Deficiency 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. In June 1993, a representative suit for refund was filed in the United States Court of Federal Claims (Gulf Life Insurance Co. v. United States, C.A. No. 93-404T). In February 1996, the court ruled in favor of the company on all legal issues related to this contingency, and the judgment entered in favor of the company for the portion of the contingency related to the representative case was appealed by the government. On July 9, 1997, the U.S. Court of Appeals for the Federal Circuit ruled in favor of the company. It is unknown whether the government will pursue any further appeal; however, the company intends to pursue a full refund of the amounts paid. -33- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 1. Legal Proceedings (continued). 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 in 1996 and 1997, asserting claims related to pricing and sales practices. These claims are being defended vigorously by the subsidiaries. Given the uncertain nature of litigation and the early stages of this litigation, the outcome of these actions 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; however, it is possible that settlements or adverse determinations in one or more of these actions or other future proceedings could have a material adverse effect on American General's consolidated results of operations for a given period. No provision has been made in the consolidated financial statements related to this pending litigation because the amount of the loss, if any, from these actions cannot be reasonably estimated at this time. In addition to those lawsuits or proceedings disclosed herein and in the company's 1996 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, such as Alabama, 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 jurisdictions like Alabama continues to increase and creates the potential for an unpredictable judgment in any given suit. -34- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 4. Submission of Matters to a Vote of Security Holders Annual Meeting. On April 24, 1997, American General held its annual meeting of shareholders. As of that date, shareholders of the company's common and preferred shares outstanding were entitled to 202,956,489 votes. At the meeting, the company's shareholders voted on the following matters: (i) election of ten directors, constituting the company's entire board, for one-year terms; (ii) approval of the American General Corporation 1997 Stock and Incentive Plan; and (iii) ratification of the appointment of Ernst & Young LLP as independent auditors for 1997. Each matter was approved by the shareholders. The votes cast for, against, and abstentions as to each such matter were as follows: Votes For Votes Against Abstentions ELECTION OF DIRECTORS: J. Evans Attwell 177,572,734 1,657,061 - Brady F. Carruth 178,070,315 1,159,480 - James S. D'Agostino Jr. 178,060,666 1,169,129 - W. Lipscomb Davis Jr. 178,081,554 1,148,241 - Robert M. Devlin 178,029,681 1,200,114 - Larry D. Horner 178,051,287 1,178,508 - Richard J. V. Johnson 178,075,722 1,154,073 - Jon P. Newton 178,060,638 1,169,157 - Robert E. Smittcamp 178,088,317 1,141,478 - Anne M. Tatlock 178,055,365 1,174,430 - STOCK AND INCENTIVE PLAN: 171,157,624 6,820,664 1,251,507 INDEPENDENT AUDITORS: 178,573,414 211,440 444,941 A more detailed description of the matters voted on by shareholders of the company at this meeting is included in the definitive Proxy Statement dated March 18, 1997 and incorporated herein by reference. -35- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Item 4. Submission of Matters to a Vote of Security Holders (continued). Special Meeting. On June 17, 1997, American General held a special meeting of shareholders. As of that date, shareholders of the company's common and preferred shares outstanding were entitled to 205,606,320 votes. At the meeting, the company's shareholders voted in favor of the proposal to approve the issuance of American General common stock (estimated to be a minimum of approximately 39 million and a maximum of approximately 47 million shares) as consideration in the acquisition of USLIFE. The votes cast for, against, and abstentions were as follows: Votes For Votes Against Abstentions ISSUANCE OF STOCK: 159,832,158 754,466 703,565 Additional information concerning the matter put forward at this meeting is included in the company's Form S-4 (File No. 333-27361) filed with the Securities and Exchange Commission on May 19, 1997 and incorporated herein by reference. A more detailed description of the transaction voted on by shareholders of the company at this meeting is included in the definitive Joint Proxy/Prospectus dated May 19, 1997 and incorporated herein by reference. 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. None. -36- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 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 14, 1997 -37- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 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. -38- EX-11 2 AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1997 Exhibit 11 COMPUTATION OF EARNINGS PER SHARE (Unaudited) (In millions, except share data) Six Months Ended June 30, 1997 1996 Primary: Net income available to common stock ....... $ 86 $ 359 Average shares outstanding Common stock ............................. 240,786,060 243,831,111 Assumed conversion of convertible preferred stock ........................ 1,969,035 1,366,707 Assumed exercise of stock options ........ 1,114,004 1,001,664 Total .................................. 243,869,099 246,199,482 Net income per share ....................... $ .36 $1.46 Fully Diluted: Net income ................................. $ 86 $ 359 Plus: Net dividends on convertible preferred securities of subsidiary ........ 5 5 Net income available to common stock ... $ 91 $ 364 Average shares outstanding Common stock ............................. 240,786,060 243,831,111 Assumed conversion of convertible preferred securities of subsidiary ..... 6,144,016 6,144,016 Assumed conversion of convertible preferred stock ........................ 2,371,387 1,636,416 Assumed exercise of stock options ........ 1,364,362 1,134,888 Total .................................. 250,665,825 252,746,431 Net income per share ....................... $ .36 $1.44 EX-12 3 Exhibit 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Unaudited) ($ in millions) Six Months Ended June 30, 1997 1996 Consolidated operations: Income before income tax expense and net dividends on preferred securities .......................... $ 305 $ 584 Undistributed income of equity investee ............ (23) (15) Fixed charges deducted from income Interest expense ................................. 326 331 Implicit interest in rents ....................... 10 11 Total fixed charges deducted from income ....... 336 342 Earnings available for fixed charges.......... $ 618 $ 911 Fixed charges per above ............................ $ 336 $ 342 Capitalized interest ............................... 6 6 Total fixed charges ............................ 342 348 Dividends on preferred stock and securities .... 65 32 Combined fixed charges and preferred stock dividends ............................ $ 407 $ 380 Ratio of earnings to fixed charges ......... 1.80 2.62 Ratio of earnings to combined fixed charges and preferred stock dividends ............ 1.52 2.40 Consolidated operations, corporate fixed charges and preferred stock dividends only: Income before income tax expense and net dividends on preferred securities ........................ $ 305 $ 584 Undistributed income of equity investee .......... (23) (15) Corporate fixed charges deducted from income - corporate interest expense ..................... 87 89 Earnings available for fixed charges ........... $ 369 $ 658 Total corporate fixed charges per above .......... $ 87 $ 89 Capitalized interest related to real estate operations ..................................... 5 5 Total corporate fixed charges .................. 92 94 Dividends on preferred stock and securities .... 65 32 Combined corporate fixed charges and preferred stock dividends .................. $ 157 $ 126 Ratio of earnings to corporate fixed charges 3.99 6.98 Ratio of earnings to combined corporate fixed charges and preferred stock dividends ................................ 2.35 5.23 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) Six Months Ended June 30, 1997 1996 American General Finance: Income before income tax expense ................... $ 83 $ 92 Fixed charges deducted from income Interest expense ................................. 249 247 Implicit interest in rents ....................... 5 6 Total fixed charges deducted from income ....... 254 253 Earnings available for fixed charges ......... $ 337 $ 345 Ratio of earnings to fixed charges ......... 1.33 1.36 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, 1997 1996 Consolidated operations: Income (loss) before income tax expense and net dividends on preferred securities ................ $ (46) $ 269 Undistributed income of equity investee ............ (11) (8) Fixed charges deducted from income Interest expense ................................. 164 164 Implicit interest in rents ....................... 5 6 Total fixed charges deducted from income ....... 169 170 Earnings available for fixed charges.......... $ 112 $ 431 Fixed charges per above ............................ $ 169 $ 170 Capitalized interest ............................... 3 3 Total fixed charges ............................ 172 173 Dividends on preferred stock and securities .... 37 17 Combined fixed charges and preferred stock dividends ............................ $ 209 $ 190 Ratio of earnings to fixed charges ......... -* 2.50 Ratio of earnings to combined fixed charges and preferred stock dividends ............ -* 2.27 Consolidated operations, corporate fixed charges and preferred stock dividends only: Income (loss) before income tax expense and net dividends on preferred securities .............. $ (46) $ 269 Undistributed income of equity investee .......... (11) (8) Corporate fixed charges deducted from income - corporate interest expense ..................... 47 45 Earnings available for fixed charges ........... $ (10) $ 306 Total corporate fixed charges per above .......... $ 47 $ 45 Capitalized interest related to real estate operations ..................................... 2 2 Total corporate fixed charges .................. 49 47 Dividends on preferred stock and securities .... 37 17 Combined corporate fixed charges and preferred stock dividends .................. $ 86 $ 64 Ratio of earnings to corporate fixed charges -* 6.43 Ratio of earnings to combined corporate fixed charges and preferred stock dividends ................................ -* 4.73 * Earnings were inadequate to cover fixed charges. The amount of deficiency was as follows: Amount Consolidated operations: Ratio of earnings to fixed charges ............... $ 60 Ratio of earnings to combined fixed charges and preferred stock dividends .................. 97 Consolidated operations, corporate fixed charges and preferred stock dividends only: Ratio of earnings to corporate fixed charges ..... 59 Ratio of earnings to combined corporate fixed charges and preferred stock dividends .......... 96 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, 1997 1996 American General Finance: Income before income tax expense ................... $ 21 $ 48 Fixed charges deducted from income Interest expense ................................. 124 121 Implicit interest in rents ....................... 2 3 Total fixed charges deducted from income ....... 126 124 Earnings available for fixed charges ......... $ 147 $ 172 Ratio of earnings to fixed charges ......... 1.17 1.38 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-31-1997 JAN-01-1997 JUN-30-1997 45,985 0 0 110 3,389 587 52,707 289 0 3,927 77,387 44,898 229 370 1,896 8,972 1,725 85 321 6,340 77,387 1,633 1,973 14 748 2,123 260 (311) 305 180 86 0 0 0 86 0.35 0.36 0 0 0 0 0 0 0 ALL FIXED MATURITY SECURITIES ARE CLASSIFIED AS AVAILABLE-FOR-SALE AND 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 CONVERTIBLE PREFERRED STOCK. CONSISTS OF NET OF THE FOLLOWING: NET UNREALIZED GAINS (LOSSES) ON SECURITIES; RETAINED EARNINGS; AND COST OF TREASURY STOCK. INCLUDES INSURANCE CHARGES. INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES. CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET OF ACCRETION OF INTEREST. CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP. EXCLUDES $60 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $21 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES SUBSIDIARIES.
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