-----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, AtSBZ9O4Bz7hnNsUns/KpG45KgmjjpZAOHJYqwNk1itkY4moWgx2PKBGzcKIAXbj Jz9bIp8nImE2ZtijXHxKfg== 0000005103-97-000076.txt : 19971115 0000005103-97-000076.hdr.sgml : 19971115 ACCESSION NUMBER: 0000005103-97-000076 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 001-07981 FILM NUMBER: 97717346 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 September 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 September 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 October 31, 1997, there were 243,577,782 shares (excluding shares held in treasury and by a subsidiary) of American General's Common Stock and 2,317,701 shares of American General's 7% Convertible Preferred Stock outstanding. AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 INDEX TO FORM 10-Q Page Part I. FINANCIAL INFORMATION. Item 1. Financial Statements. Consolidated Statement of Income for the nine months and quarter ended September 30, 1997 and 1996 ......................................... 2 Consolidated Balance Sheet at September 30, 1997 and December 31, 1996 ................................ 3 Consolidated Condensed Statement of Cash Flows for the nine months ended September 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 .............. 13 Part II. OTHER INFORMATION. Item 1. Legal Proceedings .................................. 30 Item 5. Other Information .................................. 31 Item 6. Exhibits and Reports on Form 8-K ................... 35 -1- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AMERICAN GENERAL CORPORATION Consolidated Statement of Income (Unaudited) (In millions, except share data) Nine Months Ended Quarter Ended September 30, September 30, 1997 1996 1997 1996 Revenues Premiums and other considerations. $ 2,472 $ 2,424 $ 839 $ 820 Net investment income ............ 2,983 2,812 1,010 943 Finance charges .................. 950 1,093 315 359 Realized investment gains ........ 25 57 11 26 Equity in earnings of Western National Corporation ............ 39 27 13 10 Other ............................ 134 111 47 39 Total revenues ............... 6,603 6,524 2,235 2,197 Benefits and expenses Insurance and annuity benefits ... 3,127 3,090 1,051 1,028 Policyholder dividends ........... 70 71 23 24 Operating costs and expenses ..... 1,058 1,041 360 349 Commissions ...................... 648 635 224 215 Change in deferred policy acquisition costs and cost of insurance purchased ............. (71) (92) (20) (25) Provision for finance receivable losses .......................... 187 301 56 90 Merger-related costs ............. 272 - - - Losses on assets held for sale ... 113 20 - 20 Litigation and other charges ..... 50 50 - - Interest expense Corporate ....................... 117 121 40 40 Consumer Finance ................ 343 369 117 122 Total benefits and expenses .. 5,914 5,606 1,851 1,863 Earnings Income before income tax expense ......................... 689 918 384 334 Income tax expense ............... 315 331 135 125 Income before net dividends on preferred securities of subsidiaries .................... 374 587 249 209 Net dividends on preferred securities of subsidiaries ...... 62 29 23 10 Net income ................... $ 312 $ 558 $ 226 $ 199 -2- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Net income per share .............. $ 1.27 $ 2.24 $ .91 $ .80 Dividends paid per common share ... $ 1.05 $ .98 $ .35 $ .33 Average fully diluted shares outstanding (in thousands) ...... 251,371 252,441 252,827 251,924 -3- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Balance Sheet (Unaudited) (In millions, except share amounts) September 30, December 31, 1997 1996 Assets Investments Fixed maturity securities (amortized cost: $45,289; $42,867) ............................ $47,557 $44,355 Mortgage loans on real estate ................. 3,258 3,228 Equity securities (cost: $85; $111) ........... 110 137 Policy loans .................................. 2,142 2,011 Investment real estate ........................ 245 626 Other long-term investments ................... 169 210 Short-term investments ........................ 108 265 Total investments ......................... 53,589 50,832 Cash ........................................... 218 176 Finance receivables, net ....................... 7,146 7,230 Investment in Western National Corporation ..... 540 535 Deferred policy acquisition costs .............. 2,877 2,954 Cost of insurance purchased .................... 735 755 Acquisition-related goodwill ................... 673 605 Other assets ................................... 2,554 2,517 Assets held for sale ........................... - 667 Assets held in Separate Accounts ............... 11,084 7,863 Total assets .............................. $79,416 $74,134 Liabilities Insurance and annuity liabilities .............. $47,592 $46,022 Debt (short-term) Corporate ($553; $631) ........................ 2,025 2,102 Consumer finance ($2,677; $3,131) ............. 6,856 7,630 Income tax liabilities ......................... 1,180 1,078 Other liabilities .............................. 1,634 1,368 Liabilities related to Separate Accounts ....... 11,084 7,863 Total liabilities ......................... 70,371 66,063 Redeemable equity Company-obligated mandatorily redeemable preferred securities of subsidiaries holding solely company subordinated notes Non-convertible .............................. 1,480 982 Convertible .................................. 246 245 Total redeemable equity .................... 1,726 1,227 Shareholders' equity Convertible preferred stock (shares issued -4- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 and outstanding: 2,317,701; 2,323,722) ........ 85 85 Common stock (shares issued: 259,135,053; 283,738,546; outstanding: 243,532,716; 241,170,903) .................................. 318 572 Net unrealized gains on securities ............. 953 627 Retained earnings .............................. 6,484 6,420 Cost of treasury stock ......................... (521) (860) Total shareholders' equity ................ 7,319 6,844 Total liabilities and equity .............. $79,416 $74,134 -5- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Condensed Statement of Cash Flows (Unaudited) (In millions) Nine Months Ended September 30, 1997 1996 Operating activities Net cash provided by operating activities ... $ 1,167 $ 1,669 Investing activities Investment purchases .............................. (9,323) (7,430) Investment dispositions and repayments ............ 8,447 6,609 Finance receivable originations and purchases ..... (3,481) (3,860) Finance receivable principal payments received .... 3,200 3,730 Sale of finance receivables ....................... 733 - Sale of land development operations ............... 287 - Net decrease (increase) in short-term investments ...................................... 213 (136) Acquisition of Home Beneficial Life ............... (283) - Acquisition of Independent Life ................... - (106) Investment in Western National Corporation ........ - (126) Other, net ........................................ (68) (155) Net cash used for investing activities ...... (275) (1,474) Financing activities Retirement Services and Life Insurance Policyholder account deposits ................... 2,309 2,238 Policyholder account withdrawals ................ (2,317) (2,113) Total Retirement Services and Life Insurance . (8) 125 Consumer Finance Net (decrease) increase in short-term debt ...... (454) 211 Long-term debt issuances ........................ 485 73 Long-term debt redemptions ...................... (808) (426) Total Consumer Finance ....................... (777) (142) Corporate Net (decrease) increase in short-term debt ...... (79) 310 Long-term debt redemptions ...................... - (50) Issuance of preferred securities of subsidiaries. 498 - Dividends on common and preferred stock ......... (248) (227) Common stock repurchases ........................ (365) (161) Other, net ...................................... 129 (50) Total Corporate .............................. (65) (178) Net cash used for financing activities ...... (850) (195) Net increase in cash ............................... 42 - Cash at beginning of period ........................ 176 227 Cash at end of period .............................. $ 218 $ 227 -6- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Supplemental disclosure of cash flow information: Cash paid during the period for Income taxes .................................... $ 292 $ 225 Interest Corporate ..................................... 110 125 Consumer Finance .............................. 378 369 Dividends on preferred securities of subsidiaries ................................... 93 43 -7- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Notes to Consolidated Financial Statements September 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 that are necessary for a fair presentation of the company's consolidated financial position at September 30, 1997, the consolidated results of operations for the three months and nine months ended September 30, 1997 and 1996, and the consolidated cash flows for the nine months ended September 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. The purchase price was allocated to specific assets and liabilities based on management's best estimate of their respective fair values at that date. 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 September 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 nine months ended September 30, 1997 were as follows: (In millions) Fair value of assets acquired $1,441 Fair values of liabilities assumed (776) Issuance of common treasury shares (382) Net cash paid for acquisition of Home Beneficial Life $ 283 USLIFE. On June 17, 1997, American General completed the merger of USLIFE in an all-stock transaction. American General issued 39.0 million shares of common stock (with a market value of approximately $1.8 billion), 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 for a period prior to closing. The acquisition was accounted for using the pooling of interests method of accounting and, accordingly, American General's consolidated financial statements and notes 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 Ended (In millions) June 30, 1997 Revenues American General $3,471 USLIFE 897 Total $4,368 Net income (loss) American General $ 205 (a) USLIFE (119) (b) Total $ 86 (a) Includes aftertax merger-related costs of $81 million, losses on assets held for sale of $73 million, and litigation charge of $33 million. (b) Includes aftertax merger-related costs of $166 million. -9- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 1. Financial Statements (continued). Western National Corporation. On September 12, 1997, American General announced a definitive agreement to acquire the remaining 54% equity ownership of Western National Corporation (Western National) that the company does not currently own. The purchase price will be $1.2 billion, or $29.75 per share, in cash or American General common stock. The aggregate cash consideration and the aggregate stock consideration will each be limited to 50% of the total consideration. The exchange ratio for American General common stock will be determined by dividing $29.75 by an average trading price of American General common stock prior to closing, subject to a 6% collar above and below $50.00 per share for American General common stock. Outside of the collars, the value of the transaction would vary, subject to a maximum value of $31.71 per Western National share at American General share prices of $60.00 and above, and a minimum value of $27.53 per Western National share at American General share prices of $40.00 and below. The acquisition agreement may be terminated if the average American General share price is below $40.00 and American General elects not to increase the aggregate consideration to maintain a minimum value of $27.53 per Western National share. The transaction, which is subject to approval by Western National's shareholders and requisite regulatory authorities, is expected to close in early 1998. Upon completion of the transaction, Western National will be reported as part of American General's Retirement Services segment, using the purchase method of accounting. Investment in Grupo Nacional Provincial Pensiones. On October 2, 1997, the company announced a definitive agreement to acquire a 40% interest in Grupo Nacional Provincial Pensiones S.A. de C.V., a new holding company formed by Grupo Nacional Provincial, S.A. (GNP), a Mexican financial services company. GNP will own the remaining 60% of the holding company, which will own a 51% interest in Profuturo GNP, a company which provides enrollment, administration, and investment services for employees covered by the Mexican social security system. The holding company also owns a 100% interest in Porvenir GNP, a company which provides single premium immediate annuities to participants covered under the Mexican social security system. The transaction, which is subject to approval by requisite regulatory authorities, is expected to close during fourth quarter 1997. -10- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 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. The restructuring costs recorded in second quarter 1997 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 include centralized support units focused on product development, insurance administration, and customer service, 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, which began in third quarter 1997. The positions being eliminated relate to USLIFE's corporate operations and to administrative service functions that are being 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 proceeding as planned toward an expected completion date in mid-1998. During third quarter 1997, the Independent Producer division combined the operations of two broker-dealer companies and initiated processes to consolidate its various data center operations and the sharing of common insurance products. 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. -11- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 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. On August 15, 1997, American General completed the sale of its land development operations to Westbrook American Holding, L.P. On September 29, 1997, the company announced a definitive agreement to sell its Canadian life insurance subsidiary to a subsidiary of Aetna, Inc. The transaction, which is subject to requisite regulatory approvals, is expected to close by year-end 1997. 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. -12- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 1. Financial Statements (continued). 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 purchased replacement shares in the open market. On October 7, 1997, the transaction was completed at a final price of $48.86 per share, and American General made a cash payment of $82 million to the investment bank to settle the transaction. This payment included changes in the market price of American General common stock prior to settlement ($12.36 per share) and a reimbursement for dividends paid on the borrowed shares. The settlement cost, which is not reflected in the consolidated balance sheet as of September 30, 1997, will increase the cost of treasury stock in fourth quarter 1997. This transaction, combined with 3.0 million shares repurchased since the announcement of the definitive agreement to acquire Home Beneficial Life, had the effect of repurchasing substantially all of the shares issued in the Home Beneficial Life acquisition. 7. Derivative Financial Instruments. During the nine months ended September 30, 1997, the company purchased options to enter into interest rate swap agreements (call swaptions) with a total notional amount of $1.5 billion, to limit its exposure to declining interest rates over prolonged periods. During such periods, the investment spread (the difference between the investment yield and the interest crediting rate) may be reduced as a result of certain limitations on the company's ability to manage interest crediting rates. The call swaptions allow the company to enter into interest rate swap agreements to receive fixed rates and pay lower floating rates, effectively increasing the investment spread. Since the call swaptions hedge insurance and annuity liabilities, the fair values of the call swaptions are not recognized in the consolidated balance sheet. The associated fair values, as well as the premiums paid to purchase the call swaptions, were immaterial as of September 30, 1997. No call swaptions were exercised as of September 30, 1997. During the nine months ended September 30, 1997, the company entered into interest rate swap agreements with a total notional amount of $310 million to convert specific investment securities or debt from a floating rate to a fixed rate basis, and currency swap agreements with a notional amount of $40 million to convert cash flows from specific investments denominated in Canadian dollars to U.S. dollars. Derivative financial instruments related to investment securities and debt did not have a material effect on net investment income, the weighted average borrowing rate, or reported interest expense during the nine months ended September 30, 1997 or 1996. -13- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 1. Financial Statements (continued). 8. 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. 9. 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 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. -14- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 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. The government recently determined that it does not plan any further appeal. American General has requested that the IRS refund all related assessments plus associated interest. 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. -15- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 1. Financial Statements (continued). 10. 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 that 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 9. In addition, certain 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. The reader is presumed to have read or have access to the company's Current Report on Form 8-K dated October 10, 1997 which includes the company's consolidated balance sheets as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, common stock activity, and cash flows, and Management's Discussion and Analysis, for the three years ended December 31, 1996, restated to reflect the acquisition of USLIFE under the pooling of interests method of accounting. This analysis should be read in conjunction with the consolidated financial statements and related notes on pages 2 through 13 of this Quarterly Report on Form 10-Q. -16- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). CONSOLIDATED RESULTS OF OPERATIONS Nine Months Ended Quarter Ended (In millions, September 30, September 30, except share data) 1997 1996 1997 1996 Net income $ 312 $ 558 $ 226 $ 199 Net income per share 1.27 2.24 .91 .80 Net income for the nine months ended September 30, 1997 reflected aftertax non-recurring charges totaling $353 million ($1.41 per share) recorded in second quarter 1997. 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 periods included aftertax non-recurring charges of $18 million ($.07 per share) in third quarter 1996 for the anticipated loss on certain assets held for sale, and $32 million ($.13 per share) in second quarter 1996 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 $57 million, or 9%, and $9 million, or 4%, for the first nine months and third quarter, respectively, of 1997 compared to the same periods in 1996. These increases were primarily due to improved business segment earnings and higher earnings on corporate assets, primarily on assets of the life and annuity subsidiaries in excess of those needed to support the business, partially offset by a decrease in net realized investment gains. 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 September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Segment earnings were as follows: Nine Months Ended Quarter Ended September 30, September 30, (In millions) 1997 1996 1997 1996 Retirement Services $186 $175 $ 59 $ 57 Life Insurance 424 (a) 399 (b) 146 139 Consumer Finance 120 (c) 102 41 43 Segment earnings $730 $676 $246 $239 (a) Excludes aftertax charges of $46 million for restructuring costs. (b) Excludes $32 million for write-down of USLIFE group business. (c) Excludes aftertax losses on assets held for sale of $27 million. A discussion of each segment's results follows. The reasons for any significant variations between the quarters ended September 30, 1997 and 1996 are the same as those discussed below for the respective nine 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 investment spread on fixed accounts, variable account fees, and operating expenses, contribute to the segment's profitability. Segment results were as follows: Nine Months Ended Quarter Ended September 30, September 30, (In millions) 1997 1996 1997 1996 Segment earnings $ 186 $ 175 $ 59 $ 57 Assets Investments 23,224 21,574 23,224 21,574 Separate Accounts 10,194 6,387 10,194 6,387 Sales 1,217 965 422 389 Deposits Fixed 1,180 1,181 336 370 Variable 1,292 917 430 324 -18- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Segment earnings increased 7% for the nine months ended September 30, 1997 compared to the same period of 1996, primarily due to asset growth over the past twelve months. Asset growth, excluding the fair value adjustment to securities, was $5.1 billion, or 18%, from September 30, 1996 to September 30, 1997, reflecting strong sales, an increase in total deposits, and market appreciation in Separate Accounts. Sales for the nine months ended September 30, 1997 increased $252 million, or 26%, compared to the same period in 1996, primarily due to increased sales of the segment's new Portfolio Director annuity product introduced in mid-1996. Variable deposits increased 41% for the nine months ended September 30, 1997, compared to the same period in 1996, as a result of policyholders' continued demand for equity investments due to the strong performance of the stock market. Sales and deposits in third quarter 1997 compared to third quarter 1996 increased at lower percentages than on a year-to-date basis due to strong sales in 1996, immediately following the introduction of Portfolio Director 2. Separate Account assets, which relate to variable account options, increased $3.8 billion from September 30, 1996 to September 30, 1997, reflecting both the increased sales and the strong market appreciation. Investment results and crediting rates on fixed accounts were as follows: Nine Months Ended Quarter Ended September 30, September 30, ($ in millions) 1997 1996 1997 1996 Net investment income $1,274 $1,235 $ 429 $ 413 Investment yield 7.92% 8.06% 7.90% 8.02% Average crediting rate 6.14 6.24 6.11 6.24 Investment spread on fixed accounts 1.78 1.82 1.79 1.78 Net investment income, the primary component of revenues, increased 3% for the first nine months of 1997 compared to the same period of 1996, reflecting a 5% growth in invested assets supporting fixed account liabilities, partially offset by a decrease in investment yield due to the declining interest rate environment. Investment yield for the nine months ended September 30, 1997 decreased 14 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 for the first nine months of 1997 declined only 4 basis points in comparison to the first nine months of 1996 and increased 1 basis point for third quarter 1997 compared to third quarter 1996. Variable account fees, included in premiums and other considerations, increased $28 million, or 54%, for the first nine months of 1997 compared to the same period in 1996 due to strong sales growth and market appreciation in Separate Accounts. -19- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). The rate of policyholder surrenders as a percentage of average fixed deferred annuity and Separate Account reserves was 5.08% for the first nine months of 1997 compared to 4.97% for the same period in 1996. The surrender ratio for third quarter 1997 was 5.23% compared to 4.67% for third quarter 1996, due to lower interest crediting rates on fixed accounts, early retirement packages offered by certain large public school groups, and higher systematic withdrawals, which allow participants to receive automatic payments over a five or ten year period. The ratio of operating expenses to average assets improved to .48% for the first nine months 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 technology expenses. Life Insurance The Life Insurance segment provides traditional and interest-sensitive life insurance and annuities to customers based on household income and product needs. Following completion of the USLIFE merger, the company realigned this 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 strengthen the company's distribution system while achieving operating efficiencies, improved product development, and enhanced customer service. Segment profitability is a function of premiums, investment spread, mortality, and operating expenses. Segment results were as follows: Nine Months Ended Quarter Ended September 30, September 30, (In millions) 1997 1996 1997 1996 Segment earnings $ 424 (a) $ 399 (b) $ 146 $ 139 Premiums and other considerations 2,254 2,217 764 750 Assets 34,656 32,314 34,656 32,314 Net investment income 1,561 1,508 527 508 (a) Excludes aftertax charges of $46 million for restructuring costs. (b) Excludes $32 million for write-down of USLIFE group business. Segment earnings for the nine months ended September 30, 1997 increased 6% compared to the same period of 1996, primarily due to additional earnings generated by the acquisition of Home Beneficial Life (acquired April 16, 1997) and Independent Life (acquired February 29, 1996). The earnings from acquisitions were partially offset by higher amortization and reduced deferral of deferred policy acquisition costs. -20- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Asset growth, excluding the fair value adjustment to securities, was $1.7 billion, or 5%, from September 30, 1996 to September 30, 1997 primarily due to the acquisition of Home Beneficial Life, increased sales, and additional deposits. Net investment income increased $53 million, or 3%, for the nine months of 1997 compared to the same period in 1996, primarily due to growth in average assets, which included the Home Beneficial Life acquisition. Year-to-date and quarter-to-date average investment yields decreased 7 and 11 basis points, respectively, primarily due to lower interest rates on new investment purchases. Information regarding sales and deposits was as follows: Nine Months Ended Quarter Ended September 30, September 30, (In millions) 1997 1996 1997 1996 Life Insurance Sales $ 390 $ 354 $ 133 $ 114 Deposits 859 792 294 261 Annuities Sales 308 292 114 90 Deposits 372 348 121 106 Life insurance sales and deposits for the nine months of 1997 exceeded comparable 1996 amounts by 10% and 8%, respectively, due to a number of new marketing initiatives, including the introduction of a corporate executive benefits product in second quarter 1997, and the acquisition of Home Beneficial Life. Annuity sales and deposits for the nine months ended September 30, 1997 exceeded comparable 1996 amounts by 6% and 7%, respectively, (and for the quarter ended September 30, 1997 exceeded comparable 1996 amounts by 27% and 15%, respectively) primarily due to increased structured settlement sales, partially offset by lower fixed annuity sales in the first half of 1997 due to competitive market conditions. Death claims, included in insurance and annuity benefits, increased 5% 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 $3.35 for the nine months of 1997 compared to $3.29 for the same period in 1996. Overall, mortality experience was within product pricing assumptions. -21- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). The ratio of operating expenses to direct premiums and deposits increased to 17.05% for the first nine months of 1997, compared to 16.60% for the same period in 1996. The increase was primarily due to Home Beneficial Life's and Independent Life's expense ratios, which exceeded those of the company's other life insurance subsidiaries. Anticipated expense savings from consolidation of these acquired companies' operations are proceeding as expected; however, the expense savings have not been fully realized to date. In addition, the segment experienced higher technology and marketing expenses. The expense ratio for third quarter 1997 declined slightly to 17.20% compared to 17.26% in the same period of 1996, due to expense reductions at Independent Life and higher life insurance deposits in third quarter 1997. Consumer Finance The Consumer Finance segment provides consumer and home equity loans and other credit-related products. Segment results are influenced by the amount and mix of finance receivables, credit quality, borrowing cost, and operating expenses. Segment results were as follows: Nine Months Ended Quarter Ended September 30, September 30, ($ in millions) 1997 1996 1997 1996 Segment earnings $ 120 * $ 102 $ 41 $ 43 Finance receivables 7,526 8,208 7,526 8,208 Yield on finance receivables 16.96% 18.02% 16.83% 17.80% Borrowing cost 6.80 6.90 6.90 6.87 Spread 10.16 11.12 9.93 10.93 * Excludes aftertax losses on assets held for sale of $27 million. Segment earnings for the nine months ended September 30, 1997 increased $18 million, or 17%, compared to the same period of 1996, primarily due to an improvement in credit quality during 1997. For third quarter 1997, segment earnings were down $2 million, or 6%, compared to third quarter 1996, primarily due to a larger reduction in the allowance for finance receivable losses in third quarter 1996, partially offset by an improvement in credit quality in third quarter 1997. 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. -22- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). 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. The proportion of real estate-secured receivables increased to 51% at September 30, 1997, compared to 42% at September 30, 1996, primarily due to purchases of real estate loan portfolios during the last three months of 1996 totaling $277 million and real estate loan growth during 1997. Total finance receivables decreased $99 million from December 31, 1996 to September 30, 1997 and $682 million during the twelve months ended September 30, 1997. All lines of receivables, except for real estate-secured consumer loans, decreased compared to December 31, 1996 and September 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 $143 million, or 13%, for the first nine months of 1997 and $44 million, or 12%, for the third quarter of 1997, compared to the same periods in 1996, due to lower average finance receivables, combined with a decline in the yield on finance receivables. The yield on finance receivables declined 106 basis points for the first nine months of 1997 and 97 basis points for the third quarter of 1997, compared to the same periods in 1996. The yield decline resulted from the change in the portfolio mix to a higher proportion of real estate-secured loans, which generally have lower yields, partially offset by the decreased proportion of non-accrual delinquent finance receivables during 1997. The spread between yield and borrowing cost decreased 96 basis points and 100 basis points for the first nine months of 1997 and the third quarter of 1997, respectively, compared to the same periods of 1996. These declines resulted from a decrease in yield, partially offset by lower borrowing cost on a year-to-date basis and increased by higher borrowing cost in third quarter 1997. -23- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Charge offs, delinquencies, and the allowance for finance receivable losses were as follows: Nine Months Ended Quarter Ended September 30, September 30, ($ in millions) 1997 1996 1997 1996 Charge offs $ 202 $ 328 $ 61 $ 107 % of average finance receivables 3.59% 5.40% 3.27% 5.37% September 30, 1997 1996 Delinquencies $ 312 $ 380 % of finance receivables 3.83% 4.28% Allowance for finance receivable losses $ 380 $ 465 % of finance receivables 5.05% 5.67% The charge off, delinquency, and allowance ratios decreased for the nine months ended September 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 4.59% and 3.93%, respectively, for the nine months ended September 30, 1996. The delinquency ratio at September 30, 1997 was unchanged from 3.83% at December 31, 1996. Excluding the receivable portfolios reclassified to assets held for sale, the charge off ratio has decreased as follows: Quarter Ended Quarter Ended Quarter Ended Quarter Ended December 31, 1996 March 31, 1997 June 30, 1997 September 30, 1997 5.03% 3.83% 3.68% 3.27% These decreases resulted from the positive impact of management's action program to improve credit quality. The allowance ratio decreased 13 basis points from 5.18% at December 31, 1996 to 5.05% at September 30, 1997 due to a $15 million decrease in the allowance for finance receivable losses in 1997 resulting from improved credit quality of the receivables portfolio, partially offset by a decrease in average finance receivables. -24- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Operating expenses decreased $35 million, or 9%, for the nine months ended September 30, 1997, compared to the same period in 1996. As a percentage of average finance receivables, operating expenses were 6.08% and 6.17% for the nine months ended September 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. 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 fixed maturity and equity securities at fair value at September 30, 1997 and December 31, 1996, and the change, were as follows: September 30, December 31, (In millions) 1997 1996 Change Fair value adjustment to fixed maturity securities $ 2,268 $ 1,488 $ 780 Adjusted by: Decrease in DPAC/CIP (837) (598) (239) Increase in deferred income taxes (523) (339) (184) Equity in WNC's unrealized gains 29 59 (30) Net unrealized gains on fixed maturity securities 937 610 327 Net unrealized gains on equity securities 16 17 (1) Net unrealized gains on securities $ 953 $ 627 $ 326 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. -25- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Fixed Maturity Securities. Fixed maturity securities represented 89% of invested assets at September 30, 1997. Information regarding the fixed maturity securities portfolio, which included bonds and redeemable preferred stocks, at September 30, 1997 was as follows: September 30, Average Credit (In millions) 1997 % Rating Investment grade $36,174 76% A Mortgage-backed 9,392 20 AAA Below investment grade 1,991 4 BB- Total fixed maturities $47,557 100% A+ 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 September 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 $2.0 billion at September 30, 1997 and $1.7 billion at December 31, 1996. These investments represented 4% of total fixed maturity securities at both balance sheet dates. Investment income from below investment grade fixed maturity securities was $126 million and $121 million for the first nine months of 1997 and 1996, respectively. Realized investment gains (losses) were immaterial. 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 .03% and .01% of total fixed maturity securities at September 30, 1997 and December 31, 1996, respectively. Mortgage Loans. Mortgage loans on real estate represented 6% of invested assets at September 30, 1997. Information regarding the mortgage loan portfolio at September 30, 1997 was as follows: September 30, Non-Performing Loans (In millions) 1997 Amount % Commercial loans $ 3,319 $ 189 5.7% Allowance for losses (61) (24) Total mortgage loans $ 3,258 $ 165 -26- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). 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 5.7% of total commercial loans at September 30, 1997, compared to 5.1% at December 31, 1996. At September 30, 1997, $168 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 undercollateralized. This amount compares to $286 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. Realized Investment Gains (Losses). Realized investment gains (losses) were as follows: Nine Months Ended September 30, (In millions) 1997 1996 Sales Fixed maturity securities $ (11) $ (7) Equity securities 4 50 Real estate and other long-term investments 25 7 Write-downs/reserve changes 12 7 Other (5) - Total realized investment gains (losses) $ 25 $ 57 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 resulted from the reversal of allowances on investment real estate. 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 closed 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. -27- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). CAPITAL RESOURCES Corporate Debt. Corporate debt is incurred primarily to fund acquisitions, share repurchases, and capital needs of subsidiaries. Corporate debt decreased $77 million from December 31, 1996 to September 30, 1997, primarily due to the net proceeds from the March 1997 issuance of 8-1/8% preferred securities and dividends paid by subsidiaries, partially offset by an increase in borrowings to fund repurchases of American General's common stock and the Home Beneficial Life acquisition. Interest expense on corporate debt decreased $4 million, or 3%, for the nine months ended September 30, 1997 compared to the same period in 1996. The decrease relates to lower average short-term borrowings resulting from the use of the proceeds of preferred securities issued in December 1996 and March 1997 to reduce short-term debt. The ratio of corporate debt to corporate capital (excluding the fair value adjustment to securities) was 20.0% at September 30, 1997, compared to 22.0% at 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 $774 million from December 31, 1996 to September 30, 1997, primarily due to the sale of the underperforming credit card and private label finance receivable portfolios. Interest expense on Consumer Finance debt decreased $26 million, or 7%, for the nine months ended September 30, 1997, compared to the same period in 1996, primarily due to the lower level of debt and the reclassification to assets held for sale of interest expense on non-strategic assets sold in June 1997. Redeemable Equity. Redeemable equity increased $499 million from December 31, 1996 to September 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 corporate debt. Shareholders' Equity. Shareholders' equity increased from $6.8 billion at December 31, 1996 to $7.3 billion at September 30, 1997, primarily due to the $326 million increase 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). -28- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). 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 removed from review by the rating agencies. In conjunction with the company's September 12, 1997 announcement of a definitive agreement to acquire the remaining 54% equity ownership of Western National, S&P, D&P, and Moody's affirmed all of American General's ratings. As of November 10, 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++ Year 2000 Contingency. Management has been engaged in a company-wide program to render its computer systems (hardware and mainframe and personal applications software) year 2000 compliant. The company will continue to incur internal staff costs as well as third-party vendor and other expenses to prepare the systems for year 2000. The cost of testing and conversion of systems applications has not had, and is not expected to have, a material adverse effect on the company's consolidated results of operations or financial condition. However, risks and uncertainties exist in most significant systems development projects. If conversion of the company's systems is not completed on a timely basis, due to nonperformance by third- party vendors or other unforeseen circumstances, the year 2000 problem could have a material adverse impact on the operations of the company. -29- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). 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. Parent Company Cash Flows Nine Months Ended September 30, (In millions) 1997 1996 Net cash provided by operating activities $ 238 $ 404 Dividends paid by Life Insurance and Retirement Services segments 328 301 Dividends paid by Consumer Finance segment 127 139 Net cash provided by operating activities decreased in the first nine months of 1997 compared to the same period in 1996 primarily due to an increase in federal income taxes paid and payment of a litigation settlement and a portion of the USLIFE merger-related transaction costs. During the first nine months of 1997, the Life Insurance and Retirement Services segments paid $471 million of cash dividends to subsidiaries of American General, of which $328 million was dividended to the parent company. -30- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Segment Cash Flows Nine Months Ended September 30, (In millions) 1997 1996 Life Insurance and Retirement Services Net cash provided by operating activities $1,476 $1,457 Net cash provided by (used for) policyholder account deposits, net of withdrawals Fixed (8) 125 Variable 1,423 1,337 Consumer Finance Net cash provided by operating activities 374 477 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 operating activities were relatively flat in the first nine months of 1997 compared to 1996. Cash provided by fixed account deposits decreased by $133 million, primarily due to a $204 million increase in fixed account withdrawals in the first nine months of 1997. The increases in both fixed withdrawals and net variable deposits, which include transfers from fixed accounts, were the result of policyholders seeking higher returns in equity-based investments, including the company's Separate Accounts. Because the investment risk on variable accounts lies with the policyholder, deposits and withdrawals related to Separate Accounts are not included in the company's consolidated condensed statement of cash flows. The Consumer Finance segment's cash provided by operating activities decreased $103 million in the first nine months of 1997 compared to the first nine 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 $502 million in the nine months ended September 30, 1997 compared to the same period in 1996 primarily due to payment of USLIFE merger-related costs and a litigation settlement, increased federal income taxes paid, and decreased finance charge revenues in the Consumer Finance segment. -31- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Investing Activities. Cash flows related to investing activities were as follows: Dispositions and Purchases Repayments Nine Months Ended Nine Months Ended (In millions) September 30, September 30, 1997 1996 1997 1996 Fixed maturity securities $9,047 $7,019 $7,563 $5,980 Mortgage loans 220 323 595 352 Equity securities 2 1 70 161 Other 54 87 506 116 Total $9,323 $7,430 $8,734 $6,609 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 September 30, 1997, committed credit facilities totaled $3.6 billion, and there were no borrowings under these facilities. 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; the company's ability to render its computer systems year 2000 compliant; 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. 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 September 30, 1997 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 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. The government recently determined that it does not plan any further appeal. American General has requested that the IRS refund all related assessments plus associated interest. 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 Current Report on Form 8-K filed on October 10, 1997, 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 -33- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 1. Legal Proceedings (continued). 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. Item 5. Other Information. Executive Officers Information regarding the 13 executive officers of the company is as follows: Present Principal Position with the Company and Other Material Name and Age Positions Held during Last Five Years Robert M. Devlin Chairman (since 1997) and Chief Executive (57) Officer (since 1996), Director (since 1993), President (1995-97), and Vice Chairman (1993- 95), American General Corporation; President and Chief Executive Officer (1986-93), American General Life Insurance Company, Houston, Texas, a subsidiary of American General Corporation. Director, Cooper Industries, Inc. James S. D'Agostino Jr. President (since 1997) and Director (since (51) 1996), American General Corporation; Chairman (1995-97), Chief Executive Officer (1993-97), and President (1993-95), American General Life and Accident Insurance company, Nashville, Tennessee, a subsidiary of American General Corporation; with American General Corporation during the remainder of last five years in various other capacities including Executive Vice President - Administration (1993). Jon P. Newton Vice Chairman and Director (since 1995), (56) Vice Chairman and General Counsel (1995-97), and Senior Vice President and General Counsel (1993-95), American General Corporation. Partner (1985-93), Clark, Thomas, Winters & Newton, Austin, Texas. Mark S. Berg Senior Vice President and General Counsel (39) (since 1997), American General Corporation. Partner (1991-97), Vinson & Elkins L.L.P., Houston, Texas. -34- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 5. Other Information (continued). Present Principal Position with the Company and Other Material Name and Age Positions Held during Last Five Years Frederick W. Geissinger President and Chief Executive Officer (since (52) 1995), American General Finance, Inc., Evansville, Indiana, a subsidiary of American General Corporation; President and Chief Executive Officer (1994-95), American General Land Development, Inc., Houston, Texas, a subsidiary of American General Corporation. Independent Consultant (1992-94), New York, New York. Albert E. Haines Senior Vice President - Administration (since (53) 1996), American General Corporation. President (1992-96), Chamber of Commerce, The Greater Houston Partnership, Houston, Texas. Joe Kelley President (since 1995) and Chief Executive (50) Officer (since 1997), American General Life and Accident Insurance Company, Nashville, Tennessee, a subsidiary of American General Corporation; Senior Vice President and Chief Marketing Officer (1994-95), American General Life Insurance Company, Houston, Texas, a subsidiary of American General Corporation. Senior Vice President (1992-94), Prudential Preferred Financial Services, Houston, Texas. Rodney O. Martin Jr. President (since 1997), American General (45) Independent Producer Division, Houston, Texas, a subsidiary of American General Corporation; President and Chief Executive Officer (since 1996), American General Life Insurance Company, Houston, Texas, a subsidiary of American General Corporation; President and Chief Executive Officer (1995-96), American General Life Insurance Company of New York, Syracuse, New York, a subsidiary of American General Corporation. President (1993-95), Connecticut Mutual Insurance Services, Hartford,Connecticut. Senior Vice President - Corporate Distribution (1992-93), Connecticut Mutual Life Insurance Company, Hartford, Connecticut. -35- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 5. Other Information (continued). Present Principal Position with the Company and Other Material Name and Age Positions Held during Last Five Years Ellen H. Masterson Senior Vice President and Chief Financial (46) Officer (since 1997), American General Corporation. Partner (1985-97), Coopers & Lybrand L.L.P., Dallas, Texas. Nicholas R. Rasmussen Senior Vice President (since 1983) and Senior (51) Vice President - Corporate Development (since 1993), and Senior Vice President - Group Executive (1990-93), American General Corporation. Carl J. Santillo Senior Vice President (since 1997), and Senior (48) Vice President - Finance (1996-97), American General Corporation. Senior Vice President - Life & Health Operations (1993-96), Nationwide Life Insurance Company, Columbus, Ohio. President (1993-96), Employers Life of Wausau, Wausau, Wisconsin. Executive Vice President - Operations (1987-93), Wausau Insurance Companies, Wausau, Wisconsin. Peter V. Tuters Senior Vice President (since 1992) and Chief (45) Investment Officer (since 1993), American General Corporation. Thomas L. West Jr. President (since 1994) and Chief Executive (60) Officer (since 1997), The Variable Annuity Life Insurance Company, Houston, Texas, a subsidiary of American General Corporation. Senior Vice President, Annuity Operations (1991-94), Aetna Life & Casualty Company, Hartford, Connecticut. -36- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 5. Other Information (continued). Election of New Director On September 23, 1997, the company announced the election of Michael E. Murphy to the company's board of directors. His biographical information is as follows: Michael E. Murphy Director (since 1997), American General (60) Corporation. Vice Chairman (since 1993) and Director (since 1979), Executive Vice President and Chief Financial and Administrative Officer (1979-93), Sara Lee Corporation, Chicago, Illinois. Director, Bassett Furniture Industries, Incorporated; GATX Corporation; Payless ShoeSource, Inc., and True North Communications Inc. -37- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. * Exhibit 3 Amended and Restated Bylaws of American General Corporation (As of October 23, 1997). Exhibit 10 Form of Severance Agreement between American General Corporation and Ellen H. Masterson (incorporated by reference to Exhibit 10.10 to American General's Annual Report on Form 10-K for 1993). * 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. * Filed herewith b. Reports on Form 8-K. (1) Current Report on Form 8-K dated August 15, 1997, with respect to the filing of American General's consolidated financial information for the seven months and one month ended July 31, 1997. (2) Current Report on Form 8-K dated September 11, 1997, with respect to the issuance of a joint news release announcing a definitive agreement under which American General will acquire the remaining 53.8% of the common equivalent shares of Western National for a total consideration consisting of cash and American General common stock valued at approximately $1.2 billion, or $29.75 per share. (3) Current Report on Form 8-K dated October 10, 1997, with respect to the filing of American General's consolidated balance sheets as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, common stock activity, and cash flows, and Management's Discussion and Analysis, for the three years ended December 31, 1996, restated to include the acquisition of USLIFE under the pooling of interests method of accounting. -38- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 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: November 13, 1997 -39- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 EXHIBIT INDEX Exhibit * 3 Amended and Restated Bylaws of American General Corporation (As of October 23, 1997). 10 Form of Severance Agreement between American General Corporation and Ellen H. Masterson (incorporated by reference to Exhibit 10.10 to American General's Annual Report on Form 10-K for 1993). * 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. * Filed herewith -40- EX-11 2 AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Exhibit 11 COMPUTATION OF EARNINGS PER SHARE (Unaudited) (In millions, except share data) Nine Months Ended September 30, 1997 1996 Primary: Net income available to common stock ....... $ 312 $ 558 Average shares outstanding Common stock ............................. 241,631,360 243,320,348 Assumed conversion of convertible preferred stock ........................ 1,950,940 1,578,392 Assumed exercise of stock options ........ 934,163 996,788 Total .................................. 244,516,463 245,895,528 Net income per share ....................... $1.28 $2.27 Fully Diluted: Net income ................................. $ 312 $ 558 Plus: Net dividends on convertible preferred securities of subsidiary ........ 8 8 Net income available to common stock ... $ 320 $ 566 Average shares outstanding Common stock ............................. 241,631,360 243,320,348 Assumed conversion of convertible preferred securities of subsidiary ..... 6,144,016 6,144,016 Assumed conversion of convertible preferred stock ........................ 2,353,292 1,892,638 Assumed exercise of stock options ........ 1,241,842 1,083,695 Total .................................. 251,370,510 252,440,697 Net income per share ....................... $1.27 $2.24 EX-12 3 AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 Exhibit 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Unaudited) ($ in millions) Nine Months Ended September 30, 1997 1996 Consolidated operations: Income before income tax expense and net dividends on preferred securities .......................... $ 689 $ 918 Undistributed income of equity investee ............ (35) (24) Fixed charges deducted from income Interest expense ................................. 485 495 Implicit interest in rents ....................... 15 16 Total fixed charges deducted from income ....... 500 511 Earnings available for fixed charges.......... $1,154 $1,405 Fixed charges per above ............................ $ 500 $ 511 Capitalized interest ............................... 5 9 Total fixed charges ............................ 505 520 Dividends on preferred stock and securities .... 102 49 Combined fixed charges and preferred stock dividends ............................ $ 607 $ 569 Ratio of earnings to fixed charges ......... 2.28 2.70 Ratio of earnings to combined fixed charges and preferred stock dividends ............ 1.90 2.47 Consolidated operations, corporate fixed charges and preferred stock dividends only: Income before income tax expense and net dividends on preferred securities ........................ $ 689 $ 918 Undistributed income of equity investee .......... (35) (24) Corporate fixed charges deducted from income - corporate interest expense ..................... 136 135 Earnings available for fixed charges ........... $ 790 $1,029 Total corporate fixed charges per above .......... $ 136 $ 135 Capitalized interest related to real estate operations ..................................... 5 8 Total corporate fixed charges .................. 141 143 Dividends on preferred stock and securities .... 102 49 Combined corporate fixed charges and preferred stock dividends .................. $ 243 $ 192 Ratio of earnings to corporate fixed charges 5.61 7.21 Ratio of earnings to combined corporate fixed charges and preferred stock dividends ................................ 3.26 5.38 Exhibit 12 (continued) AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Unaudited) ($ in millions) Nine Months Ended September 30, 1997 1996 American General Finance: Income before income tax expense ................... $ 148 $ 160 Fixed charges deducted from income Interest expense ................................. 366 369 Implicit interest in rents ....................... 8 9 Total fixed charges deducted from income ....... 374 378 Earnings available for fixed charges ......... $ 522 $ 538 Ratio of earnings to fixed charges ......... 1.39 1.42 Exhibit 12 (continued) AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Unaudited) ($ in millions) Quarter Ended September 30, 1997 1996 Consolidated operations: Income before income tax expense and net dividends on preferred securities ................ $ 384 $ 334 Undistributed income of equity investee ............ (12) (9) Fixed charges deducted from income Interest expense ................................. 159 164 Implicit interest in rents ....................... 5 5 Total fixed charges deducted from income ....... 164 169 Earnings available for fixed charges.......... $ 536 $ 494 Fixed charges per above ............................ $ 164 $ 169 Capitalized interest ............................... - 3 Total fixed charges ............................ 164 172 Dividends on preferred stock and securities .... 37 17 Combined fixed charges and preferred stock dividends ............................ $ 201 $ 189 Ratio of earnings to fixed charges ......... 3.27 2.86 Ratio of earnings to combined fixed charges and preferred stock dividends ............ 2.67 2.61 Consolidated operations, corporate fixed charges and preferred stock dividends only: Income before income tax expense and net dividends on preferred securities .............. $ 384 $ 334 Undistributed income of equity investee .......... (12) (9) Corporate fixed charges deducted from income - corporate interest expense ..................... 49 46 Earnings available for fixed charges ........... $ 421 $ 371 Total corporate fixed charges per above .......... $ 49 $ 46 Capitalized interest related to real estate operations ..................................... - 3 Total corporate fixed charges .................. 49 49 Dividends on preferred stock and securities .... 37 17 Combined corporate fixed charges and preferred stock dividends .................. $ 86 $ 66 Ratio of earnings to corporate fixed charges 8.72 7.65 Ratio of earnings to combined corporate fixed charges and preferred stock dividends ................................ 4.95 5.67 Exhibit 12 (continued) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Unaudited) AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended September 30, 1997 ($ in millions) Quarter Ended September 30, 1997 1996 American General Finance: Income before income tax expense ................... $ 65 $ 68 Fixed charges deducted from income Interest expense ................................. 117 122 Implicit interest in rents ....................... 3 3 Total fixed charges deducted from income ....... 120 125 Earnings available for fixed charges ......... $ 185 $ 193 Ratio of earnings to fixed charges ......... 1.54 1.55 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 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 47,557 0 0 110 3,258 245 53,589 218 0 3,612 79,416 45,078 189 380 1,945 8,881 1,726 85 318 6,916 79,416 2,472 2,983 25 1,123 3,197 405 (476) 689 315 312 0 0 0 312 1.28 1.27 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; COST OF TREASURY STOCK; AND FOREIGN CURRENCY TRANSLATION GAINS (LOSSES). 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 $95 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $33 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
EX-3 5 Exhibit 3 AMENDED AND RESTATED BYLAWS (As of October 23, 1997) of American General Corporation Houston, Texas AMENDED AND RESTATED BYLAWS OF AMERICAN GENERAL CORPORATION ARTICLE I. Capital Stock SECTION 1. Certificates for Shares. The certificates for shares of the capital stock of the company shall be in such form as shall be approved by the board of directors. The certificates shall be signed by the chairman of the board or president, and also by the secretary, and may be sealed with the seal of the company or a facsimile thereof. Where any such certificate is countersigned by a transfer agent, or registered by a registrar, either of which is other than the company itself or an employee of the company, the signatures of the chairman of the board or president and of the secretary may be facsimiles. The certificates shall be consecutively numbered and shall be entered on the stock records of the company as they are issued, and each shall exhibit the holder's name and the number of shares. SECTION 2. Transfer of Shares. The shares of stock of the company shall be transferable only on the stock records of the company by the registered holders thereof in person or by their duly authorized attorneys or legal representatives, upon surrender of certificates representing such shares duly endorsed or in proper form for transfer, with appropriate evidence of authority to transfer, and cancellation thereof. SECTION 3. Fixing of Record Date; Closing of Transfer Books. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, or entitled to receive payment of any dividend, or for any other proper purpose, the board of directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than fifty (50) days and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. In lieu of fixing a record date, the board of directors may provide that the stock transfer books of the company shall be closed for a stated period not to exceed, in any case, fifty (50) days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which the notice of the meeting is mailed or the date on which the resolution of the board of directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided herein, such determination shall apply to any adjournment of the meeting except where the determination has been made through the closing of stock transfer books and the stated period of closing has expired. SECTION 4. Registered Shareholders. The company shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person or entity, whether or not it shall have express or other notice thereof, except as expressly provided by the laws of the State of Texas. SECTION 5. Lost, Destroyed, or Stolen Stock Certificates. No certificate for shares of stock in the company shall be issued in place of any certificate alleged to have been lost, destroyed, or stolen except on production of evidence satisfactory to the board of directors, or such person or persons as it may designate, of such loss, destruction, or theft, and, if the board of directors so requires, upon the furnishing of an indemnity bond in such amount (but not to exceed twice the then-market value of the shares represented by the certificate) and with such terms and such surety or sureties as the board of directors may, in its discretion, require. SECTION 6. Regulations. The board of directors shall have the power and authority to make all such rules and regulations to the extent permitted by law, the articles of incorporation, and these bylaws, as it may deem expedient concerning the issue, transfer, registration, or replacement of certificates for shares of the capital stock of the company. ARTICLE II. Shareholders SECTION 1. Annual Meeting. The annual meeting of the shareholders shall be held at such hour as shall be designated by the board of directors either (i) on the last business day of April of each year, or (ii) on such other date, not more than thirteen (13) months after the last preceding annual meeting, as the board of directors shall designate, for the purpose of electing directors and for the transaction of such other business as may properly be brought before the meeting. SECTION 2. Special Meetings. A special meeting of shareholders for any purpose or purposes may be called at any time by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president, or the secretary upon the written request therefor, stating the purpose or purposes of the meeting, delivered to such officer, signed by the holders of at least ten percent (10%) of the issued and outstanding shares entitled to vote at such meeting. Only such business as shall be stated or indicated in the notice of the meeting shall be transacted at any such special meeting of shareholders. SECTION 3. Place. The annual meeting of shareholders may be held at any place as may be designated in the call of the meeting. Meetings of shareholders shall be held at the principal office of the company unless another place is designated for a meeting in the manner provided herein. SECTION 4. Notice. Written or printed notice stating the place, day, and hour of each meeting of shareholders, and in case of a special meeting the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than fifty (50) days before the date of the meeting, either personally or by mail, by or at the direction of the officer calling the meeting, to each shareholder of record entitled to vote at such meeting. SECTION 5. Quorum. Except as may be otherwise provided by law or the articles of incorporation, no meeting of shareholders shall elect directors, or transact other business of the company, unless there shall be present, in person or by proxy, a quorum, which is defined as the holders of a majority of the issued and outstanding shares of capital stock of the company entitled to vote at the meeting, and the act of a majority of the shares represented at any meeting at which a quorum is present shall be the act of the meeting. The shareholders present at any meeting, though less than a quorum, may adjourn the meeting, and any business may be transacted at the adjourned meeting that could have been transacted at the original meeting. No notice of adjournment, other than the announcement at the meeting, need be given. SECTION 6. Proxies. At any meeting of shareholders, a shareholder may vote either in person or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Such proxies shall be filed with the secretary of the company before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless it is expressly provided therein that the proxy shall be irrevocable or unless it is otherwise made irrevocable by law. SECTION 7. Voting of Shares. Each outstanding share of a class of stock entitled to vote upon a matter submitted to a vote at a meeting of shareholders shall be entitled to one vote on such matter. Votes for directors, and upon demand of any shareholder votes upon any question before a meeting, shall be by ballot. SECTION 8. Presiding Officer and Secretary. The chairman of the board, or in his absence the president, shall preside at each meeting of shareholders, and in the absence of both such officers, a vice chairman of the board shall preside. Should none be present, the meeting shall appoint one of the vice presidents, or in the absence of all vice presidents, one of the shareholders, to preside at the meeting. The records of each meeting shall be kept by the secretary, or in his absence an assistant secretary, or in the absence of both, a person appointed by the chairman of the meeting. SECTION 9. List of Shareholders. A complete list of shareholders entitled to vote at each shareholders' meeting, arranged in alphabetical order, with the address of each and number of shares of each class and series of stock held by each, shall be prepared by the secretary and filed at the registered office of the company, and shall be subject to inspection by any shareholder during usual business hours for a period of ten (10) days prior to such meeting. It shall be produced at such meeting and shall at all times during such meeting be subject to inspection by any shareholder. SECTION 10. Inspectors of Election. The chairman of each meeting of shareholders shall appoint a committee to act as inspectors of election. Such committee shall report to the meeting the number of shares of each class and series of stock, and of all classes, represented by proxy and shall prepare a list showing the total number of shares of each class and series of stock, and of all classes, represented either in person or by proxy. The inspectors of election shall oversee the vote of the shareholders for the election of directors and for any other matters that are put to a vote of shareholders at the meeting; receive a ballot evidencing votes cast by the proxy committee; judge the qualifications of shareholders voting; collect, count, and report the results of ballots cast by any shareholders voting in person; and perform such other duties as may be required by the chairman of the meeting or the shareholders. SECTION 11. Nature of Business at Meetings of Shareholders. No business may be transacted at an annual meeting of shareholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the board of directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by an shareholder of the company (i) who is a shareholder of record on the date of the giving of the notice provided for in this Section 11 and on the record date for the determination of shareholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 11. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, such shareholder must have given timely notice thereof in proper written form to the Secretary of the company. To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the company not less than one hundred and twenty (120) days nor more than one hundred and fifty (150) days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a shareholder's notice to the Secretary must set forth as to each matter such shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such shareholder, (iii) the class or series and number of shares of capital stock of the company which are owned beneficially or of record by such shareholder, (iv) a description of all arrangements or understandings between such shareholder and any other person or persons (including their names) in connection with the proposal of such business by such shareholder and any material interest of such shareholder in such business and (v) a representation that such shareholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of shareholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 11; provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 11 shall be deemed to preclude discussion by any shareholder of any such business. If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. ARTICLE III. Board of Directors SECTION 1. Number, Term of Office, Nomination, Vacancy and Removal. The business affairs and property of the company shall be managed and controlled by the board of directors, and, subject to the restrictions imposed by law, by the articles of incorporation, or by these bylaws, the board of directors may exercise all of the powers of the company. (a) Number. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock of the company as to dividends or upon liquidation to elect additional directors under specified circumstances, the number of the directors of the company shall be fixed from time to time by the board of directors but shall not be fewer than three (3) nor more than twenty-five (25). Within these limits, the number of directors may be increased or decreased (provided that any decrease does not shorten the term of any incumbent director) from time to time by resolution of the board of directors. Directors must be shareholders, but they need not be residents of the State of Texas. (b) Election and Terms. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock of the company as to dividends or upon liquidation to elect additional directors under specified circumstances, directors shall be elected at the annual meeting of the shareholders. Each director shall serve until the next annual meeting and until his successor shall have been elected and qualified, or until his earlier death, resignation, or removal; provided, however, that the term of any director who is also an officer of the company or of any subsidiary of the company shall simultaneously terminate when that director ceases, for whatever reason, to be an officer of the company or of any subsidiary of the company, unless the board of directors, in its discretion and upon resolution adopted by a majority of the remaining directors then in office, waives the applicability hereof. (c) Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the company, except as may be otherwise provided in the Certificate of Incorporation with respect to the right of holders of preferred stock of the company to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the board of directors may be made at any annual meeting of shareholders, or at any special meeting of shareholders called for the purpose of electing directors, (a) by or at the direction of the board of directors (or any duly authorized committee thereof) or (b) by any shareholder of the company (i) who is a shareholder of record on the date of the giving of the notice provided for in this Section 1(c) and on the record date for the determination of shareholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section 1(c). In addition to any other applicable requirements, for a nomination to be made by a shareholder, such shareholder must have given timely notice thereof in proper written form to the Secretary of the company. To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the company (a) in the case of an annual meeting, not less than one hundred and twenty (120) days nor more than one hundred fifty (150) days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of shareholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. To be in proper written form, a shareholder's notice to the Secretary must set forth (a) as to each person whom the shareholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the company which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the shareholder giving the notice (i) the name and record address of such shareholder, (ii) the class or series and number of shares of capital stock of the company which are owned beneficially or of record by such shareholder, (iii) a description of all arrangements or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such shareholder, (iv) a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the company unless nominated in accordance with the procedures set forth in this Section 1(c). If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. (d) Vacancies. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock of the company as to dividends or upon liquidation to elect directors under specified circumstances, any vacancies on the board of directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the board of directors. Any director so elected by the board of directors to fill a vacancy shall hold office for the remainder of the full term of the director whose departure from the board created the vacancy. A directorship to be filled by reason of an increase in the number of directors by action of the board of directors (within the limits set forth in paragraph (a) of Section 1 of this article) may be filled by the board of directors for a term of office continuing only until the next election at an annual meeting or at a special meeting of shareholders called for that purpose; provided, however, that the board of directors shall not fill more than two such directorships during the period between two successive annual meetings of shareholders. (e) Removal. Subject to the rights of any class or series of stock having a preference over the Common Stock of the company as to dividends or upon liquidation to elect directors under specified circumstances, any director may be removed from office, with or without cause, only by the affirmative vote of the holders of at least seventy-five percent (75%) of the combined voting power of the then outstanding shares of all classes of stock of the company entitled to vote generally in the election of directors, voting together as a single class. SECTION 2. Annual Meeting. Each newly elected board of directors shall hold its first meeting immediately following the annual meeting of shareholders each year, for the purposes of organization, the election of officers of the company, and the transaction of such other business as may properly come before such meeting, and no notice of such meeting shall be necessary. SECTION 3. Regular Meetings. In addition to the annual meeting of the board of directors, four (4) regular meetings shall be held in each year at the time and place designated by the chairman of the board, for the purpose of transacting any business within the powers of the board. Notice of such regular meetings shall be given as provided herein. SECTION 4. Special Meetings. A special meeting of the board of directors shall be held whenever called by the chief executive officer or by the secretary on the written request of any five (5) of the directors, and at such time and place as may be specified in the notice thereof. Such notice, or any waiver pursuant to Article VII, Section 6 hereof, need not state the purpose or purposes of such meeting. SECTION 5. Notice. The secretary shall give notice to each director of each regular and special meeting in person or by mail or by any form of telecommunication, at least twenty-four (24) hours before the meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting has not been lawfully called or convened. SECTION 6. Quorum. A majority of the directors in office shall constitute a quorum for the transaction of business, but if at any meeting of the board of directors there is less than a quorum present, a majority of those present or any director solely present may adjourn the meeting from time to time without further notice. The act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the board of directors, unless the act of a greater number is required by law, the articles of incorporation, or these bylaws. SECTION 7. Order of Business and Officers at Meetings. At meetings of the board of directors, business shall be transacted in such order as the board may determine from time to time. At all meetings of the board of directors, the chairman of the board shall preside, and in the absence of the chairman of the board the president shall preside, and in the absence of both, a vice chairman shall preside. Should all three be absent, a chairman shall be chosen by the board of directors from among the directors present. The secretary of the company shall act as secretary of all meetings of the board of directors, or in the absence of the secretary an assistant secretary shall so act; or in the absence of both, the presiding officer shall appoint any person to act as secretary of the meeting. SECTION 8. Compensation. Directors shall not receive any stated salary for their service as directors, but by resolution of the board of directors an annual retainer may be paid and a fixed sum and expenses of attendance, if any, may be allowed for attendance at any meeting of the board of directors; provided that nothing contained herein shall be construed to preclude any director from serving the company in any other capacity and receiving compensation therefor. SECTION 9. Presumption of Assent. A director of the company who is present at a meeting of the board of directors at which action on any company matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the company immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 10. Retirement. No director of the company shall stand for reelection as a director following his seventieth birthday with the exception of any person who shall serve, or has served, as chief executive officer of the company at any time, who shall not be prevented by this provision from standing for reelection as a director for five years after retirement from the position of chief executive officer, or until the annual meeting following the attainment of age seventy-five, whichever shall first occur. Any director who is also an officer, other than the chief executive officer, of the company or an officer of any subsidiary of the company shall retire as provided in Section 1 of this article. ARTICLE IV. Committees of the Board of Directors SECTION 1. Executive Committee. The board of directors, acting by resolution adopted by a majority of the full board of directors, may elect from among its members an executive committee of not fewer than three (3) nor more than ten (10) members, which committee shall have and may exercise all of the authority of the board of directors in the business and affairs of the company except where action of the full board of directors is specified by law. The chief executive officer shall be a member of the executive committee and shall be chairman of such committee. The executive committee shall meet at such times and places as may be fixed by the committee, or on the call of the chief executive officer, at such times and places as may be designated in the call of such meetings. The executive committee shall maintain a record of its proceedings and shall report to each regular meeting of the board of directors a summary of the actions taken by such committee since the last regular meeting of the board of directors. The executive committee shall function as the company's nominating committee. In its capacity as nominating committee, it has the power and duty to recommend candidates for election to the board of directors, to the committees of the board, and for the chairmanship of each committee except the executive committee. SECTION 2. Audit Committee. The board of directors, acting by resolution adopted by a majority of the full board of directors, may elect from among its members an audit committee of not fewer than three (3) nor more than ten (10) members, none of whom shall be an officer of the company or of any of its subsidiaries during the time of service on such committee. The chairman of the committee shall be elected by a majority of the full board of directors at the time the committee is elected or at such time as it becomes necessary to elect a new chairman because of the chairman's death or resignation. The audit committee shall meet at such times and places as may be fixed by the committee, or on the call of its chairman, at such times and places as may be designated in the call of such meetings. The committee shall also meet promptly upon the request of the company's principal independent auditors. The audit committee shall maintain a record of its proceedings and shall report to the board of directors a summary of its activities not less frequently than twice each fiscal year. The audit committee shall have the following powers and duties: (a) to recommend to the board of directors each year the engagement of a firm of certified public accountants to act as principal independent auditors for the company and its subsidiaries; (b) to review at regular intervals audit arrangements for the company and its subsidiaries and the reports to be rendered; (c) to review in advance the plan and scope of the audit of the company and its subsidiaries to be performed for the following year by the principal independent auditors and the related detailed estimate of fees; (d) to review and approve non-audit services and fees of the company's principal independent auditors, giving appropriate consideration to the possible effect on the auditors' independence of each non-audit service provided; (e) to review periodically with the company's principal independent auditors the accounting principles and policies of the company and such matters relating to the internal auditing systems and procedures and the internal accounting controls of the company and its subsidiaries as the committee or the board of directors may determine to be necessary or desirable; (f) to review periodically the coordination between the company's principal independent auditors and the company's internal audit staff, and to review with the company's principal independent auditors, upon completion of their audit, their findings and recommendations and the responses of the company's management to such findings and recommendations; (g) to review the annual financial statements issued by the company to its security holders; (h) to conduct from time to time, or cause to be conducted, such investigations or inquiries relating to accounting or audit matters as the facts presented to the committee warrant and as the committee may deem necessary or appropriate in the interest of the company and its shareholders; (i) to confer with and direct the officers of the company to the extent necessary to exercise the committee's powers and to carry out its duties; (j) to meet with representatives of any independent auditors of the company and/or its internal audit staff in the absence of management, whenever the committee deems such to be appropriate; and (k) to perform such additional duties as may be assigned to the committee by the board of directors. SECTION 3. Personnel Committee. The board of directors, acting by resolution adopted by a majority of the full board of directors, may elect from among its members a personnel committee of not fewer than three (3) nor more than ten (10) members, none of whom shall be an officer of the company or of any of its subsidiaries during the time of service on this committee. The chairman of the committee shall be elected by a majority of the full board of directors at the time the committee is elected or at such time as it becomes necessary to elect a new chairman because of the chairman's death or resignation. The committee shall meet at such times and places as may be fixed by the committee, or on the call of its chairman, at such times and places as may be designated in the call of such meetings. The committee shall maintain a record of its proceedings and shall report to each regular meeting of the board of directors a summary of the actions taken by the committee since the last regular meeting of the board of directors. The personnel committee shall have the following powers and duties: (a) to review the relationship of the contribution of key officers and employees to the company's performance and prospects; (b) to review and approve and recommend to the board of directors for approval or ratification the annual salary of any officer of the company or of a subsidiary of the company whose annual salary is or will be of an amount which will place him or her among the twenty-five most highly salaried officers in the group; (c) to review and approve or ratify the annual salary of any officer or employee of the company or of a subsidiary of the company whose annual salary is or will be of an amount which will place him or her among the second twenty-five most highly salaried officers in the group; (d) to review and approve incentive compensation and other employee benefit programs; (e) to review key personnel issues; and (f) to perform such additional duties as may be assigned to the committee by the board of directors. SECTION 4. Other Committees. In addition to the executive, audit, and personnel committees, the board of directors may, by resolution adopted by a majority of the full board of directors, elect from among its own members such other committees as it shall deem to be appropriate, each of which shall have and may exercise that authority of the board of directors which shall have been delegated to it in the resolution creating such committee, except as may be prohibited by law. SECTION 5. Term of Office and Committee Size. The term of office of each member of any committee shall be the period designated by the board of directors, but shall not be longer than one year and until his successor shall be elected, unless such member shall be removed by the board of directors, as provided in this section, or the committee is dissolved by the board of directors. A member of any committee may be removed during the period between annual meetings by action of the majority of the full board of directors at any regular or special meeting. The membership of any committee elected by the board of directors may be increased or decreased during the period between annual meetings, subject to any limitations of this article, by action of the majority of the full board of directors at any regular or special meeting. SECTION 6. Quorum. A majority of the members of any committee shall constitute a quorum for the transaction of business. The act of the majority of the members present at a meeting at which a quorum is present shall be the act of the committee. SECTION 7. Responsibility. The designation of any committee and the delegation thereto of authority shall not operate to relieve the board of directors, or any member thereof, of any responsibility imposed upon it or him by law. SECTION 8. Vacancies. The board of directors may fill all vacancies in any committee. ARTICLE V. Officers SECTION 1. Titles and Term of Office. The board of directors at its annual meeting shall elect officers of the company as follows: a chairman of the board, a president and a secretary. The board of directors may also elect one or more vice chairmen. The board of directors or the executive committee may elect other officers, including one or more executive vice presidents, senior vice presidents, vice presidents, a general counsel, a controller, a general auditor, and other officers and assistant officers as the board of directors or the executive committee deems necessary. Each officer shall hold office for the term for which he is elected and until his successor shall have been duly elected and qualified, or until his death, resignation, or removal in the manner hereinafter provided. One person may hold more than one office except that the president shall not also hold the office of secretary. The chairman of the board, each vice chairman of the board, if any, and the president shall be directors of the company, but no other officer need be a director. SECTION 2. Removal. Any officer who may be elected only by the board of directors may be removed only by the board of directors. Any officer who may be elected by either the board of directors or the executive committee may be removed by either the board of directors or the executive committee. Removal of any officer may occur whenever in the judgment of the board of directors or the executive committee, as the case may be, the best interests of the company will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election of an officer shall not of itself create contract rights. SECTION 3. Vacancies. A vacancy in the office of any officer may be filled for the unexpired portion of the term by the board of directors. SECTION 4. Chief Executive Officer. The board of directors shall designate either the chairman of the board or the president to be the chief executive officer of the company. All other officers of the company shall be subordinate to the chief executive officer and shall report to him as he may direct. The chief executive officer shall have responsibility for the general management and direction of the business of the company and for the execution of all orders and resolutions of the board of directors. In addition to the powers prescribed in these bylaws, he shall have all of the powers usually vested in the chief executive officer of a corporation and such other powers as may be prescribed from time to time by the board of directors. He may delegate any of his powers and duties to any other officer with such limitations as he may deem proper. SECTION 5. Chairman of the Board. The chairman of the board shall preside at all meetings of the shareholders and of the board of directors; shall have authority to execute all legal instruments necessary for the transaction of the company's business; may sign certificates for shares of capital stock of the company; and may be designated as chief executive officer, as provided in these bylaws. He shall be a member of all standing committees of the board of directors except those the membership of which is restricted to non-officer directors, and shall have such other responsibilities and powers as may be prescribed in these bylaws or from time to time by the board of directors. If he is not designated as chief executive officer, the chairman of the board shall have such powers and perform such duties as maybe delegated to him by the chief executive officer, and shall be vested with all the powers and authorized to perform all the duties of the chief executive officer in his absence or inability to act. SECTION 6. Vice Chairman of the Board. In the absence of the chairman of the board and the president, a vice chairman of the board shall preside at all meetings of the shareholders and the board of directors; shall have authority to execute all legal instruments necessary for the transaction of the company's business; and shall have such other powers and duties as may be delegated to him by the board of directors or the chief executive officer. SECTION 7. President. In the absence of the chairman of the board, the president shall preside at all meetings of the shareholders and of the board of directors; shall have authority to execute all legal instruments necessary for the transaction of the company's business; may sign certificates for shares of capital stock of the company; and may be designated as chief executive officer, as provided in these bylaws. He may delegate such of his powers and duties to other officers with such limitations as he may deem proper. The president shall have such other powers and duties as may be prescribed in these bylaws or from time to time by the board of directors. If he is not designated as chief executive officer, the president shall have such powers and perform such duties as may be delegated to him by the chief executive officer, and shall be vested with all the powers and authorized to perform all the duties of the chief executive officer in his absence or inability to act. SECTION 8. Vice President. Each vice president shall have such powers and duties as may be delegated to him by the board of directors or the chief executive officer, or any authorized officers senior to the vice president, and may exercise the powers of the president during his absence or inability to act. Any action taken by a vice president in the performance of the duties of the president shall be conclusive evidence of the absence or inability to act of the president at the time such action was taken. SECTION 9. Secretary. The secretary shall keep the minutes of all meetings of the board of directors, of the shareholders, and of the executive committee; shall issue all notices; may sign with the chairman of the board, a vice chairman of the board, or the president in the name of the company all legal instruments necessary for the transaction of the company's business and affix the seal of the company thereto; shall sign with the chairman of the board or president all certificates for shares of the capital stock of the company; and shall have such other powers and duties as may be prescribed by the board of directors or the chief executive officer. SECTION 10. Treasurer. The treasurer shall have responsibility for the safekeeping and custody of all the funds and securities of the company; shall establish and execute programs for the provision of the capital required by the company, including negotiating the procurement of capital and maintaining the required financial arrangements; shall establish and maintain adequate sources for the company's short-term borrowings; shall establish and maintain liaison with investment bankers and financial analysts; shall establish and maintain banking arrangements; and shall have such other powers and duties as may be prescribed by the board of directors or the chief executive officer. SECTION 11. Powers and Duties of Assistant Secretaries. Each assistant secretary shall have the usual powers and duties pertaining to his office, together with such other powers and duties as may be assigned to him by the secretary, and may exercise the powers of the secretary during that officer's absence or inability to act. Any action taken by an assistant secretary in the performance of the duties of the secretary shall be conclusive evidence of the absence or inability to act of the secretary at the time such action was taken. SECTION 12. Powers and Duties of Assistant Treasurers. Each assistant treasurer shall have the usual powers and duties pertaining to his office, together with such other powers and duties as may be assigned to him by the treasurer, and may exercise the powers of the treasurer during that officer's absence or inability to act. Any action taken by an assistant treasurer in the performance of the duties of the treasurer shall be conclusive evidence of the absence or inability to act of the treasurer at the time such action was taken. ARTICLE VI. INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 1. Actions. The company shall indemnify any person who was or is a named defendant or respondent or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative, or investigative (including any action by or in the right of the company), or any appeal of such action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding, by reason of the fact that he is or was a director, officer or employee of the company, or is or was serving at the request of the company as a director, officer, partner, venturer, proprietor, trustee, employee, or similar functionary of another foreign or domestic corporation or non-profit corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise (any such person acting in any such capacity being hereinafter referred to as "potential indemnitee"), against judgments, penalties (including excise and similar taxes), fines, amounts paid in settlement, and reasonable expenses (including court costs and attorneys' fees) actually incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed, (i) in the case of conduct in his official capacity as a director of the company, to be in the best interests of the company and (ii) in all other cases, to be not opposed to the best interests of the company; and, with respect to any criminal action or proceeding, if he had no reasonable cause to believe his conduct was unlawful; provided, however, that in connection with any action, suit or proceeding in which the person shall have been adjudged to be liable to the company or liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the person's official capacity as a director or officer, (i) indemnification shall be limited to reasonable expenses (including court costs or attorneys' fees) actually incurred in connection with such proceeding, and (ii) indemnification shall be prohibited, if the person is found liable for willful or intentional misconduct in the performance of his duty to the company. The termination of any action, suit or proceeding by judgment, order, settlement, or conviction, or on a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in the best interests of the company; and, with respect to any criminal action or proceeding, shall not create a presumption that the person had reasonable cause to believe that his conduct was unlawful. SECTION 2. Success on Merits or 0therwise. Where a potential indemnitee has been wholly successful, on the merits or otherwise, in defense of any such action, suit or proceeding, he shall be indemnified against reasonable expenses (including court costs and attorneys' fees) actually incurred by him in connection therewith. SECTION 3. Determination that Indemnification is Proper. Any indemnification under Section 1 of this article (unless otherwise ordered by a court of competent jurisdiction) shall be made by the company only as authorized in a specific case upon a determination that the applicable standard of conduct has been met. Such determination shall be made (i) by the board of directors by a majority vote of a quorum consisting of directors who at the time of the vote have not been named as defendants or respondents in such action, suit or proceeding, or (ii) if such a quorum cannot be obtained, by a majority vote of a committee of the board of directors, designated to act in the matter by a majority vote of all directors, consisting solely of two or more directors who at the time of the vote are not named defendants or respondents in such action, suit or proceeding, or (iii) by special legal counsel selected by the board of directors (or a committee thereof) by vote in the manner set forth in subparagraphs (i) and (ii) of this Section 3, or if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all directors, or (iv) by the shareholders in a vote that excludes the shares held by any director who is named as a defendant or respondent in such action, suit or proceeding. SECTION 4. Expenses Prior to Final Disposition. Reasonable expenses incurred by a director, officer, or employee of the company or other person entitled to indemnity hereunder, who was, is or is threatened to be made a named defendant or respondent in any such action, suit or proceeding described in Section 1 shall be paid by the company in advance of the final disposition thereof upon receipt of a written affirmation by the director, officer, employee or other person of his good faith belief that he has met the standard of conduct necessary for indemnification under this article and a written undertaking by or on behalf of the director, officer, employee or other person to repay such amount if it is ultimately determined that the person has not met such necessary standard of conduct or that indemnification is prohibited by Section 1 of this article. Determinations with respect to payments under this Section 4 shall be made in the manner specified by Section 3 for determining that indemnification is permissible, except as otherwise provided by law. SECTION 5. Nonexclusive Rights-Continuance Beyond Tenure. The indemnification provided by this article shall not be deemed (i) to be exclusive of any other rights consistent with law to which the person indemnified may be entitled under the articles of incorporation of the company, bylaws, any general or specific action of the board of directors, agreement, authorization of shareholders, or otherwise, or as may be permitted or required by law, both as to action in his official capacity as a director and as to action in another capacity while holding such office, or (ii) to be a limitation upon the power of the company to indemnify and to advance expenses, consistent with law. The indemnification provided by this article shall continue as to a person who has ceased to be a director, officer, or employee of the company or other person entitled to indemnity hereunder or to serve in such other capacity in which he was entitled to indemnification hereunder, and shall inure to the benefit of his heirs and legal representatives. SECTION 6. Insurance Authorized. Subject to any restrictions now or hereafter established by applicable law, the company shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, or employee of the company or who is or was serving at the request of the company as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation or non-profit corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the company would have the power to indemnify him against that liability under the provisions of this article or the Texas Business Corporation Act. SECTION 7. Definitions. For purposes of this article, references to "the company" include any domestic or foreign predecessor entity of the company in a merger, consolidation, or other transaction in which the liabilities of the predecessor are transferred to the company by operation of law and in any other transaction in which the company assumes the liabilities of the predecessor but does not specifically exclude liabilities that are the subject matter of this article. For purposes of this article, references to "serving at the request of the company" shall include any service as a director, officer or employee of the company which imposes duties on, or involves services by, such director, officer or employee with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the company" as referred to in this article. SECTION 8. Expenses as Witness. Notwithstanding any other provision of this article, the company may pay or reimburse expenses incurred by any director, officer, or employee of the company or any other potential indemnitee hereunder in connection with his appearance as a witness or other participation in any action, suit or a proceeding described in Section 1 at a time when he is not a named defendant or respondent in such action, suit or proceeding. SECTION 9. Notice to Shareholders. Any indemnification of or advance of expenses to a director in accordance with this article shall be reported in writing to the shareholders of the company with or before the notice or waiver of notice of the next shareholders' meeting or with or before the next submission to shareholders of a consent to action without a meeting and, in any case, within the twelve-month period immediately following the date of the indemnification or advance. ARTICLE VII. Miscellaneous Provisions SECTION 1. Registered Office. Unless the board of directors otherwise determines, the registered office of the company, required by the Texas Business Corporation Act to be maintained in the State of Texas, shall be the principal place of business of the company, but such registered office may be changed from time to time by the board of directors in the manner provided by law and need not be identical to the principal place of business of the company. SECTION 2. Books and Records. Correct and complete books and records of account of the company and the minutes of the proceedings of its shareholders, board of directors, and each committee of its board of directors shall be kept at the registered office of the company. Records of the original issuance of shares issued by the company and of each transfer of those shares that have been presented for registration of transfer shall be kept at the registered office of the company or at the office of its principal transfer agent or registrar. A record of the past and present shareholders of the company, giving the names and addresses of all such shareholders and the number of shares of each class and series of stock held by each, shall also be kept at the registered office of the company or at the office of its principal transfer agent or registrar. Any books, records, and minutes may be in written form or in any other form capable of being converted into written form within a reasonable time. Any person who shall have been a holder of record of shares for at least six (6) months immediately preceding his demand, or who shall be the holder of record of at least five percent (5%) of all the outstanding shares of the company, upon written demand stating the purpose thereof, or any director of the company shall have the right to examine, in person or by agent, accountant, or attorney, at any reasonable time or times, for any proper purpose, its relevant books and records of account, minutes, and share transfer records, and to make extracts therefrom. SECTION 3. Action Without Meeting and Telephone Meetings. Any action permitted, or required by law, these bylaws, or the articles of incorporation of the company, to be taken at a meeting of the board of directors or of any committee thereof may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the board of directors or of such committee, as the case may be. Such consent shall have the same force and effect as a unanimous vote at a meeting. Subject to the notice requirements of these bylaws, members of the board of directors or of any committee created by the board of directors may participate in and hold a meeting of such board or committee by means of conference telephone or similar communications equipment, including teleconferencing via a satellite communications system, provided all persons participating in the meeting can hear each other. SECTION 4. Fiscal Year. The fiscal year of the company shall be the calendar year. SECTION 5. Seal. The seal of the company shall be such as from time to time may be approved by the board of directors. SECTION 6. Notice and Waiver of Notice. Whenever any notice is required to be given under the provisions of these bylaws, said notice shall be deemed to be sufficient if given by depositing the same in a post office box in a sealed postpaid wrapper addressed to the person entitled thereto at his post office address, as it appears on the records of the company, and such notice shall be deemed to have been given on the day of such mailing. A waiver of notice, signed by the person or persons entitled to said notice, whether before or after the date and time stated therein, shall be deemed equivalent thereto. SECTION 7. Resignations. Any director or officer may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of its receipt by the chairman of the board, the president, or the secretary. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. SECTION 8. Securities of Other Corporations. The board of directors shall by resolution designate the officers of the company who shall have power and authority to transfer, endorse for transfer, vote, or consent to or take any other action with respect to any securities of another issuer which may be held or owned by the company and to make, execute, and deliver any waiver, proxy, or consent with respect to any such securities. SECTION 9. Investments and Loans. Investments and loans of the company shall be made pursuant and subject to the provisions of the law. SECTION 10. Execution of Contracts and Other Instruments. All contractual or obligatory undertakings, including but not limited to deeds, conveyances, transfers, and releases, shall be signed by, (a) the chairman of the board, a vice chairman of the board, the president, or a vice president, or (b) any attorney-in-fact or agent of the company who has been, or at any time in the future may be, appointed by the chairman of the board, a vice chairman of the board, the president, or a vice president, and by the company secretary or an assistant secretary. When necessary, such instruments may have the corporate seal affixed and may be attested by the secretary or an assistant secretary. Checks may be signed by the chairman of the board, a vice chairman of the board, the president, a vice president, the secretary, the treasurer, or any other person who may be authorized by the board of directors or the chief executive officer. SECTION 11. Rules and Regulations. Rules and regulations for the conduct of the company's business not in conflict with these bylaws may be adopted by the executive committee by resolution duly recorded in the minutes of the committee; provided, however, that such action may be modified or abrogated by the board of directors. ARTICLE VIII. Amendments Unless otherwise provided in the Articles of Incorporation, the power to alter, amend, or repeal these bylaws or adopt new bylaws shall be vested in the full board of directors subject, however, to repeal or change by action of the affirmative vote of the holders of at least seventy-five percent (75%) of the then outstanding shares of all classes of stock of the company entitled to vote generally in election of directors, voting together as a single class. CERTIFICATION I HEREBY CERTIFY that the foregoing is a true and full copy of the bylaws of AMERICAN GENERAL CORPORATION as the same are now in effect. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of AMERICAN GENERAL CORPORATION this ______day of __________________, 19__. ________________________________ Secretary -----END PRIVACY-ENHANCED MESSAGE-----