10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to _____________________ Commission file number 1-7981 American General Corporation (Exact name of registrant as specified in its articles of incorporation) Texas 74-0483432 (State of Incorporation) (I.R.S. Employer Identification No.) 2929 Allen Parkway, Houston, Texas 77019-2155 (Address of principal executive offices) (Zip Code) (713) 522-1111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . As of July 31, 2000, there were 252,548,567 shares (excluding shares held in treasury and by a subsidiary) of American General's Common Stock outstanding. INDEX TO FORM 10-Q Page Part I. FINANCIAL INFORMATION. Item 1. Financial Statements. Consolidated Income Statement for the six months and quarters ended June 30, 2000 and 1999 ........ 2 Consolidated Balance Sheet at June 30, 2000 and December 31, 1999 ................................ 3 Consolidated Statements of Shareholders' Equity and Comprehensive Income for the six months ended June 30, 2000 and 1999 ........................... 4 Consolidated Condensed Statement of Cash Flows for the six months ended June 30, 2000 and 1999 ...... 5 Notes to Consolidated Financial Statements ......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............ 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk .............................. 27 Part II. OTHER INFORMATION. Item 1. Legal Proceedings .................................... 28 Item 4. Submission of Matters to a Vote of Security Holders ............................... 28 Item 6. Exhibits and Reports on Form 8-K ..................... 29 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AMERICAN GENERAL CORPORATION Consolidated Income Statement (Unaudited) (In millions, except per share data) Six Months Ended Quarter Ended June 30, June 30, 2000 1999 2000 1999 Revenues Premiums and other considerations. $ 1,966 $ 1,914 $ 973 $ 990 Net investment income ............ 2,675 2,597 1,345 1,312 Finance charges .................. 789 713 398 356 Realized investment losses ....... (109) (7) (58) (5) Other ............................ 151 116 77 60 Total revenues ............... 5,472 5,333 2,735 2,713 Benefits and expenses Insurance and annuity benefits ... 2,751 2,691 1,367 1,378 Operating expenses ............... 796 808 400 416 Commissions ...................... 646 599 329 321 Change in deferred policy acquisition costs and cost of insurance purchased ............. (242) (221) (126) (135) Provision for finance receivable losses .......................... 97 100 48 48 Goodwill amortization ............ 24 24 12 12 Interest expense Corporate ....................... 110 95 56 51 Consumer Finance ................ 333 276 170 138 Other charges .................... 315 - 315 - Total benefits and expenses .. 4,830 4,372 2,571 2,229 Earnings Income before income tax expense . 642 961 164 484 Income tax expense ............... 213 336 45 168 Income before net dividends on preferred securities of subsidiaries .................... 429 625 119 316 Net dividends on preferred securities of subsidiaries ...... 50 45 25 23 Net income ................... $ 379 $ 580 $ 94 $ 293 Net income per share Basic ........................... $ 1.53 $ 2.30 $ .38 $ 1.17 Diluted ......................... $ 1.50 $ 2.25 $ .38 $ 1.14 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Balance Sheet (Unaudited) (In millions) June 30, December 31, 2000 1999 Assets Investments Fixed maturity securities (amortized cost: $63,806; $62,375) ........................ $ 61,631 $ 60,625 Mortgage loans on real estate .............. 3,732 3,686 Equity securities (cost: $329; $299) ....... 369 339 Policy loans ............................... 2,395 2,375 Investment real estate ..................... 219 222 Other long-term investments ................ 518 412 Short-term investments ..................... 2,675 676 Total investments ...................... 71,539 68,335 Cash ........................................ 274 294 Assets held in separate accounts ............ 25,600 24,097 Finance receivables, net .................... 11,260 10,634 Deferred policy acquisition costs ........... 5,452 4,980 Cost of insurance purchased ................. 1,134 1,170 Goodwill .................................... 1,462 1,501 Other assets ................................ 4,442 4,436 Total assets ........................... $121,163 $115,447 Liabilities Insurance and annuity liabilities ........... $ 67,301 $ 66,401 Liabilities related to separate accounts .... 25,600 24,097 Debt (short-term) Corporate ($2,134; $1,932) ................. 3,173 3,120 Consumer Finance ($4,903; $4,489) .......... 10,753 10,206 Income tax liabilities ...................... 687 833 Other liabilities ........................... 5,249 2,446 Total liabilities ...................... 112,763 107,103 Redeemable equity Company-obligated mandatorily redeemable preferred securities of subsidiaries holding solely company subordinated notes Non-convertible .......................... 1,971 1,675 Convertible .............................. - 249 Total redeemable equity ................ 1,971 1,924 Shareholders' equity Convertible preferred stock (shares issued and outstanding: 0, 2.3) ................... - 85 Common stock (shares issued: 269.3, 269.3; outstanding: 252.5, 248.1) ................. 869 962 Retained earnings ........................... 7,892 7,732 Accumulated other comprehensive income (loss) (1,457) (1,278) Cost of treasury stock ...................... (875) (1,081) Total shareholders' equity ............. 6,429 6,420 Total liabilities and equity ........... $121,163 $115,447 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Statements of Shareholders' Equity and Comprehensive Income (Unaudited) (In millions, except per share data) Six Months Ended June 30, Shareholders' Equity 2000 1999 Convertible preferred stock Balance at beginning of period .................. $ 85 $ 85 Conversion ...................................... (85) - Balance at end of period ........................ - 85 Common stock Balance at beginning of period .................. 962 939 Issuance of treasury shares ..................... (93) (13) Balance at end of period ........................ 869 926 Retained earnings Balance at beginning of period .................. 7,732 7,007 Net income ...................................... 379 580 Cash dividends (per share) Preferred ($.64; $1.29) ......................... (1) (3) Common ($.88; $.80) ............................ (218) (200) Balance at end of period ........................ 7,892 7,384 Accumulated other comprehensive income (loss) Balance at beginning of period................... (1,278) 1,599 Change in net unrealized gains (losses) on securities .................................. (179) (1,475) Balance at end of period ........................ (1,457) 124 Cost of treasury stock Balance at beginning of period .................. (1,081) (759) Issuance for conversion of preferred stock and preferred securities .......................... 418 - Issuance for employee benefit plans and other ... 31 40 Share repurchases ............................... (243) (221) Balance at end of period ........................ (875) (940) Total shareholders' equity .................... $6,429 $7,579 Comprehensive Income Net income ....................................... $ 379 $ 580 Change in net unrealized gains (losses) on securities Fair value of fixed maturity securities ........ (425) (3,191) Deferred policy acquisition costs and cost of insurance purchased ........................... 154 905 Deferred income taxes .......................... 96 807 Change in fixed maturity securities ............ (175) (1,479) Change in equity securities and other .......... (4) 4 Total ......................................... (179) (1,475) Comprehensive income (loss) ...................... $ 200 $ (895) Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Condensed Statement of Cash Flows (Unaudited) (In millions) Six Months Ended June 30, 2000 1999 Operating activities Net cash provided by operating activities ... $ 1,199 $ 1,253 Investing activities Investment purchases .............................. (9,107) (12,273) Investment dispositions and repayments ............ 7,756 10,288 Finance receivable originations and purchases ..... (3,404) (2,921) Finance receivable principal payments received .... 2,655 2,513 Net increase in short-term investments ............ (1,999) (442) Other, net ........................................ (73) (74) Net cash used for investing activities ...... (4,172) (2,909) Financing activities Retirement Services and Life Insurance Policyholder account deposits ................... 3,711 3,210 Policyholder account withdrawals ................ (3,354) (2,338) Net policyholder account deposits .............. 357 872 Short-term collateralized financings ............ 2,055 277 Total Retirement Services and Life Insurance .. 2,412 1,149 Consumer Finance Net increase in short-term debt ................. 414 58 Long-term debt issuances ........................ 831 455 Long-term debt redemptions ...................... (699) (191) Short-term collateralized financings ............ 14 - Total Consumer Finance ........................ 560 322 Corporate Net increase in short-term debt ................. 202 96 Long-term debt issuance ......................... - 150 Long-term debt redemption ....................... (150) - Issuance of preferred securities of subsidiary .. 295 - Common stock repurchases ........................ (219) (219) Dividends on common and preferred stock ......... (219) (203) Non-recourse obligation collateralized by bonds . - 483 Other, net ...................................... 72 (115) Total Corporate ............................... (19) 192 Net cash provided by financing activities ... 2,953 1,663 Net increase (decrease) in cash .................... (20) 7 Cash at beginning of period ........................ 294 341 Cash at end of period .............................. $ 274 $ 348 Supplemental disclosure of cash flow information: Cash paid during the period for Income taxes .................................... $ 208 $ 48 Interest Corporate ...................................... 109 89 Consumer Finance ............................... 332 265 Dividends on preferred securities of subsidiaries ................................... 75 68 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Notes to Consolidated Financial Statements June 30, 2000 (In millions, except per share data) 1. Accounting Policies. The accompanying unaudited consolidated financial statements of American General Corporation (American General) and its subsidiaries (collectively, the company or we) have been prepared in accordance with generally accepted accounting principles for interim periods. In the opinion of management, these statements include all adjustments that are necessary for a fair presentation of the company's consolidated financial position at June 30, 2000, the consolidated results of operations for the six months and quarters ended June 30, 2000 and 1999, and the consolidated shareholders' equity, comprehensive income, and cash flows for the six months ended June 30, 2000 and 1999. 2. Future Accounting Standard. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivative instruments to be recognized at fair value in the balance sheet. Changes in the fair value of a derivative instrument will be reported as earnings or other comprehensive income, depending upon the intended use of the derivative instrument. We will adopt SFAS 133 on January 1, 2001. We do not expect adoption to have a material impact on the company's results of operations and financial position. 3. Calculation of Earnings Per Share. We calculate basic and diluted earnings per share as follows: Six Months Ended Quarter Ended June 30, June 30, 2000 1999 2000 1999 Net income .................. $ 379 $ 580 $ 94 $ 293 Net dividends on convertible preferred stock ............ - (3) - (2) Basic earnings .............. 379 577 94 291 Net dividends on dilutive securities Convertible preferred securities of subsidiary . 5 5 2 2 Convertible preferred stock - 3 - 2 Dilutive earnings ........... $ 384 $ 585 $ 96 $ 295 Average basic shares outstanding ................ 248.1 250.7 247.4 250.0 Dilutive securities Convertible preferred securities of subsidiary . 6.1 6.1 6.1 6.1 Convertible preferred stock - 2.3 - 2.3 Stock options ............. .8 1.2 .8 1.4 Restricted stock .......... .6 .3 .6 .4 Average diluted shares outstanding ................ 255.6 260.6 254.9 260.2 Net income per share Basic ...................... $1.53 $2.30 $ .38 $1.17 Diluted .................... $1.50 $2.25 $ .38 $1.14 Item 1. Financial Statements (continued). 4. Derivative Financial Instruments. Derivative financial instruments did not have a material effect on net investment income, interest expense, or net income during the six months ended June 30, 2000 or 1999. Significant activity related to derivative financial instruments in 2000 was as follows: During the six months ended June 30, 2000, we purchased call swaptions with notional amounts of $1.8 billion, while swaptions with notional amounts of $14.4 billion expired. Swaptions, which are options to enter into interest rate swap agreements, limit the company's exposure to reduced spreads between investment yields and interest rates credited to policyholders should interest rates decrease or increase significantly over prolonged periods. Call and put swaptions with notional amounts of $3.8 billion and $400 million, respectively; average strike rates of 5.3% and 9.5%, respectively; and total premium paid of $1 million and $.2 million, respectively, were outstanding at June 30, 2000. These swaptions expire throughout 2000. Should the strike rates remain below market rates (for call swaptions) and above market rates (for put swaptions), the swaptions will expire and the company's exposure would be limited to the premiums paid. 5. Dollar Rolls. We use dollar roll agreements as part of our strategy to increase investment income. Dollar rolls are agreements to sell mortgage-backed securities and repurchase substantially the same securities at a specified price and date in the future. We account for dollar rolls as short-term collateralized financings and include the repurchase obligation in other liabilities. At June 30, 2000, the company had $2.1 billion of outstanding dollar roll agreements. The average amount outstanding and the weighted-average interest rate on the short-term collateralized borrowings for the six months ended June 30, 2000 were $1.8 billion and 5.7%, respectively. 6. Investing Activities. Cash flows related to investing activities were as follows: Dispositions and Purchases Repayments Six Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 Fixed maturity securities $8,679 $11,819 $7,458 $10,065 Mortgage loans 257 271 216 166 Equity securities 36 20 41 21 Other 135 163 41 36 Total $9,107 $12,273 $7,756 $10,288 7. Redeemable Equity. In second quarter 2000, we had activity in preferred securities of subsidiaries as follows: 1) On June 27, 2000, American General Capital II (the trust), a subsidiary trust of American General, issued 300,000 shares, or $300 million, of non-convertible preferred securities. Semi-annual cumulative dividends on the preferred securities are payable by the trust at the annual rate of 8-1/2%. Item 1. Financial Statements (continued). The trust has no independent operations. The sole assets of the trust are Junior Subordinated Debentures (subordinated debentures) issued by American General and mandatorily redeemable in 2030. The interest terms and payment dates of the subordinated debentures held by the trust correspond to those of the trust's preferred securities. The subordinated debentures are eliminated in our consolidated financial statements. Our obligation under the subordinated debentures and related agreements, when taken together, constitute a full and unconditional guarantee of payments due on the preferred securities. The subordinated debentures are redeemable, under certain conditions, at the option of the company, on a proportionate basis. 2) On June 30, 2000, holders of approximately 5 million shares of our 6% convertible preferred securities of subsidiaries converted their securities at a conversion rate of 1.2288 per share into 6.1 million shares of American General common stock. On that date, the conversion rights expired for the remaining 10,811 shares. On July 5, 2000, we announced that we will exercise our right to redeem these shares at $50 par value on August 31, 2000. 8. Convertible Preferred Stock. On March 1, 2000, we redeemed all outstanding shares of our mandatorily convertible preferred stock. Holders received .8264 share of our common stock for each share of preferred stock redeemed. In total, we issued 1.9 million shares of common stock. 9. Other Charges. The company recorded the following non-recurring items, totaling $193 million aftertax or $.76 per share, during second quarter 2000: 1) On June 21, 2000, one of the company's life insurance subsidiaries entered into settlements to resolve pending class action litigation and related regulatory inquiries concerning industrial life insurance. See Note 10 for further discussion of this matter. In conjunction with the proposed settlements, we recorded a charge of $265 million ($175 million aftertax or $.68 per share). The charge covers the cost of policyholder benefits, including premium adjustments and benefit enhancements, and other charges and expenses resulting from the proposed settlements, as well as related administrative and legal costs. 2) In late June 2000, we discovered a potential fraud committed against a subsidiary that conducts mortgage warehouse lending activities in our consumer finance division. Recent mortgages processed by one originator allegedly had been funded based on fraudulent information. In July, the originator's license was suspended and the originator and its parent company filed for bankruptcy. Based on the available information, we recorded a charge of $50 million ($32 million aftertax or $.13 per share) for our estimated loss related to this alleged fraud. We are pursuing all appropriate remedies to recover this loss, including insurance recovery and legal action. Item 1. Financial Statements (continued). 3) During second quarter 2000, we finalized certain tax issues associated with our 1989-1992 tax returns under examination by the Internal Revenue Service. As a result, we reduced goodwill by $27 million and recognized a $14 million ($.05 per share) tax benefit to reflect the use of acquired net operating loss carryforwards. 10. Legal Proceedings. The company is party to various lawsuits and proceedings, including the following: 1) In the mid-1990s, one of our subsidiaries, American General Financial Center (renamed A.G. Financial Service Center, Inc.) (Financial Service Center), provided financing for satellite dishes sold by independent unaffiliated dealers. On May 18, 1999, the Chancery Court of the First Judicial District of Jones County, Mississippi in a case captioned Clayton D. Smith, et al. v. Delta TV Corporation, Don Acy, US Electronics, American General Financial Center, Civil Action No. 96-0254 (the Clayton Smith matter), rendered a judgment awarding approximately $500,000 in compensatory damages and $167 million in punitive damages against Financial Service Center. The lawsuit was filed on November 15, 1996, by 29 individuals who had each purchased a satellite dish. Financial Service Center, together with certain other American General companies, currently are named as defendants in other pending cases involving the financing of satellite dishes. In August 1999, Financial Service Center filed a voluntary petition to reorganize under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Southern District of Indiana. The decision to reorganize was necessitated by the judgment rendered against Financial Service Center by the Mississippi state court. The filing for reorganization under Chapter 11 is limited to Financial Service Center and was intended to provide a fair and orderly process for managing the claims against Financial Service Center. In January 2000, settlement agreements were entered into in connection with the Clayton Smith matter and other pending cases relating to satellite dish financing. Accordingly, we recorded a charge of $57 million ($36 million aftertax) in fourth quarter 1999 to cover the proposed settlements and other litigation. Resolution of the satellite dish litigation within the recorded charge is dependent upon a number of factors, including obtaining the bankruptcy court's approval of Financial Service Center's plan of reorganization. If court approvals are obtained and appeals are not taken, we expect that the settlements will be final in third quarter 2000. Item 1. Financial Statements (continued). 2) Prior to our acquisition of USLIFE Corporation, one of its subsidiaries entered the workers' compensation reinsurance business in 1997. We discontinued writing new workers' compensation reinsurance business in 1998. Our largest contract was a quota share reinsurance agreement with Superior National Insurance Group, Inc. and its affiliates (collectively, Superior National), effective May 1, 1998. On November 29, 1999, we initiated an arbitration proceeding to rescind this contract from its inception, based in part on misrepresentations and nondisclosures which we believe were made by Superior National. On March 3, 2000, the California Department of Insurance ordered seizure of certain of Superior National's insurance subsidiaries as a result of their financial condition. On April 26, 2000, Superior National Insurance Group, Inc. filed a voluntary petition to reorganize under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Central District of California. We do not believe that the action of the California Department of Insurance or the bankruptcy filing will prevent the company from ultimately arbitrating its claim for rescission, and we plan to fully pursue all remedies through the arbitration process. Although we believe, based on the advice of counsel, that the company will succeed in rescinding the contract, risks and uncertainties remain with respect to the ultimate outcome. In the unlikely event the company does not prevail in the arbitration, we do not expect the additional aftertax losses from our workers' compensation business to exceed $85 million, after recoveries from reinsurers. We believe that any ultimate loss related to our workers' compensation business will not have a material adverse effect on our results of operations and financial position. 3) Certain companies acquired by American General Life and Accident Insurance Company (collectively, AGLA), a subsidiary of the company, previously issued small face amount life insurance policies known as industrial life insurance. AGLA ceased writing industrial life insurance more than twenty years ago. On December 10, 1999, a class action was filed against AGLA, Leola McNeil v. American General Life and Accident Insurance Company et al., Civil Action No. 3-99-1157 (M.D. TN 1999), principally challenging AGLA's pricing practices with respect to certain minority purchasers of industrial life insurance and seeking compensatory and punitive damages and injunctive relief. On April 27, 2000, the Florida Department of Insurance (the Department) issued a cease and desist order to AGLA, In the Matter of American General Life and Accident Insurance Company, Case No. 348600-00-C, requiring AGLA to cease collecting a portion of premiums from Florida minority policyholders and to submit a corrective action plan to the Department. Prior to that date, AGLA had taken action to cease collecting a portion of the premiums on its industrial life policies from affected minority policyholders nationwide. Item 1. Financial Statements (continued). On June 21, 2000, American General announced that AGLA entered into a settlement, subject to court approval, to resolve the McNeil class action. We also announced that AGLA entered into an agreement with the Department to resolve related regulatory matters, including the cease and desist order. Since the announcement, 31 other states, representing in excess of 90% of AGLA's industrial life policyholders, have joined in the settlement. The regulatory settlement agreements are contingent on final court approval of the class action settlement. In conjunction with the proposed settlements, we recorded a charge of $265 million ($175 million aftertax) in second quarter 2000. The charge covers the cost of policyholder benefits, including premium adjustments and benefit enhancements, and other charges and expenses resulting from the proposed settlements, as well as related administrative and legal costs. The company is also party to various other lawsuits and proceedings arising in the ordinary course of business. These lawsuits and proceedings include certain class action claims and claims filed by individuals who excluded themselves from market conduct settlements relating to life insurance pricing and sales practices. In addition, many of these claims arise in jurisdictions, such as Alabama and Mississippi, that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. Based upon information presently available, we believe that the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on the company's results of operations and financial position. However, it should be noted that the frequency of large damage awards, including large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given suit. 11. Tax Return Examinations. American General and the majority of its subsidiaries file a consolidated Federal income tax return. The Internal Revenue Service has completed examinations of our tax returns through 1992 and is currently examining our tax returns for 1993 through 1996. Although the final outcome of any issues raised is uncertain, we believe that the ultimate liability, including interest, will not have a material adverse effect on the financial statements. 12. Division Results. We report our financial results in three business divisions, as well as a category for corporate operations. Results of each division include earnings from its business operations and earnings on the amount of equity we consider necessary to support its business. Corporate operations include corporate capital costs and other income or expenses not allocated to the business divisions. Goodwill amortization, net realized investment gains (losses), and non-recurring items are also excluded from division results, consistent with the manner in which we review and evaluate the divisions. Item 1. Financial Statements (continued). Division results for the six months ended June 30, were as follows: Income Revenues Before Taxes Net Income 2000 1999 2000 1999 2000 1999 Retirement Services $1,947 $1,758 $ 492 $ 428 $ 328 $ 287 Life Insurance 2,723 2,739 573 537 377 350 Consumer Finance 932 844 189 171 121 110 Total divisions 5,602 5,341 1,254 1,136 826 747 Corporate operations (21) (1) (164) (144) (109) (94) Goodwill amortization (24) (24) (24) (24) Net dividends on preferred securities of subsidiaries (50) (45) Operating earnings 643 584 Realized investment losses (109) (7) (109) (7) (71) (4) Non-recurring items - - (315) - (193) - Consolidated total $5,472 $5,333 $ 642 $ 961 $ 379 $ 580 Division results for the quarter ended June 30, were as follows: Income Revenues Before Taxes Net Income 2000 1999 2000 1999 2000 1999 Retirement Services $ 964 $ 913 $ 249 $ 217 $ 166 $ 145 Life Insurance 1,371 1,383 289 272 190 177 Consumer Finance 469 423 97 89 62 57 Total divisions 2,804 2,719 635 578 418 379 Corporate operations (11) (1) (86) (77) (56) (49) Goodwill amortization (12) (12) (12) (12) Net dividends on preferred securities of subsidiaries (25) (23) Operating earnings 325 295 Realized investment losses (58) (5) (58) (5) (38) (2) Non-recurring items - - (315) - (193) - Consolidated total $2,735 $2,713 $ 164 $ 484 $ 94 $ 293 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This item presents specific comments on material changes to our consolidated results of operations, capital resources, and liquidity for the periods reflected in the interim financial statements filed with this report. This analysis should be read in conjunction with the consolidated financial statements and related notes on pages 2 through 12 of this Quarterly Report on Form 10-Q. The reasons for any significant variations between the quarters ended June 30, 2000 and 1999 are the same as those discussed below for the respective six month periods, unless otherwise noted. Amounts in the tables are in millions, except per share data. OVERVIEW The company is a diversified financial services organization with over $121 billion of assets and over $20 billion of annual revenues and deposits. We are a leading provider of retirement services, life insurance, consumer loans, and investments to 12 million customers. Our financial highlights were as follows: Six Months Ended Quarter Ended June 30, June 30, 2000 1999 2000 1999 Revenues and deposits(1) $ 11,283 $ 9,965 $ 5,718 $ 5,228 Earnings Operating earnings 643 584 325 295 Net income 379 580 94 293 Earnings per share Operating earnings 2.54 2.26 1.29 1.15 Net income 1.50 2.25 .38 1.14 Assets(2) 122,866 109,722 Shareholders' equity(2) Total 7,911 7,484 Per share 31.23 29.65 Operating return on equity 16.46% 15.74% 16.33% 15.75% (1) Excludes realized investment losses. (2) Excludes fair value adjustment under SFAS 115. Revenues and deposits increased $1.3 billion, or 13%, for the six months ended June 30, 2000, compared to the same period in 1999, due to higher fixed and variable deposits in our retirement services and life insurance divisions. Operating earnings increased 10% for the first six months of 2000 due to increases in earnings in our retirement services division (up 14%), life insurance division (up 8%), and consumer finance division (up 10%). Operating earnings per share increased 12%, compared to the 10% increase in operating earnings, as a result of the decline in average shares outstanding due to the repurchase of 7.0 million shares of our common stock in the last twelve months. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Net income decreased $201 million, or 35%, for the six months ended June 30, 2000, due to aftertax charges of $193 million and aftertax realized investment losses of $71 million. The charges mainly relate to our settlement of industrial life insurance litigation and a fraud loss in second quarter 2000. See Note 9 of the financial statements for further discussion of the charges. The investment losses from sale of our securities reflect our ongoing management of the investment portfolio to maximize its relative value and to optimize the company's tax position. The $427 million increase in shareholders' equity reflects $930 million in net income over the last twelve months, in addition to a $250 million increase related to the conversion of our convertible preferred securities, partially offset by dividends paid to our shareholders of $422 million and share repurchases of $447 million. BUSINESS DIVISIONS We manage our business operations through three divisions - retirement services, life insurance, and consumer finance - based on products and services offered. Results of each of our business division's operations are discussed below. Retirement Services Our retirement services division results were as follows: Six Months Ended Quarter Ended June 30, June 30, 2000 1999 2000 1999 Fixed margin $ 490 $ 468 $ 247 $ 238 Variable fees 119 84 60 44 Asset management fees 31 15 16 7 Other revenue 32 16 16 9 Net revenue 672 583 339 298 Operating expenses 166 151 84 80 Other, net* 14 4 6 1 Pretax earnings 492 428 249 217 Income taxes 164 141 83 72 Division earnings $ 328 $ 287 $ 166 $ 145 *Primarily commissions and change in DPAC/CIP. Earnings. Retirement services earnings are a function of the level of our managed assets, fixed margin, variable fees, asset management fees, and operating expenses. Division earnings for the six months ended June 30, 2000 increased 14%, or $41 million, compared to the same period in 1999. The increase was due to the 18% growth in managed assets from June 30, 1999 to June 30, 2000, which generated an increase in fixed margin, variable fees, and asset management fees that was partially offset by higher operating expenses. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Assets and Deposits. Investments and separate account assets grew 10% and 27%, respectively, from June 30, 1999 to June 30, 2000. Assets and deposits were as follows: Six Months Ended Quarter Ended June 30, June 30, 2000 1999 2000 1999 Assets Investments* $ 43,707 $39,732 Separate accounts 22,669 17,854 Premiums and deposits Fixed 2,828 2,386 $1,491 $1,331 Variable 1,786 1,529 899 749 Mutual funds 476 49 205 29 Surrender ratios Fixed 9.94% 7.62% 10.05% 8.31% Variable 5.74 5.00 5.21 4.86 *Excludes fair value adjustment under SFAS 115. Total premiums and deposits increased 28%, or $1.1 billion, for the six months ended June 30, 2000 and 23%, or $.5 billion, in second quarter compared to the same periods in 1999. The 18% increase in fixed premiums and deposits for the six month period and the 12% increase for second quarter resulted from our strong sales of fixed annuities through financial institutions. Variable deposit growth of 17% and 20% for the first six months and second quarter of 2000, respectively, reflects our ability to meet continued consumer interest in equity-based products through group retirement plans. Mutual fund deposit growth was $427 million in the first six months and $176 million in second quarter, compared to the 1999 periods, reflecting our recent introduction of this product to meet customer demand for mutual funds without an annuity wrapper. Changes in the surrender ratios resulted from widening of the spread between market and credited interest rates, more policies without surrender protection, and increased competition. Fixed Margin. Fixed margin, the difference between net investment income on general account investments and interest credited to policyholders' fixed accounts, increased 5% in the first six months of 2000 compared to 1999. Fixed investment spread measures this difference in terms of interest rates. Net investment income and the components of fixed investment spread were as follows: Six Months Ended Quarter Ended June 30, June 30, 2000 1999 2000 1999 Net investment income $1,567 $1,457 $ 792 $ 741 Investment yield* 7.72% 7.72% 7.73% 7.78% Average crediting rate 5.35 5.38 5.37 5.39 Fixed investment spread 2.37% 2.34% 2.36% 2.39% *Excludes fair value adjustment under SFAS 115. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). The $22 million increase in the fixed investment margin for the first six months of 2000 was largely due to a higher level of invested assets and the resulting 8% increase in net investment income. Investment yield, average crediting rate, and fixed investment spread were relatively flat for the six months and quarter ended June 30, 2000 compared to the same periods in 1999, primarily due to management of the interest crediting rates. Variable and Asset Management Fees. Variable fees are annuity product fees, primarily mortality and expense charges, which we earn from separate accounts. Asset management fees are the advisory and management fees we earn on mutual fund and separate account assets. The increase in these fees of $51 million, or 51%, for the first six months of 2000, compared to the same period of 1999, was driven by a 27% growth in separate account assets. Our variable fee rate increased 13 basis points to 1.36% for the first six months of 2000, primarily due to more favorable revenue-sharing agreements with third-party asset managers. Operating Expenses. Operating expenses increased $15 million for the six months and $4 million for the quarter ended June 30, 2000, compared to the same periods in 1999, primarily due to increased personnel costs for our expanded sales efforts and $3 million of operating expenses for a mutual fund group that we purchased in first quarter 2000. The ratio of operating expenses to average assets under management improved to .49% for the first six months of 2000 from .54% for the same period a year ago. Life Insurance Our life insurance division results were as follows: Six Months Ended Quarter Ended June 30, June 30, 2000 1999 2000 1999 Premiums and other considerations $1,527 $1,539 $ 770 $ 780 Net investment income 1,091 1,112 547 557 Other income 105 88 54 46 Total revenues 2,723 2,739 1,371 1,383 Insurance and annuity benefits 1,428 1,475 721 742 Operating expenses 334 357 167 185 Other expenses* 388 370 194 184 Total expenses 2,150 2,202 1,082 1,111 Pretax earnings 573 537 289 272 Income taxes 196 187 99 95 Division earnings $ 377 $ 350 $ 190 $ 177 *Primarily commissions and change in DPAC/CIP. Earnings. The division's profitability is driven by growth in insurance reserves and insurance in force, as well as interest spread, mortality, and operating expenses. Earnings increased 8% for the six months ended June 30, 2000 compared to the same period in 1999. The increase resulted from a 4% growth in combined general and separate account reserves and a 9% increase in insurance in force, due to growth in existing business as well as new ventures, and reduced operating expenses. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Sales and Premiums and Deposits. Sales represent annualized premiums and deposits for new products issued. Premiums represent funds received on traditional in force business, while deposits represent funds we receive for interest-sensitive insurance and annuities. Sales and premiums and deposits of the life insurance division were as follows: Six Months Ended Quarter Ended June 30, June 30, 2000 1999 2000 1999 Sales Individual life insurance $ 279 $ 252 $ 140 $ 136 Individual annuities 464 297 228 154 Premiums and deposits Life insurance $1,745 $1,829 $ 881 $1,010 Annuities 477 332 241 183 Other 291 333 145 163 Total $2,513 $2,494 $1,267 $1,356 Individual life insurance sales for the first six months of 2000 increased 10% over the 1999 period due to increasing sales of variable products, universal life, and term insurance. The increase also related to a 25% increase in life insurance sales through our independent distribution channel, which more than offset a decline in sales through career agents due to changes in marketing emphasis. Total life insurance premiums and deposits decreased 5% in the six month period and 13% in the quarter due to lower corporate market deposits, which can fluctuate significantly from quarter to quarter. Individual annuity sales increased 56% in the first six months of 2000, compared to the same period of 1999, while annuity premiums and deposits increased 44%. These increases were due to strong sales of variable annuities through our financial institution channel. Other premiums and deposits, which include primarily accident and health and property and casualty business, declined 12% for the first six months of 2000, compared to the same period of 1999, due to our de-emphasis of these lines of business. Investment Spread. Investment results and interest crediting rates were as follows: Six Months Ended Quarter Ended June 30, June 30, 2000 1999 2000 1999 Assets Investments* $28,673 $27,523 Separate accounts 2,931 1,841 Liabilities Insurance and annuities 25,964 25,976 Separate accounts 2,931 1,841 Investment yield 8.06% 8.34% 8.07% 8.32% Average crediting rate 5.87 5.89 5.90 5.86 Investment spread 2.19% 2.45% 2.17% 2.46% *Excludes fair value adjustment under SFAS 115. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Net investment income and the investment yield decreased during the first six months and second quarter of 2000, compared to the same periods of 1999, due to lower income from securities called before their maturity dates and lower market rates on new and reinvested funds. This decrease in net investment income was partially offset by an increase in investment income generated by the higher amount of investments and separate account assets. Mortality and Persistency. Death claims and premium termination rates were as follows: Six Months Ended Quarter Ended June 30, June 30, 2000 1999 2000 1999 Death claims $ 518 $ 508 $ 259 $ 258 Death claims per $1,000 in force $ 3.82 $ 3.73 $ 3.83 $ 3.80 Premium termination rate 11.87% 12.26% 11.59% 12.10% Death claims per $1,000 of in force increased during the first six months and second quarter of 2000, compared to the same periods in 1999, consistent with the increasing average age of the in force business. The lower premium termination rate for 2000 reflects higher than normal terminations in our career agency lines during 1999. Mortality and persistency experience during the first six months of 2000 reflected normal fluctuations and remained within our pricing assumptions. Expenses. Operating expenses decreased $23 million, or 7%, for the first six months and decreased 10% for second quarter 2000 compared to the same periods in 1999. Reductions in salary-related and technology costs more than offset costs to market new products. The year-to-date ratio of operating expenses to direct premiums and deposits improved to 13.19% in 2000 compared to 14.30% in 1999. Other expenses, which consist of commissions and the change in DPAC and CIP, increased 5% in the first six months of 2000 compared to the same period in 1999. Commissions increased period over period due to the higher level of sales in 2000. Deferrals of commissions and certain operating expenses, as well as the related amortization of previously-capitalized DPAC and CIP, were unchanged in 2000 from the prior year. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Consumer Finance Our consumer finance division results were as follows: Six Months Ended Quarter Ended June 30, June 30, 2000 1999 2000 1999 Finance margin $ 456 $ 437 $ 228 $ 218 Other income 143 131 71 67 Net revenue 599 568 299 285 Provision for finance receivable losses 97 100 48 48 Operating expenses 251 242 123 119 Other expenses* 62 55 31 29 Pretax earnings 189 171 97 89 Income taxes 68 61 35 32 Division earnings $ 121 $ 110 $ 62 $ 57 *Primarily insurance benefits. Earnings. Division earnings are a function of the amount and mix of finance receivables, interest spread, credit quality, and operating expenses. Earnings increased 10% for the six months ended June 30, 2000, compared to the same period in 1999, due to increases in average receivables, improved credit quality, and the benefits of operating efficiencies, partially offset by lower interest spread. Finance Receivables. The mix of finance receivables was as follows: June 30, 2000 1999 Real estate loans $ 7,249 $6,218 Non-real estate loans 2,988 2,497 Retail sales finance 1,406 1,244 Total finance receivables 11,643 9,959 Allowance for losses (383) (386) Finance receivables, net $11,260 $9,573 Average finance receivables Year-to-date $11,181 $9,792 Quarter 11,305 9,862 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). We increased our finance receivables portfolio by $1.7 billion during the last twelve months. Average finance receivables in the first six months of 2000 increased 14% compared to the same period in 1999, due to higher loan production and acquisitions of real estate and non-real estate loan portfolios. Over the last twelve months, we generated $6.6 billion of loans in our branch offices and purchased $1.3 billion of real estate loans and $.5 billion of non-real estate loans, while $6.5 billion of loans were repaid. At quarter end, 62% of the portfolio was secured by real estate, unchanged from a year ago. During first quarter 2000, we completed the sale of $27 million of fully-reserved receivables, resulting in a pretax gain of $1 million. The allowance for finance receivable losses decreased $3 million from the prior year period, primarily due to the sale of these receivables, partially offset by an increase for a portfolio of non-real estate loans purchased in second quarter 2000. Finance Margin. Finance margin is the difference between the finance charges we charge our customers and interest expense on the debt required to fund finance receivables. Interest spread measures this difference in terms of interest rates. Finance margin and the components of interest spread were as follows: Six Months Ended Quarter Ended June 30, June 30, 2000 1999 2000 1999 Finance charges $ 789 $ 713 $ 398 $ 356 Interest expense 333 276 170 138 Finance margin $ 456 $ 437 $ 228 $ 218 Yield on finance receivables 14.17% 14.66% 14.15% 14.47% Borrowing cost 6.47 6.20 6.52 6.17 Interest spread 7.70% 8.46% 7.63% 8.30% Year-to-date finance charges increased 11% from the prior year period due to the increase in our average finance receivables, partially offset by the decline in yield on real estate loans. Interest expense increased for the same period due to increases in average debt outstanding and higher borrowing costs. Interest spread decreased in 2000 due to the combined effect of the decline in yield and the increase in our borrowing cost. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Credit Quality. Net charge-off and delinquency ratios reflect the quality of our receivables portfolio, the success of our collection efforts, and general economic conditions. Credit quality information was as follows: Six Months Ended Quarter Ended June 30, June 30, 2000 1999 2000 1999 Charge offs $ 97 $ 100 $ 48 $ 48 Delinquencies 367 371 Allowance for losses 383 386 Ratios Charge-off 1.74% 2.05% 1.72% 1.96% Delinquency 3.02 3.53 Allowance 3.29 3.87 Charge-off coverage 1.98x 1.93x 1.98x 2.01x Risk-adjusted yield 12.43% 12.61% 12.43% 12.51% The decrease in the charge-off ratio reflects a higher percentage of real estate loans in the portfolio during the first six months and second quarter of 2000, compared to the same periods in 1999. The decreases in delinquencies and the delinquency ratio at June 30, 2000, compared to June 30, 1999, were due to continued improvement in credit quality, the higher level of recently purchased receivables in the first six months of 2000, and the sale of $27 million of fully-reserved receivables in first quarter 2000. The allowance for finance receivable losses is maintained at an amount that we believe is adequate to absorb anticipated charge offs in our existing portfolio. The allowance as a percentage of finance receivables has continued to decline as the portfolio has grown, reflecting improved credit quality. We have maintained a slightly higher year-to-date charge-off coverage ratio at 2 times annual charge offs. Risk-adjusted yield represents the yield on finance receivables less the charge-off ratio. Although risk-adjusted yield declined, the decrease is less than the decline in yield on finance receivables due to the improvement in the charge-off ratio. Operating Expenses. Operating expenses as a percentage of average finance receivables for the first six months of 2000 improved to 4.49% from 4.97% for the same period of 1999. This decrease reflects a 14% increase in average finance receivables compared to a 3% increase in operating expenses. Operating expenses increased due to higher salary-related and technology costs, partially offset by lower litigation expenses. INVESTMENTS Our invested assets consisted primarily of fixed maturity securities (86%), mortgage loans on real estate (5%), short-term investments (4%), and policy loans (3%) at June 30, 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Fair Value of Securities. At June 30, 2000, the market value of our fixed maturity securities was 96.6% of amortized cost compared to 97.2% of amortized cost at December 31, 1999. The negative fair value adjustment on our fixed maturity securities portfolio increased by $425 million, with a related $175 million negative adjustment to shareholders' equity. The components of the fair value adjustment at June 30, 2000 and December 31, 1999, and the six month change, were as follows: June 30, December 31, 2000 1999 Change Fair value adjustment to fixed maturity securities $(2,175) $(1,750) $ (425) Related increase in DPAC/CIP 501 347 154 Related decrease in deferred income taxes 591 495 96 Valuation allowance on deferred tax asset (381) (381) - Net unrealized losses Fixed maturity securities (1,464) (1,289) (175) Other 7 11 (4) Net unrealized losses on securities $(1,457) $(1,278) $ (179) Fixed Maturity Securities. At June 30, 2000, our fixed maturity securities investment portfolio consisted of $46.2 billion of corporate bonds, $13.2 billion of mortgage-backed securities, and $2.1 billion of bonds issued by governmental agencies. The average credit rating of the portfolio was A at June 30, 2000 and A+ at December 31, 1999. Average ratings by category at June 30, 2000 were as follows: June 30, Average Credit 2000 % Rating Investment grade $44,982 73% A Mortgage-backed 13,207 21 AAA Below investment grade 3,442 6 B+ Total fixed maturity securities $61,631 100% A Investment income from our below investment grade securities was $197 million (10.6% yield) for the six months ended June 30, 2000 and $177 million (10.1% yield) for the same period in 1999. Realized investment losses on below investment grade securities were $76 million and $54 million for the six months ended June 30, 2000 and 1999, respectively. Non-performing bonds were less than 0.1% of total fixed maturity securities at June 30, 2000 and December 31, 1999. We classify bonds as non-performing when the payment of interest is sufficiently uncertain as to preclude accrual of interest. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Assets Under Management. Assets under management, which include invested assets, separate account assets, finance receivables, and mutual funds, increased to $116 billion at June 30, 2000 from $100 billion at June 30, 1999. The 16% increase over the prior year primarily related to growth in separate account assets and invested assets. Mutual funds under management increased $1.9 billion to $2.5 billion, primarily from our acquisition of the North American Funds, a family of 16 sub-advised mutual funds, in first quarter 2000. CAPITAL RESOURCES Corporate Capital. The level of our corporate capital is determined primarily by the required equity of our business divisions. The mix of corporate capital between debt and equity is influenced by our overall corporate strategy and structure. Our target capital structure consists of 25% corporate debt, 15% redeemable equity, and 60% shareholders' equity. The amount and mix of our corporate capital at June 30, 2000 and December 31, 1999 were as follows: June 30, December 31, 2000 1999 Corporate capital* $13,055 $12,768 Corporate debt 24.3% 24.4% Redeemable equity 15.1 15.1 Shareholders' equity 60.6 60.5 *Excludes fair value adjustment under SFAS 115. Redeemable Equity. On June 27, 2000, we issued $300 million of 8-1/2% preferred securities. Net proceeds of $295 million were used to reduce short- term debt. On June 30, 2000, holders of approximately 5 million shares of our 6% convertible preferred securities converted their securities into 6.1 million shares of American General common stock. Shareholders' Equity. On March 1, 2000, we redeemed all outstanding shares of our mandatorily convertible preferred stock, with a stated value of $85 million. Holders received .8264 share of our common stock for each share of preferred stock redeemed, for a total of 1.9 million common shares. We use share repurchases as a means of maintaining our target capital structure. We repurchased 4.2 million shares for $243 million in the six months ended June 30, 2000 and 2.4 million shares for $150 million in second quarter 2000. Since 1987, American General has repurchased 126.7 million common shares for an aggregate cost of $3.4 billion. Our future repurchase activity will be based on the company's corporate development activities, capital management strategy, and fluctuations in our common stock price. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Retirement Services and Life Insurance. The amount of statutory equity required to support the business of our retirement services and life insurance companies is principally a function of four factors: (1) quantity and quality of assets invested to support insurance and annuity reserves, (2) mortality and other insurance-related risks, (3) interest-rate risk resulting from potential mismatching of asset and liability durations, and (4) general business risks. Each of these items is a key factor in the National Association of Insurance Commissioners' risk-based capital (RBC) formula, used to evaluate the adequacy of a life insurance company's statutory equity. We currently manage the statutory equity of our principal retirement services and life insurance companies to a target of 2.5 times the Company Action Level RBC (or 5.0 times the Authorized Control Level RBC). We adjust dividends from, or contributions to, these companies to maintain this target. At June 30, 2000, our principal retirement services and life insurance companies had statutory equity in a range of 2.1 to 3.2 times the Company Action Level RBC, with a weighted-average of 2.6 times. Consumer Finance. The capital of our consumer finance division varies directly with the level of its finance receivables. This capital, totaling $12.3 billion at June 30, 2000, consisted of $1.5 billion of equity and $10.8 billion of consumer finance debt, which was not guaranteed by American General. The capital mix of consumer finance debt and equity is based upon maintaining leverage at a level that supports cost-effective funding. The consumer finance division's target ratio of debt to tangible net worth, a standard measure of financial risk in the consumer finance industry, is currently 7.5 to 1. The ratio was 7.7 to 1 at June 30, 2000 and 7.6 to 1 at December 31, 1999. LIQUIDITY Our overall liquidity is based on cash flows from the business divisions and our ability to borrow in both the long-term and short-term markets at competitive rates. At June 30, 2000, we had committed and unused credit facilities of $5.6 billion, substantially all of which were to support the company's commercial paper borrowings. We believe that our overall sources of liquidity will continue to be sufficient to satisfy our foreseeable financial obligations. Corporate Operations. The primary sources of cash for corporate operations include net dividends from our business divisions and the proceeds from issuances of debt and redeemable equity. Corporate operations use cash to pay dividends to shareholders, to pay aftertax interest on corporate debt and dividends on preferred securities, to repurchase common stock, and to pay other corporate expenses. We expect to fund future acquisitions and maturities of debt and preferred securities through external sources, while maintaining our capital structure. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Net dividends received from our business divisions were as follows: Six Months Ended June 30, 2000 1999 Dividends received Retirement Services $ 70 $ 87 Life Insurance 194 246 Consumer Finance 27 134 Total received 291 467 Contributions paid Retirement Services 43 - Life Insurance 133 229 Total paid 176 229 Net dividends received $ 115 $ 238 Dividends received from both our retirement services and life insurance divisions declined in 2000 since additional capital was required to support their target capital levels and new business growth. Dividends received from our consumer finance division also declined in 2000 because the division retained capital to support its purchase of a non-real estate portfolio in second quarter 2000. The life insurance division received contributions in 2000 and 1999 to partially fund the industrial life insurance litigation and the market conduct litigation settlements, respectively. Retirement Services. Principal sources of cash for our retirement services division were as follows: Six Months Ended June 30, 2000 1999 Cash from operating activities $ 908 $ 852 Fixed policyholder account deposits, net of withdrawals 420 703 Variable account deposits, net of withdrawals 1,443 1,302 Mutual fund deposits, net of withdrawals 269 18 Short-term collateralized financings 1,260 267 The increase in net variable account and mutual fund deposits and the decline in net fixed policyholder account deposits period over period resulted from policyholders continuing to seek higher returns in equity-based investments, as well as new variable product introductions. Because the investment risk on variable accounts and mutual fund products lies predominately with the policyholder, deposits and withdrawals related to separate accounts and mutual funds are not included in the company's cash flow statement. The increase in cash from short-term collateralized financings relates to the company's expanded use of dollar rolls as part of our investment strategy. The division's major use of cash was the net purchase of investments necessary to support increases in insurance and annuity liabilities. The division also paid net dividends of $27 million to the parent in the first six months of 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Life Insurance. Principal sources of cash for our life insurance division were as follows: Six Months Ended June 30, 2000 1999 Cash from operating activities $ 36 $129 Fixed policyholder account deposits, net of withdrawals (63) 169 Variable account deposits, net of withdrawals 440 422 Short-term collateralized financings 795 10 The $232 million decline in net fixed policyholder account deposits and the increase in net variable account deposits in the first six months of 2000, compared to 1999, resulted from policyholders seeking higher returns from equity-based investments, new variable product introductions, and the transfer of lump sum fixed deposits to variable accounts. The increase in short-term collateralized financings relates to our expanded use of dollar rolls. The division's major use of cash was the net purchase of investments necessary to support increases in insurance and annuity liabilities. In the first six months of 2000, the division paid net dividends of $61 million to the parent. Consumer Finance. Principal sources of cash for our consumer finance division were as follows: Six Months Ended June 30, 2000 1999 Cash from operating activities $350 $283 Increase in debt 546 322 Net cash provided by operating activities increased $67 million in 2000 compared to 1999 due to the increase in finance charges from higher average net receivables. Cash generated by borrowings increased due to higher growth in finance receivables in 2000. The division's major use of cash was to fund finance receivables growth. Net cash used to fund finance receivables was $749 million in the first six months of 2000, compared to $408 million in the first six months of 1999. The division paid dividends of $27 million to the parent in 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). FORWARD-LOOKING STATEMENTS All statements, trend analyses, and other information contained herein relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. We have made these forward-looking statements based upon our current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those that we anticipated. Actual results may differ materially from those included in the forward-looking statements. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: (1) changes in general economic conditions, including the performance of financial markets and interest rates; (2) customer responsiveness to both products and distribution channels; (3) competitive, regulatory, or tax changes that affect the cost of, or demand for, our products; (4) our ability to secure necessary regulatory approvals; (5) adverse litigation or arbitration results or resolution of litigation or arbitration, including proceedings related to industrial life insurance, satellite dish financing, market conduct, and workers' compensation insurance; and (6) the formation of strategic alliances or business combinations among our competitors or business partners. Investors are also directed to other risks and uncertainties discussed in documents we filed with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments, or otherwise. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Our exposure to market risk is primarily related to changes in interest rates. Quantitative and qualitative disclosures about our market risk resulting from changes in interest rates are included in the section titled "Asset/Liability Management" of Management's Discussion and Analysis in our 1999 Annual Report to Shareholders. There have been no material changes in such risks or our asset/liability management program during the six months ended June 30, 2000. See Note 4 of the financial statements for information about significant derivative financial instrument activity during the year. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Refer to Note 10 of Notes to Consolidated Financial Statements included in Part I of this Form 10-Q for the quarter ended June 30, 2000. Item 4. Submission of Matters to a Vote of Security Holders. On April 27, 2000, American General held its annual meeting of shareholders. As of that date, shareholders of the company's common and preferred shares outstanding were entitled to 249,094,817 votes. At the meeting, the company's shareholders voted on the following matters: (1) election of eleven directors constituting the company's entire board, for one-year terms; and (2) ratification of the appointment of Ernst & Young LLP as independent auditors for 2000. Each matter was approved by the shareholders. The votes cast for, against, and abstentions as to each such matter were as follows: Votes For Votes Against Abstentions Election of Directors: J. Evans Attwell 199,057,784 5,245,160 - Brady F. Carruth 202,160,174 2,142,770 - W. Lipscomb Davis Jr. 202,460,915 1,842,029 - Robert M. Devlin 184,584,608 19,718,336 - J. Edward Easler II 202,384,864 1,918,080 - Larry D. Horner 202,475,550 1,827,394 - Richard J.V. Johnson 202,480,844 1,822,100 - Michael E. Murphy 202,452,398 1,850,546 - Michael J. Poulos 199,944,241 4,358,703 - Robert E. Smittcamp 202,495,605 1,807,339 - Anne M. Tatlock 200,277,876 4,025,068 - Independent Auditors: 203,340,803 204,252 757,889 A more detailed description of the matters voted on by shareholders of the company at this meeting is included in the definitive Proxy Statement dated March 21, 2000 and incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. 11 Computation of Earnings per Share (included in Note 3 of Notes to Consolidated Financial Statements) 12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 27 Financial Data Schedule b. Reports on Form 8-K. The following reports on Form 8-K were filed after March 31, 2000: 1) Current Report on Form 8-K dated June 21, 2000, with respect to proposed settlement by American General Life and Accident Insurance Company to resolve its industrial life litigation, including charge of approximately $265 million ($175 million aftertax) to be recorded by the company in second quarter 2000. 2) Current Report on Form 8-K dated June 22, 2000, with respect to the pricing of a public offering of 300,000 shares of 8-1/2% Capital Trust Pass-through Securities of American General Capital II, a subsidiary trust of the company, at $994.71 per share. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 7, 2000. AMERICAN GENERAL CORPORATION (Registrant) By: NICHOLAS R. RASMUSSEN Nicholas R. Rasmussen Executive Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) EXHIBIT INDEX Exhibit 11 Computation of Earnings per Share (included in Note 3 of Notes to Consolidated Financial Statements) 12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 27 Financial Data Schedule