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 September 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 October 31, 2000, there were 251,444,968 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 nine months and quarters ended September 30, 2000 and 1999 .... 2 Consolidated Balance Sheet at September 30, 2000 and December 31, 1999 ............................. 3 Consolidated Statements of Shareholders' Equity and Comprehensive Income for the nine months ended September 30, 2000 and 1999 ....................... 4 Consolidated Condensed Statement of Cash Flows for the nine months ended September 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 ............... 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk ................................. 28 Part II. OTHER INFORMATION. Item 1. Legal Proceedings ................................... 29 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) Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Revenues Premiums and other considerations. $ 2,903 $ 2,866 $ 937 $ 952 Net investment income ............ 4,054 3,897 1,379 1,300 Finance charges .................. 1,203 1,077 414 364 Realized investment losses ....... (129) (12) (20) (5) Other ............................ 234 181 83 65 Total revenues ............... 8,265 8,009 2,793 2,676 Benefits and expenses Insurance and annuity benefits ... 4,128 4,020 1,377 1,329 Operating expenses ............... 1,198 1,215 402 407 Commissions ...................... 957 910 311 311 Change in deferred policy acquisition costs and cost of insurance purchased ............. (372) (337) (130) (116) Provision for finance receivable losses .......................... 147 150 50 50 Goodwill amortization ............ 36 36 12 12 Interest expense Corporate ....................... 167 146 57 51 Consumer Finance ................ 514 420 181 144 Other charges .................... 315 - - - Total benefits and expenses .. 7,090 6,560 2,260 2,188 Earnings Income before income tax expense . 1,175 1,449 533 488 Income tax expense ............... 401 507 188 171 Income before net dividends on preferred securities of subsidiaries .................... 774 942 345 317 Net dividends on preferred securities of subsidiaries ...... 76 68 26 23 Net income ................... $ 698 $ 874 $ 319 $ 294 Net income per share Basic ........................... $ 2.80 $ 3.48 $ 1.27 $ 1.18 Diluted ......................... $ 2.76 $ 3.39 $ 1.26 $ 1.15 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Balance Sheet (Unaudited) (In millions) September 30, December 31, 2000 1999 Assets Investments Fixed maturity securities (amortized cost: $64,350; $62,375) ........................ $ 62,848 $ 60,625 Mortgage loans on real estate .............. 3,773 3,686 Equity securities (cost: $330; $299) ....... 361 339 Policy loans ............................... 2,423 2,375 Investment real estate ..................... 217 222 Other long-term investments ................ 531 412 Short-term investments ..................... 2,487 676 Total investments ...................... 72,640 68,335 Cash ........................................ 309 294 Assets held in separate accounts ............ 25,986 24,097 Finance receivables, net .................... 11,257 10,634 Deferred policy acquisition costs ........... 5,524 4,980 Cost of insurance purchased ................. 1,087 1,170 Goodwill .................................... 1,449 1,501 Other assets ................................ 4,950 4,436 Total assets ........................... $123,202 $115,447 Liabilities Insurance and annuity liabilities ........... $ 67,614 $ 66,401 Liabilities related to separate accounts .... 25,986 24,097 Debt (short-term) Corporate ($2,165; $1,932) ................. 3,253 3,120 Consumer Finance ($5,018; $4,489) .......... 10,778 10,206 Income tax liabilities ...................... 949 833 Other liabilities ........................... 5,705 2,446 Total liabilities ...................... 114,285 107,103 Redeemable equity Company-obligated mandatorily redeemable preferred securities of subsidiaries holding solely company subordinated notes Non-convertible .......................... 1,970 1,675 Convertible .............................. - 249 Total redeemable equity ................ 1,970 1,924 Shareholders' equity Convertible preferred stock (shares issued and outstanding: 0, 2.3) ................... - 85 Common stock (shares issued: 269.3, 269.3; outstanding: 251.8, 248.1) ................. 882 962 Retained earnings ........................... 8,099 7,732 Accumulated other comprehensive income (loss) (1,101) (1,278) Cost of treasury stock ...................... (933) (1,081) Total shareholders' equity ............. 6,947 6,420 Total liabilities and equity ........... $123,202 $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) Nine Months Ended September 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 ..................... (80) (10) Balance at end of period ........................ 882 929 Retained earnings Balance at beginning of period .................. 7,732 7,007 Net income ...................................... 698 874 Cash dividends (per share) Preferred ($.64; $1.93) ........................ (1) (4) Common ($1.32; $1.20) .......................... (330) (300) Balance at end of period ........................ 8,099 7,577 Accumulated other comprehensive income (loss) Balance at beginning of period................... (1,278) 1,599 Change in net unrealized gains (losses) on securities .................................. 177 (1,847) Balance at end of period ........................ (1,101) (248) 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 ... 46 47 Share repurchases ............................... (316) (421) Balance at end of period ........................ (933) (1,133) Total shareholders' equity .................... $ 6,947 $ 7,210 Comprehensive Income Net income ....................................... $ 698 $ 874 Change in net unrealized gains (losses) on securities Fair value of fixed maturity securities ........ 248 (3,914) Deferred policy acquisition costs and cost of insurance purchased ........................... 42 1,072 Deferred income taxes .......................... (102) 1,002 Change in fixed maturity securities ............ 188 (1,840) Change in equity securities and other .......... (11) (7) Total ......................................... 177 (1,847) Comprehensive income (loss) ...................... $ 875 $ (973) Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Condensed Statement of Cash Flows (Unaudited) (In millions) Nine Months Ended September 30, 2000 1999 Operating activities Net cash provided by operating activities ... $ 1,729 $ 1,709 Investing activities Investment purchases .............................. (12,908) (17,221) Investment dispositions and repayments ............ 10,791 14,278 Finance receivable originations and purchases ..... (4,762) (4,484) Finance receivable principal payments received .... 3,966 3,817 Net increase in short-term investments ............ (1,811) (1,046) Other, net ........................................ (147) (152) Net cash used for investing activities ...... (4,871) (4,808) Financing activities Retirement Services and Life Insurance Policyholder account deposits ................... 5,480 4,903 Policyholder account withdrawals ................ (4,993) (3,626) Net policyholder account deposits .............. 487 1,277 Short-term collateralized financings ............ 2,213 1,047 Total Retirement Services and Life Insurance .. 2,700 2,324 Consumer Finance Net increase in short-term debt ................. 529 234 Long-term debt issuances ........................ 1,240 680 Long-term debt redemptions ...................... (1,200) (354) Short-term collateralized financings ............ 29 - Total Consumer Finance ........................ 598 560 Corporate Net increase in short-term debt ................. 233 143 Long-term debt issuances ........................ 246 150 Long-term debt redemptions ...................... (350) - Issuance of preferred securities of subsidiary .. 295 194 Common stock repurchases ........................ (313) (419) Dividends on common and preferred stock ......... (331) (304) Non-recourse obligation collateralized by bonds . - 483 Other, net ...................................... 79 (8) Total Corporate ............................... (141) 239 Net cash provided by financing activities ... 3,157 3,123 Net increase in cash ............................... 15 24 Cash at beginning of period ........................ 294 341 Cash at end of period .............................. $ 309 $ 365 Supplemental disclosure of cash flow information: Cash paid during the period for Income taxes .................................... $ 319 $ 152 Interest Corporate ...................................... 166 145 Consumer Finance ............................... 532 438 Dividends on preferred securities of subsidiaries ................................... 90 83 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Notes to Consolidated Financial Statements September 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 September 30, 2000, the consolidated results of operations for the nine months and quarters ended September 30, 2000 and 1999, and the consolidated shareholders' equity, comprehensive income, and cash flows for the nine months ended September 30, 2000 and 1999. 2. Future Accounting Standards. 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 have identified our derivative instruments and are currently documenting hedging activities as required by SFAS 133. We will be prepared to 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. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements," which provides criteria for revenue recognition. SAB 101 must be adopted no later than fourth quarter 2000. There will be no changes to the company's revenue recognition policies as a result of SAB 101. Item 1. Financial Statements (continued). 3. Calculation of Earnings Per Share. We calculate basic and diluted earnings per share as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Net income .................. $ 698 $ 874 $ 319 $ 294 Net dividends on convertible preferred stock ............ - (4) - (1) Basic earnings .............. 698 870 319 293 Net dividends on dilutive securities Convertible preferred securities of subsidiary . 5 8 - 3 Convertible preferred stock - 4 - 1 Dilutive earnings ........... $ 703 $ 882 $ 319 $ 297 Average basic shares outstanding ................ 249.0 249.8 251.4 248.0 Dilutive securities Convertible preferred securities of subsidiary . 4.1 6.1 - 6.1 Convertible preferred stock - 2.3 - 2.3 Stock options ............. 1.0 1.4 1.3 1.9 Restricted stock .......... .8 .3 .8 .4 Average diluted shares outstanding ................ 254.9 259.9 253.5 258.7 Net income per share Basic ...................... $2.80 $3.48 $1.27 $1.18 Diluted .................... $2.76 $3.39 $1.26 $1.15 4. Derivative Financial Instruments. Derivative financial instruments did not have a material effect on net investment income, interest expense, or net income during the nine months ended September 30, 2000 or 1999. Significant activity related to derivative financial instruments in 2000 was as follows: During the nine months ended September 30, 2000, we purchased call swaptions with notional amounts of $1.8 billion, while swaptions with notional amounts of $16.8 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 swaptions with notional amounts of $1.8 billion, an average strike rate of 5.5%, and total premium paid of $.4 million were outstanding at September 30, 2000. These swaptions expire in October 2000. Should the strike rates remain below market rates for call swaptions outstanding, the swaptions will expire and the company's exposure would be limited to the premiums paid. Item 1. Financial Statements (continued). 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 September 30, 2000, the company had $2.2 billion of outstanding dollar roll agreements. The average amount outstanding and the weighted-average interest rate on the short-term collateralized borrowings for the first nine months ended September 30, 2000 were $1.9 billion and 6.0%, respectively. 6. Investing Activities. Cash flows related to investing activities were as follows: Dispositions and Purchases Repayments Nine Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 Fixed maturity securities $12,293 $16,593 $10,318 $13,945 Mortgage loans 381 381 300 239 Equity securities 67 38 100 27 Other 167 209 73 67 Total $12,908 $17,221 $10,791 $14,278 7. Redeemable Equity. Activity in preferred securities of subsidiaries during 2000 was 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%. The trust has no independent operations. The sole assets of the trust are Junior Subordinated Debentures (subordinated debentures) issued by American General that are 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 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, 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. We exercised our right to redeem these shares at $50 par value on August 31, 2000. Item 1. Financial Statements (continued). 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 $315 million ($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. 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. Item 1. Financial Statements (continued). 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. On September 1, 2000, payment was made in connection with the final settlement of the Clayton Smith matter. Resolution of the satellite dish litigation, the timing of which is uncertain, 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. 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. Through the arbitration with Superior National, which is scheduled to commence in the fourth quarter of 2000, we plan to fully pursue all remedies. 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. Item 1. Financial Statements (continued). 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. 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, 35 other states, representing in excess of 90% of AGLA's industrial life policyholders, have joined in the settlement. The class action settlement received court approval on September 8, 2000 and became final and no longer subject to appeal on October 8, 2000. In addition, the regulatory settlement agreements are now final. 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 industrial life and market conduct settlements relating to life insurance pricing and sales practices. In addition, many of these proceedings are pending in jurisdictions 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 any unpredictable judgment in any given suit. Item 1. Financial Statements (continued). 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 1997. 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. Division results for the nine months ended September 30, were as follows: Income Revenues Before Taxes Net Income 2000 1999 2000 1999 2000 1999 Retirement Services $2,946 $2,661 $ 745 $ 641 $ 495 $ 427 Life Insurance 4,050 4,079 867 814 570 532 Consumer Finance 1,416 1,280 286 259 184 167 Total divisions 8,412 8,020 1,898 1,714 1,249 1,126 Corporate operations (18) 1 (243) (217) (162) (140) Goodwill amortization (36) (36) (36) (36) Net dividends on preferred securities of subsidiaries (76) (68) Operating earnings 975 882 Realized investment losses (129) (12) (129) (12) (84) (8) Non-recurring items (315) - (193) - Consolidated total $8,265 $8,009 $1,175 $1,449 $ 698 $ 874 Item 1. Financial Statements (continued). Division results for the quarter ended September 30, were as follows: Income Revenues Before Taxes Net Income 2000 1999 2000 1999 2000 1999 Retirement Services $ 999 $ 903 $ 253 $ 213 $ 167 $ 140 Life Insurance 1,327 1,340 294 277 193 182 Consumer Finance 484 436 97 88 63 57 Total divisions 2,810 2,679 644 578 423 379 Corporate operations 3 2 (79) (73) (53) (46) Goodwill amortization (12) (12) (12) (12) Net dividends on preferred securities of subsidiaries (26) (23) Operating earnings 332 298 Realized investment losses (20) (5) (20) (5) (13) (4) Consolidated total $2,793 $2,676 $ 533 $ 488 $ 319 $ 294 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, investments, 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 13 of this Quarterly Report on Form 10-Q. The reasons for any significant variations between the quarters ended September 30, 2000 and 1999 are the same as those discussed below for the respective nine 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 $123 billion of assets, over $22 billion of annual revenues and deposits, and targeted operating earnings per share of $5.17 for full-year 2000. We are a leading provider of retirement services, life insurance, consumer loans, and investments to 12 million customers. Our financial highlights were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Revenues and deposits(1) $ 16,802 $ 14,914 $ 5,519 $ 4,949 Earnings Operating earnings 975 882 332 298 Net income 698 874 319 294 Earnings per share Operating earnings 3.85 3.42 1.31 1.16 Net income 2.76 3.39 1.26 1.15 Assets(2) 124,344 111,689 Shareholders' equity(2) Total 8,068 7,477 Per share 31.84 30.13 Operating return on equity(2) 16.63% 15.88% 16.78% 15.65% (1) Excludes realized investment losses. (2) Excludes fair value adjustment under SFAS 115. Revenues and deposits increased $1.9 billion, or 13%, for the nine months ended September 30, 2000, compared to the same period in 1999, primarily due to higher fixed and variable deposits in our retirement services division. Operating earnings increased 11% for the first nine months of 2000 due to increases in earnings in our retirement services division (up 16%), life insurance division (up 7%), and consumer finance division (up 10%). Operating earnings per share increased 13%, compared to the 11% increase in operating earnings, as a result of the decline in average shares outstanding primarily due to the repurchase of 5.2 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 $176 million, or 20%, for the nine months ended September 30, 2000, and included aftertax charges of $193 million and aftertax realized investment losses of $84 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 $591 million increase in shareholders' equity over the last twelve months reflects $955 million in net income 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 $433 million and share repurchases of $320 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 divisions' operations are discussed below. Retirement Services Our retirement services division results were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Fixed margin $ 743 $ 695 $ 253 $ 227 Variable fees 182 133 63 49 Asset management fees 45 24 14 9 Other revenue 53 24 21 8 Net revenue 1,023 876 351 293 Operating expenses 250 232 84 81 Other, net* 28 3 14 (1) Pretax earnings 745 641 253 213 Income taxes 250 214 86 73 Division earnings $ 495 $ 427 $ 167 $ 140 *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 nine months ended September 30, 2000 increased 16%, or $68 million, compared to the same period in 1999. The increase was due to the 19% growth in managed assets from September 30, 1999 to September 30, 2000, which generated increases in fixed margin, variable fees, and asset management fees that were 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 9% and 31%, respectively, from September 30, 1999 to September 30, 2000. Assets and deposits were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Assets under management Investments (1) $44,364 $40,875 Separate accounts 22,896 17,512 Mutual funds (2) 2,885 782 Premiums and deposits Fixed 4,248 3,697 $1,420 $1,311 Variable 2,537 2,221 751 692 Mutual funds 758 85 282 36 Surrender ratios Fixed 9.81% 7.71% 9.59% 7.90% Variable 5.82 5.14 5.92 4.86 (1) Excludes fair value adjustment under SFAS 115. (2) Not included on the balance sheet. Total premiums and deposits for the nine months and quarter ended September 30, 2000 increased 26%, or $1.5 billion, and 20%, or $414 million, respectively, compared to the same periods in 1999. The 15% increase in fixed premiums and deposits for the nine-month period and the 8% increase for third quarter resulted from our sales of fixed annuities through financial institutions and expanded distribution of annuities through our life insurance agents. Variable deposit growth of 14% and 8% for the first nine months and third quarter of 2000, respectively, reflects continued consumer interest in equity-based products provided through our group retirement plans. Mutual fund deposit growth was $673 million in the first nine months and $246 million in third quarter, compared to the 1999 periods, reflecting our recent introduction of mutual funds to both group and retail markets. Changes in the surrender ratios resulted from widening of the spread between market and credited interest rates, more policies past the surrender protection period, 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 7% in the first nine 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: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Net investment income $2,382 $2,205 $ 815 $ 748 Investment yield* 7.76% 7.71% 7.84% 7.68% Average crediting rate 5.38 5.38 5.41 5.35 Fixed investment spread 2.38% 2.33% 2.43% 2.33% *Excludes fair value adjustment under SFAS 115. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). The $48 million increase in fixed margin for the first nine months of 2000 was largely due to a higher level of invested assets and the resulting 8% increase in net investment income. Investment yield and fixed investment spread increased during the first nine months of 2000, compared to the same period in 1999, due to higher market rates on new investments. 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 combined fees of $70 million, or 45%, for the first nine months of 2000, compared to the same period of 1999, was driven by a 31% growth in separate account assets. Our total variable fee rate, which is variable fees and asset management fees as a percentage of average separate account assets, increased 5 basis points to 1.35% for the first nine months of 2000, primarily due to more favorable revenue-sharing agreements with third-party asset managers. Other Revenue. Other revenue consists primarily of surrender charges and dealer concessions on mutual fund sales. The increase in other revenue over 1999 was due to higher surrender charges and increased marketing revenues earned on mutual funds in 2000. Operating Expenses. Operating expenses increased $18 million for the nine months and $3 million for the quarter ended September 30, 2000, compared to the same periods in 1999, primarily due to increased marketing-related and administrative costs to support the growth in business and $6 million of year- to-date 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 nine months of 2000 from .54% for the same period a year ago due to growth in assets under management over the last twelve months exceeding growth in operating expenses. Life Insurance Our life insurance division results were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Premiums and other considerations $2,256 $2,294 $ 729 $ 755 Net investment income 1,636 1,651 545 539 Other income 158 134 53 46 Total revenues 4,050 4,079 1,327 1,340 Insurance and annuity benefits 2,137 2,171 709 696 Operating expenses 495 530 161 173 Other expenses* 551 564 163 194 Total expenses 3,183 3,265 1,033 1,063 Pretax earnings 867 814 294 277 Income taxes 297 282 101 95 Division earnings $ 570 $ 532 $ 193 $ 182 *Primarily commissions and change in DPAC/CIP. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Earnings. The division's profitability is driven by growth in insurance and annuity reserves and insurance in force, as well as interest spread, mortality, and operating expenses. Earnings increased 7% for the nine months ended September 30, 2000 compared to the same period in 1999. The increase resulted from a 4% growth in combined general and separate account reserves, an 8% increase in insurance in force, and reduced operating and other expenses. Sales and Premiums and Deposits. Sales represent annualized premiums and deposits for new products issued. Premiums represent funds received on traditional life insurance products, 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: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Sales Individual life insurance $ 388 $ 378 $ 109 $ 126 Individual annuities 662 445 198 148 Life insurance in force $383,292 $354,313 Direct premiums and deposits Life insurance $ 2,567 $ 2,663 $ 822 $ 834 Annuities 674 491 197 159 Other 443 492 152 159 Total $ 3,684 $ 3,646 $1,171 $1,152 Individual life insurance sales for the first nine months of 2000 increased 3% over the 1999 period, and declined 13% quarter over quarter, due to a 17% year-to-date increase in life insurance sales through our independent distribution channel, partially offset by a decline in sales through career agents resulting from our planned change in marketing emphasis. Direct life insurance premiums and deposits (before net reinsurance ceded) decreased 4% in the nine month period due to lower corporate market deposits, which can fluctuate significantly from quarter to quarter. Individual annuity sales increased 49% in the first nine months of 2000, compared to the same period of 1999, while annuity premiums and deposits increased 37%. These increases were due to a 102% growth in sales of variable annuities through our financial institution channel. Life insurance in force grew 8% from September 30, 1999 to September 30, 2000, due to new sales including larger size policies. Other premiums and deposits, which include primarily accident and health and property and casualty business, declined 10% for the first nine months of 2000, compared to the same period of 1999, due to our de-emphasis of these lines of business. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Investment Spread. Investment results and interest crediting rates were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Assets Investments* $28,447 $27,997 Separate accounts 3,090 1,940 Liabilities Insurance and annuities 25,933 26,034 Separate accounts 3,090 1,940 Investment yield 8.06% 8.24% 8.06% 8.02% Average crediting rate 5.93 5.91 5.93 5.93 Investment spread 2.13% 2.33% 2.13% 2.09% *Excludes fair value adjustment under SFAS 115. Net investment income and the investment yield decreased during the first nine months of 2000, compared to the same period in 1999, due to lower income from securities called before their maturity dates. This decrease in net investment income was partially offset by an increase in investment income generated by the higher amount of investments. Mortality, Morbidity, and Persistency. Death claims and premium termination rates were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Death claims $ 770 $ 753 $ 252 $ 245 Death claims per $1,000 in force $ 3.80 $ 3.68 $ 3.75 $ 3.60 Premium termination rate 12.41% 12.61% 13.47% 13.29% Death claims per $1,000 of in force increased during the first nine months and third quarter of 2000, compared to the same periods in 1999, consistent with the increasing average age of the in force business. Premium termination rates for the nine months and quarter ended September 30, 2000 were relatively stable compared to the same periods in 1999. Mortality and persistency experience during the first nine months of 2000 reflected normal fluctuations and remained within our pricing assumptions. Higher claims in our group medical business, which has been discontinued, and certain long-term disability cases adversely impacted year-to-date 2000 morbidity experience. Expenses. Operating expenses decreased $35 million, or 6%, for the first nine months and decreased 5% for third quarter 2000 compared to the same periods in 1999 due to the benefit of our ongoing shared service initiatives, the reduction of postretirement life insurance benefits for former employees of an acquired company to conform to company-wide standards, and a decline in premium tax expense. The year-to-date ratio of operating expenses to direct premiums and deposits improved to 13.48% in 2000 compared to 14.52% in 1999. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Other expenses, which consist of commissions and the change in DPAC and CIP, decreased 3% in the first nine months of 2000 compared to the same period in 1999. The amortization rate for previously-capitalized DPAC and CIP was reduced for certain product lines during third quarter 2000, as a result of more favorable than expected experience that has resulted from operating efficiencies, as well as better than expected mortality and interest spreads. Consumer Finance Our consumer finance division results were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Finance margin $ 689 $ 657 $ 233 $ 220 Other income 213 203 70 72 Net revenue 902 860 303 292 Provision for finance receivable losses 147 150 50 50 Operating expenses 377 366 126 124 Other expenses* 92 85 30 30 Pretax earnings 286 259 97 88 Income taxes 102 92 34 31 Division earnings $ 184 $ 167 $ 63 $ 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 nine months ended September 30, 2000, compared to the same period in 1999, due to increases in average receivables and improved credit quality, partially offset by lower interest spread. Finance Receivables. The mix of finance receivables was as follows: September 30, 2000 1999 Real estate loans $ 7,244 $ 6,404 Non-real estate loans 2,970 2,514 Retail sales finance 1,426 1,258 Total finance receivables 11,640 10,176 Allowance for losses (383) (386) Finance receivables, net $11,257 $ 9,790 Average finance receivables Year-to-date $11,331 $ 9,867 Quarter 11,631 10,018 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). We increased our finance receivables portfolio by $1.5 billion during the last twelve months. Average finance receivables in the first nine months of 2000 increased 15% compared to the same period in 1999, due to higher loan production. Over the last twelve months, we generated $6.7 billion of loans in our branch offices and purchased $1.0 billion of real estate loans and $.5 billion of non-real estate loans, while $6.7 billion of loans were repaid. At quarter end, 62% of the portfolio was secured by real estate compared to 63% 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 and improved credit quality, partially offset by increases for portfolio purchases in the last twelve months. 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: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Finance charges $1,203 $1,077 $ 414 $ 364 Interest expense 514 420 181 144 Finance margin $ 689 $ 657 $ 233 $ 220 Yield on finance receivables 14.17% 14.59% 14.18% 14.45% Borrowing cost 6.55 6.19 6.69 6.18 Interest spread 7.62% 8.40% 7.49% 8.27% Year-to-date finance charges increased 12% from the prior year period due to the increase in our average finance receivables, partially offset by the decline in yield. 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. Other Income. Other income consists primarily of insurance premiums for credit insurance policies and net investment income. The increase in other income of $10 million, or 5%, was due to increased premium production resulting from greater loan volume and higher net investment income from an increase in invested assets. 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 finance receivables portfolio, the success of our collection efforts, and general economic conditions. Credit quality information was as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Charge offs $ 147 $ 150 $ 50 $ 50 Delinquencies 406 393 Allowance for losses 383 386 Ratios Charge-off 1.73% 2.04% 1.72% 2.02% Delinquency 3.33 3.67 Allowance 3.29 3.80 Charge-off coverage 1.96x 1.93x 1.91x 1.92x Risk-adjusted yield 12.44% 12.55% 12.46% 12.43% The decrease in the charge-off ratio reflects the result of past and ongoing credit quality improvement efforts. Delinquencies are finance receivables which are 60 days or more past due. Delinquencies increased while the delinquency ratio decreased at September 30, 2000, compared to September 30, 1999, due to increased receivables, improved credit quality, 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. Risk-adjusted yield declined from the nine months ended September 30, 1999; however, the decrease is less than the decline in yield on finance receivables due to the improvement in the charge-off ratio. The risk adjusted yield for third quarter 2000 improved slightly from the prior year quarter due to an improved charge-off ratio, offset by a decline in yield. Operating Expenses. Operating expenses as a percentage of average finance receivables for the first nine months of 2000 improved to 4.42% from 4.96% for the same period of 1999. This decrease reflects a 15% increase in average finance receivables compared to a 2% increase in operating expenses. INVESTMENTS Our invested assets consisted primarily of fixed maturity securities (87%), mortgage loans on real estate (5%), short-term investments (3%), and policy loans (3%) at September 30, 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Fair Value of Securities. At September 30, 2000, the market value of our fixed maturity securities was 97.7% 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 decreased by $248 million, with a related $188 million positive adjustment to shareholders' equity. The components of the fair value adjustment at September 30, 2000 and December 31, 1999, and the nine month change, were as follows: September 30, December 31, 2000 1999 Change Fair value adjustment to fixed maturity securities $(1,502) $(1,750) $ 248 Related increase in DPAC/CIP 389 347 42 Related decrease in deferred income taxes 393 495 (102) Valuation allowance on deferred tax asset (381) (381) - Net unrealized losses Fixed maturity securities (1,101) (1,289) 188 Other - 11 (11) Net unrealized losses on securities $(1,101) $(1,278) $ 177 Fixed Maturity Securities. At September 30, 2000, our fixed maturity securities investment portfolio consisted of $47.1 billion of corporate bonds, $13.6 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 September 30, 2000 and A+ at December 31, 1999. Average ratings by category at September 30, 2000 were as follows: September 30, Average Credit 2000 % Rating Investment grade $45,804 72% A Mortgage-backed 13,579 22 AAA Below investment grade 3,465 6 B+ Total fixed maturity securities $62,848 100% A Investment income from our below investment grade securities was $291 million (10.3% yield) for the nine months ended September 30, 2000 and $264 million (9.9% yield) for the same period in 1999. Realized investment losses on below investment grade securities were $110 million and $83 million for the nine months ended September 30, 2000 and 1999, respectively. Non-performing bonds were less than .1% of total fixed maturity securities at September 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 $118 billion at September 30, 2000 from $102 billion at September 30, 1999. The 16% increase over the prior year was due to growth in separate account assets and invested assets, as well as mutual funds under management. Mutual funds under management increased $2.1 billion to $2.9 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 September 30, 2000 and December 31, 1999 were as follows: September 30, December 31, 2000 1999 Corporate capital* $13,291 $12,768 Corporate debt 24.5% 24.4% Redeemable equity 14.8 15.1 Shareholders' equity 60.7 60.5 *Excludes fair value adjustment under SFAS 115. Corporate Debt. On August 11, 2000, we issued $250 million of Senior Notes due August 11, 2010, which bear interest at 7-1/2%. Net proceeds of $246 million were used to reduce short-term debt. 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. The conversion rights expired for the remaining shares and we exercised our right to redeem these shares on August 31, 2000. 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 5.2 million shares for $316 million in the nine months ended September 30, 2000 and 1.0 million shares for $73 million in third quarter 2000. Since 1987, American General has repurchased 127.7 million common shares for an aggregate cost of $3.5 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 September 30, 2000, our principal retirement services and life insurance companies had statutory equity in a range of 2.4 to 3.3 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 $12.4 billion at September 30, 2000, consisted of $1.6 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 7.5 to 1 at September 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 September 30, 2000, we had committed and unused credit facilities of $6.2 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 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: Nine Months Ended September 30, 2000 1999 Dividends received Retirement Services $ 139 $ 124 Life Insurance 339 381 Consumer Finance 43 164 Total received 521 669 Contributions paid Retirement Services 83 21 Life Insurance 133 247 Total paid 216 268 Net dividends received $ 305 $ 401 Dividends received from our life insurance division declined in 2000 since additional capital was required to support its target capital level 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: Nine Months Ended September 30, 2000 1999 Cash from operating activities $1,394 $1,228 Fixed policyholder account deposits, net of withdrawals 574 1,093 Variable account deposits, net of withdrawals 1,963 1,867 Mutual fund deposits, net of withdrawals 403 28 Short-term collateralized financings 1,394 643 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 $56 million to the parent in the first nine 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: Nine Months Ended September 30, 2000 1999 Cash from operating activities $ 59 $209 Fixed policyholder account deposits, net of withdrawals (87) 184 Variable account deposits, net of withdrawals 584 567 Short-term collateralized financings 819 404 The $271 million decline in net fixed policyholder account deposits and the increase in net variable account deposits in the first nine 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, partially offset by lower corporate market deposits. 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 nine months of 2000, the division paid net dividends of $206 million to the parent. Consumer Finance. Principal sources of cash for our consumer finance division were as follows: Nine Months Ended September 30, 2000 1999 Cash from operating activities $409 $377 Increase in debt 569 560 Net cash provided by operating activities increased $32 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 $796 million in the first nine months of 2000, compared to $667 million in the first nine months of 1999. The division paid dividends of $43 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," "target," 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, accounting, or tax changes that affect the cost of, or demand for, our products; (4) our ability to secure necessary regulatory approvals, including approvals for dividends and products; 5) our ability to realize projected expense savings; (6) adverse litigation or arbitration results or resolution of litigation or arbitration, including proceedings related to industrial life insurance, satellite dish financing, and workers' compensation insurance; and (7) 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 nine months ended September 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 September 30, 2000. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. 3 Amended and Restated Bylaws of American General 10.1 Amendment to American General Corporation 1994 Stock and Incentive Plan (November 2000) 10.2 Amendment to American General Corporation 1997 Stock and Incentive Plan (November 2000) 10.3 Amendment to American General Corporation 1999 Stock and Incentive Plan (November 2000) 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 June 30, 2000: 1) Current Report on Form 8-K dated August 8, 2000, with respect to authorization for issuance in an underwritten public offering of $250 million aggregate principal amount of the company's 7-1/2% Notes Due 2010. 2) Current Report on Form 8-K dated October 30, 2000, with respect to authorization for issuance in an underwritten public offering of an additional $250 million aggregate principal amount of the company's 7-1/2% Notes Due 2010. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 13, 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 3 Amended and Restated Bylaws of American General 10.1 Amendment to American General Corporation 1994 Stock and Incentive Plan (November 2000) 10.2 Amendment to American General Corporation 1997 Stock and Incentive Plan (November 2000) 10.3 Amendment to American General Corporation 1999 Stock and Incentive Plan (November 2000) 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