-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, h6gNezcJ+M6W6uAuMKMC3+dr0GdSg25sfLnwHE0IhktQW4nWyShXfc8mBm+s+vC5 xR7QbnTaAUngHMtSGsFbEg== 0000005103-94-000033.txt : 19940517 0000005103-94-000033.hdr.sgml : 19940517 ACCESSION NUMBER: 0000005103-94-000033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN GENERAL CORP /TX/ CENTRAL INDEX KEY: 0000005103 STANDARD INDUSTRIAL CLASSIFICATION: 6311 IRS NUMBER: 740483432 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07981 FILM NUMBER: 94527672 BUSINESS ADDRESS: STREET 1: 2929 ALLEN PKWY CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135221111 10-Q 1 FORM 10-Q FOR 3/31/94 - AMERICAN GENERAL CORP. AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 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 March 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to _____________________ Commission file number 1-7981 American General Corporation (Exact name of registrant as specified in its articles of incorporation) Texas 74-0483432 (State of Incorporation) (I.R.S. Employer Identification No.) 2929 Allen Parkway, Houston, Texas 77019-2155 (Address of principal executive offices) (Zip Code) (713) 522-1111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . The number of shares outstanding of the registrant's common stock at April 30, 1994 was 211,563,368 (excluding shares held in treasury and by a subsidiary). AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 INDEX TO FORM 10-Q Page Part I. FINANCIAL INFORMATION. Item 1. Financial Statements. Consolidated Statement of Income for the three months ended March 31, 1994 and 1993 ............. 2 Consolidated Balance Sheet at March 31, 1994 and December 31, 1993 ................................ 3 Consolidated Condensed Statement of Cash Flows for the three months ended March 31, 1994 and 1993 ... 4 Notes to Consolidated Financial Statements ......... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 7 Part II. OTHER INFORMATION. Item 1. Legal Proceedings .................................. 17 Item 5. Other Information .................................. 17 Item 6. Exhibits and Reports on Form 8-K ................... 17 -1- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AMERICAN GENERAL CORPORATION Consolidated Statement of Income (Unaudited) (In millions, except share data) Three Months Ended March 31, 1994 1993 Revenues Premiums and other considerations ................ $ 289 $ 311 Net investment income ............................ 621 598 Finance charges .................................. 281 263 Realized investment gains ........................ 3 2 Other ............................................ 20 13 Total revenues ............................... 1,214 1,187 Benefits and expenses Insurance and annuity benefits ................... 539 554 Operating costs and expenses ..................... 301 289 Interest expense Corporate ....................................... 28 27 Consumer Finance ................................ 93 94 Total benefits and expenses .................. 961 964 Earnings Income before income tax expense and cumulative effect .............................. 253 223 Income tax expense ............................... 92 79 Income before cumulative effect .................. 161 144 Cumulative effect of accounting changes .......... - (46) Net income ................................... $ 161 $ 98 Earnings per share Income before cumulative effect .................. $ .75 $ .66 Cumulative effect of accounting changes .......... - (.21) Net income per share ......................... $ .75 $ .45 Dividends paid per common share ................... $ .290 $ .275 Average fully diluted shares outstanding (in thousands) .................................. 213,331 217,005 -2- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Balance Sheet (Unaudited) (In millions) March 31, December 31, 1994 1993 Assets Investments Fixed maturity securities (amortized cost: $25,897; $24,885) ........................... $26,157 $26,479 Mortgage loans on real estate ................. 2,939 3,032 Equity securities (cost: $185; $182) .......... 222 233 Policy loans .................................. 1,156 1,156 Investment real estate ........................ 758 772 Other long-term investments ................... 129 137 Short-term investments ........................ 47 67 Total investments ........................... 31,408 31,876 Cash ........................................... 9 6 Finance receivables, net ....................... 6,508 6,390 Deferred policy acquisition costs .............. 2,114 1,637 Acquisition-related goodwill ................... 613 618 Other assets ................................... 1,236 1,205 Net assets of life insurance companies held for sale ...................................... 161 153 Assets held in Separate Accounts ............... 2,232 2,097 Total assets ................................ $44,281 $43,982 Liabilities Insurance and annuity liabilities .............. $27,759 $27,239 Debt (short-term) Corporate ($409; $312) ........................ 1,354 1,257 Real Estate ($381; $414) ...................... 412 429 Consumer Finance ($2,042; $1,824) ............. 5,947 5,843 Income tax liabilities ......................... 974 1,241 Other liabilities .............................. 1,010 739 Liabilities related to Separate Accounts ....... 2,232 2,097 Total liabilities ........................... 39,688 38,845 Shareholders' equity Common stock ................................... 365 365 Net unrealized gains on securities ............. 151 709 Retained earnings .............................. 4,325 4,229 Cost of treasury stock ......................... (248) (166) Total shareholders' equity .................. 4,593 5,137 Total liabilities and shareholders' equity .. $44,281 $43,982 -3- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Condensed Statement of Cash Flows (Unaudited) (In millions) Three Months Ended March 31, 1994 1993 Operating activities Net cash provided by operating activities ...... $ 400 $ 471 Investing activities Investment purchases .............................. (2,108) (1,995) Investment calls, maturities, and sales ........... 1,525 1,324 Finance receivable originations or acquisitions ... (1,243) (1,060) Finance receivable principal payments received .... 1,072 921 Net (increase) decrease in short-term investments . 20 (62) Other, net ........................................ 31 (19) Net cash used for investing activities ......... (703) (891) Financing activities Retirement Annuities and Life Insurance Policyholder account deposits ................... 631 683 Policyholder account withdrawals ................ (343) (232) Total Retirement Annuities and Life Insurance. 288 451 Consumer Finance Net increase (decrease) in short-term debt ...... 218 (60) Net long-term debt issuances .................... 65 405 Long-term debt redemptions ...................... (179) (279) Total Consumer Finance ....................... 104 66 Corporate Net increase (decrease) in short-term debt Corporate ..................................... 97 (124) Real Estate ................................... (33) (15) Long-term debt issuance (redemptions) ........... (10) 100 Dividend payments ............................... (62) (59) Common share purchases .......................... (78) - Other, net ...................................... - 7 Total Corporate .............................. (86) (91) Net cash provided by financing activities ...... 306 426 Net decrease in cash ................................ 3 6 Cash at beginning of period ......................... 6 17 Cash at end of period .......................... $ 9 $ 23 Supplemental disclosure of cash flow information: Cash paid during the period for Income taxes .................................... $ 60 $ 9 Interest Corporate ..................................... 9 18 -4- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Real Estate ................................... 4 1 Consumer Finance .............................. 96 108 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Notes to Consolidated Financial Statements March 31, 1994 1. Accounting Policies. The accompanying unaudited consolidated financial statements of American General Corporation ("American General" or "the company") and its subsidiaries have been prepared in accordance with generally accepted accounting principles for interim periods. In the opinion of management, these statements include all adjustments, consisting only of normal recurring accruals, that are necessary for a fair presentation of the company's consolidated financial position at March 31, 1994 and the consolidated results of operations and cash flows for the three months ended March 31, 1994 and 1993. To conform with the 1994 presentation, certain items in the prior period have been reclassified. Additionally, certain amounts previously reported in the 1993 first quarter Form 10-Q have been restated to reflect the retroactive adoption of Statement of Financial Accounting Standards (SFAS) 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1993. 2. Status of Federal Tax Return Examinations. The company and its subsidiaries file a consolidated federal income tax return. The Internal Revenue Service (IRS) has completed examinations of the company's tax returns through 1985 and has commenced examination of the company's tax returns for 1986 through 1988. The IRS is disputing the company's tax treatment of some items for the years 1977 through 1985. Some of these issues will require litigation to resolve, and any amounts ultimately settled with the IRS would also include interest. Although the final outcome is uncertain, the company believes that the ultimate liability, including interest, resulting from these issues will not exceed amounts currently provided in the consolidated financial statements. 3. Legal Contingency. Two real estate subsidiaries of the company were defendants in a lawsuit that alleged damages based on lost profits and related claims arising from certain loans and joint venture contracts. On July 16, 1993, a judgment was entered against the subsidiaries jointly for $47.3 million in compensatory damages and against one of the subsidiaries for $189.2 million in punitive damages. On September 17, 1993, a Texas state district court reduced the previously-awarded -5- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 punitive damages by $60.0 million, resulting in a reduced judgment in the amount of $176.5 million plus post-judgment interest. An appeal on numerous legal grounds has been filed. The company believes, based on advice of legal counsel, that plaintiffs' claims are without merit, and Item 1. Financial Statements (continued). the company is continuing to contest the matter vigorously through the appeals process. No provision has been made in the consolidated financial statements related to this contingency. In April 1992, the IRS issued Notices of Deficiency in the amount of $12.4 million for the 1977-1981 tax years of certain insurance subsidiaries. The basis of the dispute was the tax treatment of modified coinsurance agreements. During 1992, the company elected to pay the assessment plus associated interest. A claim for refund of tax and interest was disallowed by the IRS in January 1993. On June 30, 1993, a suit for refund was filed in the Court of Federal Claims. The company believes that the IRS's claims are without merit, and is continuing to vigorously pursue refund of the amounts paid. No provision has been made in the consolidated financial statements related to this contingency. American General and certain of its subsidiaries are defendants in various other lawsuits arising in the normal course of business. American General and its subsidiaries believe they have valid defenses in these pending lawsuits and are defending these cases vigorously. The company also believes that the total amounts that would ultimately be paid, if any, arising from these lawsuits would have no material effect on the consolidated financial statements. 4. Ratios of Earnings to Fixed Charges. The ratios of earnings to fixed charges are as follows: Three Months Ended March 31, 1994 1993 Consolidated operations ....................... 3.0X 2.7X Consolidated operations, corporate fixed charges only ................................ 9.3X 8.4X American General Finance, Inc. ................ 1.9X 1.8X -6- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This item presents specific comments on material changes to the company's results of operations, capital resources, and liquidity for the periods reflected in the interim financial statements filed with this report. The reader is presumed to have read or have access to the company's 1993 Annual Report to Shareholders including the Management's Discussion and Analysis found on pages 18 through 24, 26, 28, and 30 thereof. This analysis should be read in conjunction with the consolidated financial statements and related notes on pages 2 through 6 of this Form 10-Q. STATEMENT OF INCOME Comparison of Three Months Ended March 31, 1994 and March 31, 1993 Revenues. Total revenues increased $27 million, or 2%, for the three months ended March 31, 1994 over the same period in 1993, primarily due to increases in net investment income and finance charges, partially offset by a decrease in premiums and other considerations. The $23 million, or 4%, increase in net investment income was attributable to a 9% growth in invested assets, partially offset by a decline in investment yields. The decline in yields was primarily due to prepayment of higher yielding bonds and mortgage-backed securities throughout 1993 and reinvestment of the proceeds at lower interest rates. The $18 million, or 7%, increase in finance charges resulted from an increase in average finance receivables and higher yields on those receivables. While premiums and other considerations decreased 7%, the decline was primarily due to reporting the activity of life insurance companies held for sale in other revenues, and ceding of a block of business on January 1, 1994. The revenues ceded were offset by a related decrease in insurance benefit expense. Realized Investment Gains. Realized investment gains for the three months ended March 31, 1994 included $16 million of gains due to early redemption of fixed maturity securities at the election of the issuer (calls) and $15 million of gains from sales of investments, primarily five real estate joint ventures, offset by additions to reserves of $28 million, primarily related to investment real estate. For the same period in 1993, gains of $21 million on calls and $5 million on the sale of real estate were offset by a $24 million increase in reserves, primarily related to investment real estate. -7- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Other Revenues. Other revenues increased $7 million, or 44%, for the three months ended March 31, 1994 over the same period in 1993, primarily due to reporting pretax earnings of $6 million for the life insurance companies held for sale in other revenues. The 1993 activity of the life insurance companies held for sale is included in the 1993 financial statement line items as originally reported. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Insurance and Annuity Benefits. Insurance and annuity benefits decreased $15 million, or 3%, for the first three months of 1994 compared to the same period in 1993, primarily due to ceding of a block of business beginning January 1, 1994, and reporting the 1994 activity of life insurance companies held for sale in other revenues. Operating Costs and Expenses. Operating costs and expenses increased $12 million, or 4%, for the three months ended March 31, 1994, compared to the same period in 1993, primarily due to a $10 million increase in provision for credit losses and higher operating expenses in the Consumer Finance segment, partially offset by increased deferrals of loan origination fees due to growth in finance receivables and reporting the 1994 activity of life insurance companies held for sale in other revenues. Interest Expense. Interest expense on corporate debt increased $1 million, or 2%, due to an increase in commercial paper borrowings. Interest expense on consumer finance debt decreased $1 million, or 1%, primarily due to lower borrowing rates in the three months ended March 31, 1994, compared to the 1993 period. Income Tax Expense. Income tax expense increased $13 million, or 17%, for the first three months of 1994 compared to the same period in 1993, primarily due to higher taxable income and the 1% increase in the federal corporate tax rate. -8- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). BUSINESS SEGMENTS To facilitate meaningful period-to-period comparisons of business segment results, operating earnings of each segment include earnings from its business operations and earnings on that amount of equity considered necessary to support its business, and exclude net realized investment gains, non-recurring items, and the effect of accounting changes. Earnings on equity not allocated to the business segments are included in earnings on corporate assets. Three Months Ended March 31, 1994 1993 (In millions) Revenues Retirement Annuities ........................... $ 379 $ 358 Consumer Finance ............................... 335 311 Life Insurance ................................. 477 511 Total business segments ...................... 1,191 1,180 Corporate Realized investment gains .................... 3 2 Other ........................................ 20 5 Total consolidated revenues ............... $1,214 $1,187 Deposits Retirement Annuities ........................... $ 587 $ 538 Life Insurance ................................. 267 235 Life insurance companies held for sale ......... 7 - Total deposits ............................ $ 861 $ 773 Earnings Retirement Annuities ........................... $ 53 $ 44 Consumer Finance ............................... 53 48 Life Insurance ................................. 64 70 Total business segments ...................... 170 162 Corporate Net interest on corporate debt ............... (19) (21) Expenses not allocated to segments ........... (6) (5) -9- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Earnings on corporate assets ................. 15 7 Realized investment gains .................... 1 1 Income before cumulative effect ................ 161 144 Cumulative effect of accounting changes ........ - (46) Total consolidated net income.............. $ 161 $ 98 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Retirement Annuities. Revenues for the first three months of 1994 compared to 1993 increased $21 million, or 6%, primarily due to a 5% increase in net investment income, reflecting growth in invested assets, partially offset by a decrease in the average investment yield. Invested assets increased $2 billion, or 12%, from March 31, 1993 to March 31, 1994, primarily due to growth in fixed premium deposits and reinvestment of investment income. Operating earnings increased $9 million, or 19%, reflecting continued growth in the business and a slightly higher spread between the average yield earned on investments and the average rate of interest credited to policyholders. The slight improvement in spread was due to a smaller decline in the average investment yield than in the average rate of interest credited to policyholders for the comparable three month period. The ratio of operating expenses to average assets improved from .61% in the first quarter of 1993 to .53% in 1994. The ratio of policyholder surrenders to average deferred policy reserves for the three months ended March 31, 1994 was 5.8% compared to 3.9% for the first three months of 1993, due to lower crediting rates on fixed annuity accounts and participants' growing demand for equity-based investments. This demand resulted in a $60 million increase in variable account deposits and a $11 million decrease in fixed account deposits in first quarter 1994 compared to first quarter 1993. Consumer Finance. Revenues for the first three months of 1994 compared to 1993 increased $24 million, or 8%, primarily from increased finance charges due to growth in finance receivables through business development efforts and higher yields resulting from a change in the product mix to emphasize direct consumer loans. Operating earnings increased $5 million, or 10%, due to increased spread on a higher receivables balance, partially offset by a higher provision for credit losses and increased operating expenses. The cost of segment borrowings was $3 million lower in first quarter 1994, due to lower interest rates partially offset by higher average borrowings. Annualized charge offs increased to 2.21% for the first three months of 1994 from 1.92% for the same period of 1993, and loan delinquencies increased to 2.4% at March 31, 1994 from 2.1% at March 31, 1993 (2.5% at year-end 1993). The increase in -10- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 charge offs, delinquencies, and the provision for credit losses was primarily due to the emphasis on smaller, non-real estate, direct consumer loans. Life Insurance. Total revenues decreased $34 million, or 7%, in first quarter 1994 compared to 1993 primarily due to the ceding of a block of business effective January 1, 1994, reclassification to corporate of the activity related to the life insurance companies held for sale in 1994, and lower investment income. The decrease in investment income was a result of lower yields, due to prepayment of higher yielding securities and reinvestment at lower rates throughout 1993, partially offset by growth in invested assets. Deposits increased 13% to $267 million due to growth in both variable annuity and interest-sensitive life products. Operating earnings decreased $6 million Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). in the first quarter of 1994 compared to 1993 primarily due to the decrease in investment income, higher death claim benefits in the home service distribution business, and $3 million first quarter 1993 earnings of the life insurance companies held for sale excluded from segment reporting in 1994. Corporate. Corporate operations for the three months include interest on corporate debt, expenses not allocated to the business segments, earnings on corporate assets, and net realized investment gains. For reporting purposes, corporate assets include assets representing equity of the subsidiaries not considered necessary to support their businesses. Corporate debt is that debt incurred primarily to fund acquisitions, share repurchases, and capital needs of subsidiaries. Earnings on corporate assets increased $8 million, primarily due to higher income from investment real estate in first quarter 1994 compared to 1993, and net operations of life insurance companies held for sale reported in corporate operations in first quarter 1994. BALANCE SHEET Effect of SFAS 115. The company adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," at December 31, 1993. Accordingly, all fixed maturity and equity securities were classified as available-for-sale and recorded at fair value at March 31, 1994 and December 31, 1993. SFAS 115 does not permit a company to value the related insurance and annuity liabilities at fair value. The adjustments to record the effect of unrealized gains on fixed maturity securities and related balance sheet accounts adjusted under SFAS 115 were as follows: March 31, December 31, 1994 1993 (In millions) Fair value adjustment to fixed maturity securities $260 $1,594 -11- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Less: Decrease in deferred policy acquisition costs (69) (550) Decrease (increase) in insurance and annuity liabilities 4 (4) Increase in deferred federal income taxes (69) (364) Net unrealized gains on securities $126 $ 676 Increases in market interest rates and resulting decreases in bond values during first quarter 1994 reduced the net unrealized gains on fixed maturity securities credited directly to shareholders' equity and the related adjustments to related balance sheet accounts. Care should be exercised in drawing conclusions based on balance sheet amounts that include the SFAS 115 effect, since related insurance and annuity liabilities are not carried at fair value. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). ASSETS. At March 31, 1994, the $44 billion of consolidated assets were distributed as follows: 71% in investments, principally supporting insurance and annuity liabilities, 15% in net finance receivables, 6% in intangible assets, and 8% in other assets. Investments. As shown above, investments decreased $1.3 billion from December 31, 1993 to March 31, 1994 due to the effect of SFAS 115. For more information on the investment portfolio at March 31, 1994, see the section titled "INVESTMENTS" beginning on page 13. Finance Receivables. Net finance receivables increased $118 million, or 2%, from December 31, 1993 to March 31, 1994, primarily due to business development efforts in the Consumer Finance segment. Deferred Policy Acquisition Costs (DPAC). The $477 million increase in DPAC from December 31, 1993 to March 31, 1994 was primarily due to a $481 million reduction in the effect of SFAS 115 at March 31, 1994 as compared to December 31, 1993 (see discussion titled "Effect of SFAS 115" on page 11). Separate Account Assets and Liabilities. The $135 million increase in assets and liabilities related to Separate Accounts from December 31, 1993 to March 31, 1994 primarily reflects increased sales of variable annuity products in the Retirement Annuities and Life Insurance segments. LIABILITIES AND SHAREHOLDERS' EQUITY. At March 31, 1994, consolidated liabilities and shareholders' equity were distributed as follows: 63% in insurance and annuity liabilities, 13% in consumer finance debt, 10% in shareholders' equity, 4% in corporate and real estate debt, and 10% in other liabilities. -12- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Insurance and Annuity Liabilities. The $520 million increase in insurance and annuity liabilities from December 31, 1993 to March 31, 1994 primarily reflects continued growth in the Retirement Annuities segment. Corporate Debt. Corporate debt was $97 million higher at March 31, 1994 than at December 31, 1993, principally because cash used to repurchase common shares and pay dividends to shareholders exceeded cash dividends received from subsidiaries. Excluding the effect of SFAS 115, the ratio of corporate debt to corporate capital (the sum of corporate debt plus shareholders' equity) was 23% at March 31, 1994 and 22% at December 31, 1993. Consumer Finance Debt. Consumer finance debt increased $104 million from December 31, 1993 to March 31, 1994, to support the growth in finance receivables. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Income Taxes. The liability for income taxes decreased $267 million from December 31, 1993 to March 31, 1994, primarily due to a $295 million reduction in the effect of SFAS 115 on deferred taxes from December 31, 1993 to March 31, 1994 (see discussion titled "Effect of SFAS 115" on page 11). Other Liabilities. Other liabilities increased $271 million from December 31, 1993 to March 31, 1994, primarily due to an increase in amounts owed to securities brokers because of the timing of investment transactions. Shareholders' Equity. Shareholders' equity decreased from $5.1 billion at December 31, 1993 to $4.6 billion at March 31, 1994, primarily due to a $550 million reduction in the effect of SFAS 115 on net unrealized gains from December 31, 1993 to March 31, 1994 (see discussion titled "Effect of SFAS 115" on page 11). Due to the requirements of SFAS 115, shareholders' equity will be subject to future volatility from the effects of interest rate fluctuations on the fair value of fixed maturity securities. INVESTMENTS Invested assets consist primarily of fixed maturity securities, mortgage loans on real estate, and investment real estate, which are discussed below. The company reviews invested assets on a regular basis and records write-downs where declines in fair value below cost are not considered temporary. Fixed Maturity Securities. Fixed maturity securities represented 83% of invested assets at March 31, 1994. Fixed maturity securities are carried at fair value in accordance with SFAS 115 (see discussion titled "Effect of SFAS -13- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 115" on page 11). Information regarding the fixed maturity securities portfolio at March 31, 1994, which included bonds and redeemable preferred stocks, was as follows: % of Average Credit Total Fixed ($ in millions) Rating Fair Value Maturities Mortgage-backed AAA $10,533 40% Other investment grade A 14,820 57 Below investment grade BB- 804 3 Total fixed maturities AA- $26,157 100% Below investment grade bonds, those rated below BBB-, totaled $790 million at March 31, 1994, or 3.0% of total fixed maturity securities, compared to 2.8% at December 31, 1993. Net income from below investment grade bonds, including realized investment gains and losses, was $12 million and $6 million for the first three months of 1994 and 1993, respectively. Included in 1993 are changes in the allowance for losses. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Non-performing bonds, defined as bonds for which payment of interest is sufficiently uncertain as to preclude accrual of interest, were $47 million and $46 million, or 0.2% of total fixed maturity securities, at March 31, 1994 and December 31, 1993, respectively. Mortgage Loan Portfolio. Mortgage loans on real estate totaled 9% of invested assets at March 31, 1994. Information regarding the mortgage loan portfolio at March 31, 1994 was as follows: Book Non-Performing Loans ($ in millions) Value Amount % Commercial $2,930 $158 5.4% Residential 110 5 4.3% Allowance for losses (101) (33) Total mortgage loans $2,939 $130 Non-performing (impaired) commercial loans consist of delinquent loans (60+ days) and restructured loans for which the company determines all amounts due under the contractual terms probably will not be collected. These loans represented 5.4% of total mortgage loans at March 31, 1994, compared to 4.4% at December 31, 1993. The increase was primarily due to loans in California adversely affected by economic conditions. At March 31, 1994, $437 million of performing commercial mortgage loans were on the company's watch list due to non-monetary defaults or concerns that future payments may not be made on a timely basis. This amount compares to $467 million at year-end 1993. The decrease in the watch list amount is due primarily to loans placed on delinquent status during first quarter 1994. The -14- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 company does not anticipate a significant effect on operations, liquidity, or capital from these loans. Investment Real Estate. Investment real estate totaled 2.4% of invested assets at March 31, 1994 and December 31, 1993. The breakdown of investment real estate was as follows: (In millions) March 31, 1994 December 31, 1993 Land development projects $ 623 $ 642 Income-producing real estate 207 189 American General Center, Houston 123 125 Foreclosed real estate 68 69 Allowance for losses (263) (253) Total investment real estate $ 758 $ 772 The increase in income-producing real estate was primarily due to the assumption of control and consolidation of two income-producing joint ventures in the first quarter of 1994. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). CASH FLOWS Management believes that the overall sources of cash and liquidity available to the company and its subsidiaries will continue to be sufficient to satisfy its foreseeable financial obligations. Cash Flows of the Company. Net operating cash flows generated by the company were $92 million and $53 million for the three months ended March 31, 1994 and 1993, respectively. Dividends from subsidiaries are the primary source of cash for operating requirements of the company and are used to fund interest obligations, dividends to shareholders, and repurchase of common stock. The company's insurance subsidiaries are restricted by state insurance laws as to the amounts they may pay as dividends without prior notice to, or in some cases prior approval from, their respective state insurance departments. Certain non-insurance subsidiaries are similarly restricted by long-term debt agreements. These restrictions have not affected, and are not expected to affect, the ability of the company to meet its cash obligations. During the first three months of 1994, the companies in the Life Insurance and Retirement Annuities segments paid cash dividends to American General of $54 million, compared to $29 million during the first three months of 1993. Cash dividends paid to the company by the Consumer Finance segment totaled $81 million and $41 million in the first three months of 1994 and 1993, respectively. Of the $65 million increase in dividends paid, $48 million was related to dividends declared in 1993 and paid in 1994. On April 15, 1994, the company redeemed $140 million of 8 1/2% Notes due April 1998. These notes were classified as short-term debt at March 31, 1994 and -15- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 December 31, 1993. Segment Cash Flows. Net cash flows generated by the Life Insurance and Retirement Annuities segments in the first three months of 1994 included $321 million provided by operations and $288 million provided by the increase in policyholder account deposits, net of withdrawals. This compared to $349 million and $451 million during the first three months of 1993. The decrease in policyholder account deposits, net of withdrawals, was primarily due to an increase in fixed account withdrawals in the Retirement Annuities segment. The Consumer Finance segment's operating cash flows totaled $166 million during the first three months of 1994, compared to $154 million during the first three months of 1993. Consolidated Operating Activities. Net cash flows from operating activities on a consolidated basis decreased $71 million in the first three months of 1994 compared to the comparable period in 1993. This decrease was primarily due to an increase in taxes paid. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Investing Activity. The source of cash flow from investment calls, maturities, and sales was as follows: Three Months Ended (In millions) March 31, 1994 1993 Fixed maturity securities Repayments of mortgage-backed securities $ 801 $ 538 Calls 290 529 Sales 153 47 Maturities 108 58 Mortgage loans 97 105 Equity securities 11 18 Other 65 29 Total $1,525 $1,324 Credit Facilities. Committed credit facilities are maintained by American General and certain of its subsidiaries to support the issuance of commercial paper and provide an additional source of cash for operating requirements. At March 31, 1994, committed credit facilities totaled $2.5 billion; outstanding borrowings under these facilities were $45 million. OTHER FACTORS Environmental. American General's principal exposure to environmental regulation arises from its ownership of investment real estate. Probable costs related to environmental clean-up are estimated to be $5 million, and appropriate liabilities have been recorded to reflect these costs. The -16- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 company is continuing to review these costs, as well as the cost of compliance with Environmental Protection Agency regulations. Guaranty Associations. The amount assessed the company's life insurance and annuity subsidiaries by State Guaranty Associations for the first three months of 1994 was $3.4 million, of which $2.4 million had been accrued at December 31, 1993. Assessments in the first three months of 1993 were $4.5 million, of which $2.5 million was accrued at December 31, 1992. The assessments for 1994 and 1993 were offset by $.8 million and $1.8 million, respectively, considered recoverable against future premium taxes. At March 31, 1994, the accrued liability for anticipated unrecoverable assessments was $17 million, compared to $19 million at December 31, 1993. -17- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 PART II. OTHER INFORMATION Item 1. Legal Proceedings. On March 22, 1994, two subsidiaries of the company were named as defendants in The People of the State of California ("California") v. Luis Ochoa, Skeeters Automotive, Morris Plan, Creditway of America, Inc., and American General Finance, filed in the Superior Court of California, County of San Joaquin, Case No. 271130. California seeks injunctive relief, a civil penalty of not less than $5,000 per day or not less than $250,000 for violation of its Health and Safety Code in connection with the failure to register and remove underground storage tanks on property acquired through a foreclosure proceeding by a subsidiary of the company, and a civil penalty of $2,500 for each act of unfair competition prohibited by its Business and Professions Code, but not less than $250,000, plus costs. The subsidiaries have not yet been served with process and are in the initial stages of analyzing the claims. Other than the lawsuit described above and those previously disclosed, American General and certain of its subsidiaries are defendants in various other lawsuits arising in the normal course of business. American General and its subsidiaries believe they have valid defenses in these pending lawsuits and are defending these cases vigorously. The company also believes that the total amounts that would ultimately be paid, if any, arising from these lawsuits would have no material effect on the consolidated financial statements. Item 5. Other Information. Common Stock Repurchase Program. From December 31, 1993 through March 31, 1994, the registrant purchased 3,047,500 shares of its common stock pursuant to its stock repurchase program at a cost of $83.3 million. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. Exhibit 10 American General Corporation Performance-Based Plan for Executive Officers, effective as of January 1, 1994. Exhibit 11 Computation of Earnings per Share. Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges for Consolidated Operations. Exhibit 12.2 Computation of Ratio of Earnings to Fixed Charges for Consolidated Operations, Corporate Fixed Charges Only. Exhibit 12.3 Computation of Ratio of Earnings to Fixed Charges for American General Finance, Inc. -18- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 PART II. OTHER INFORMATION (Continued) Item 6. Exhibits and Reports on Form 8-K (continued). b. Reports on Form 8-K. No Current Reports on Form 8-K were filed during the first quarterly period of 1994. -19- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN GENERAL CORPORATION (Registrant) By: PAMELA J. PENNY PAMELA J. PENNY Vice President and Controller (Duly Authorized Officer and Chief Accounting Officer) Date: May 12, 1994 -20- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 EXHIBIT INDEX Sequentially Numbered Exhibit Page 10 American General Corporation Performance-Based Plan for Executive Officers, effective as of January 1, 1994 11 Computation of Earnings per Share. 12.1 Computation of Ratio of Earnings to Fixed Charges for Consolidated Operations. 12.2 Computation of Ratio of Earnings to Fixed Charges for Consolidated Operations, Corporate Fixed Charges Only. 12.3 Computation of Ratio of Earnings to Fixed Charges for American General Finance, Inc. -21- EX-10 2 EXH. 10 FOR FORM 10-Q 3/31/94 - AMERICAN GENERAL AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Exhibit 10 AMERICAN GENERAL CORPORATION PERFORMANCE - BASED PLAN FOR EXECUTIVE OFFICERS SECTION 1 - PURPOSE 1.1 The AMERICAN GENERAL CORPORATION PERFORMANCE - BASED PLAN FOR EXECUTIVE OFFICERS (the "Plan") is designed to attract and retain the services of key executives who are in a position to make a material contribution to the successful operation of the business of American General Corporation and its subsidiaries. The Plan shall become effective as of January 1, 1994, subject to approval by shareholders in the manner required by Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). SECTION 2 - DEFINITIONS 2.1 For purposes of the Plan, the following terms shall have the following meanings: (a) "Average Shareholders' Equity" means, for any Plan Year, the sum of the consolidated shareholders' equity of the Corporation at the beginning of the Plan Year and for each quarter-end (i.e., March 31, June 30, September 30, and December 31) of that Plan Year, as reported in the Corporation's quarterly financial supplements and/or the annual report to shareholders for each applicable period, divided by five. (b) "Average Shareholders' Equity for the Three-Year Period" means the sum of the Average Shareholders' Equity for the current Plan Year and the prior two Plan Years as reported in the Corporation's annual report to shareholders for such years, divided by three. (c) "Award" means an amount granted pursuant to Section 4 of the Plan. (d) "Board of Directors" means the Board of Directors of the Corporation. (e) "Common Stock" means the common stock ($.50 par value) of the Corporation. (f) "Corporation" means American General Corporation. (g) "Incentive Pool" means a pool of funds created pursuant to Section 3 of the Plan. AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 (h) "Operating Earnings" means, for any Plan Year, the consolidated operating earnings of the Corporation, which exclude net realized investment gains, non-recurring items, and the cumulative effect of accounting changes under generally accepted accounting principles. (i) "Participant" means an officer of the Corporation or one of its subsidiaries who is, during the Plan Year, among the 15 highest salaried employees of the Corporation and its subsidiaries and who has been designated by the Committee as eligible to receive an Award under the Plan for the Plan Year. (j) "Personnel Committee" or "Committee" means the Personnel Committee of the Board of Directors. (k) "Plan Year" means the calendar year. SECTION 3 - DETERMINATION OF INCENTIVE POOL 3.1 Prior to the beginning of each Plan Year (or prior to April 1 with respect to the 1994 Plan Year), the Committee shall prescribe an objective formula pursuant to which a pool of funds (an "Incentive Pool") shall be created for such Plan Year conditioned upon (1) Operating Earnings for such Plan Year exceeding 7% of Average Shareholders' Equity for the Three-Year Period ending on the last day of such Plan Year, and (2) a cash dividend having been declared on the outstanding Common Stock during such Plan Year. 3.2 The Incentive Pool for a Plan Year shall be equal to the sum of (1) 3% of that portion of Operating Earnings for such Plan Year that exceeds a base percentage return to shareholders, established by the Committee, on Average Shareholders' Equity for the Three-Year Period ending on the last day of such Plan Year, plus (2) an amount, not to exceed $2,000,000, consisting of the excess of the cumulative Incentive Pools for all prior Plan Years over the actual Awards paid under the Plan for such Plan Years. SECTION 4 - GRANT OF AWARDS 4.1 Coincident with the establishment of the formula under which the Incentive Pool shall be determined for a Plan Year, the Committee shall award shares of the Incentive Pool ("Awards") for that Plan Year to individuals whom the Committee designates as Participants for the Plan Year. The maximum Award which can be made to a Participant under the Plan for a Plan Year shall not exceed .005 times Operating Earnings for such Plan Year. The Committee shall grant Awards under the Plan based upon a review of the contribution and -2- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 performance of the Participants as well as the Corporation's performance in relation to its competitors and as influenced by external factors. 4.2 Notwithstanding the provisions of Section 4.1, the Committee may, in its sole discretion, reduce the amount otherwise payable to a Participant at any time prior to the payment of the Award to the Participant. SECTION 5 - ELIGIBILITY FOR PAYMENT OF AWARDS 5.1 Subject to Section 4.2, a Participant who has been awarded a share of the Incentive Pool shall receive payment of an Award if the Participant remains employed by the Corporation or its subsidiaries through the end of the applicable Plan Year; provided, however, that no Participant shall be entitled to payment of an Award hereunder until the Committee certifies (by written minutes) that the performance goals and any other material terms of the Plan have in fact been satisfied. If a Participant terminates employment prior to the end of a Plan Year, no payments attributable to his Award for such Plan Year shall be made pursuant to the Plan. SECTION 6 - FORM AND TIMING OF PAYMENT OF AWARDS 6.1 Awards will be paid out in cash in one lump sum payment during the first quarter of the calendar year following the Plan Year to which the Award relates. SECTION 7 - ADMINISTRATION 7.1 The Plan shall be administered by the Personnel Committee. 7.2 Subject to the provisions of the Plan, the Committee shall have exclusive power to determine the amounts that shall be available for Awards each Plan Year and to establish the guidelines under which the Awards payable to each Participant shall be determined. 7.3 The Committee's interpretation of the Plan, grant of any Award pursuant to the Plan, and all actions taken within the scope of its authority under the Plan, shall be final and binding on all Participants (or former Participants) and their executors. 7.4 The Committee shall have the authority to establish, adopt or revise such rules or regulations relating to the Plan as it may deem necessary or advisable for the administration of the Plan. SECTION 8 - AMENDMENT AND TERMINATION 8.1 The Board of Directors may amend any provision of the Plan at any time; provided that no amendment which requires shareholder approval in order for Awards paid under the Plan to be deductible under the Code may be made -3- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 without the approval of the shareholders of the Corporation. The Board of Directors shall also have the right to terminate the Plan at any time. SECTION 9 - MISCELLANEOUS 9.1 The fact that an employee has been designated a Participant shall not confer on the Participant any right to be retained in the employ of the Corporation or its subsidiaries, or to be designated a Participant in any subsequent Plan Year. 9.2 No award under this Plan shall be taken into account in determining a Participant's compensation for the purpose of any employee benefit plan of the Corporation or its subsidiaries unless so provided in such benefit plan. 9.3 This Plan shall not be deemed the exclusive method of providing incentive compensation for an employee of the Corporation or its subsidiaries, nor shall it preclude the Committee or the Board of Directors from authorizing or approving other forms of incentive compensation. 9.4 All expenses and costs in connection with the operation of the Plan shall be borne by the Corporation and its subsidiaries. 9.5 The Corporation or its subsidiary making a payment under this Plan shall withhold therefrom such amounts as may be required by federal, state or local law, and the amount payable under the Plan to the person entitled thereto shall be reduced by the amount so withheld. 9.6 The Plan and the rights of all persons under the Plan shall be construed and administered in accordance with the laws of the State of Texas to the extent not superseded by federal law. 9.7 In the event of the death of a Participant, any payment due under this Plan shall be made to the Participant's estate. 9.8 No right or interest of any Participant in the Plan shall be assigned or transferable, or subject to any lien, directly, by operation of law, or otherwise, including execution, levy, garnishment, attachment, pledge, and bankruptcy. -4- EX-11 3 EXH. 11 FOR FORM 10-Q 3/31/94 - AMERICAN GENERAL AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Exhibit 11 COMPUTATION OF EARNINGS PER SHARE (Unaudited) ($ in millions, except share data) Three Months Ended March 31, 1994 1993 Income before cumulative effect ................ $ 161 $ 144 Cumulative effect of accounting changes* ....... - (46) Net income available to common stock ......... $ 161 $ 98 Average shares outstanding Common shares ................................ 213,010,865 216,433,100 Assumed exercise of stock options ............ 320,394 571,435 Total ........................................ 213,331,259 217,004,535 Earnings per share Income before cumulative effect .............. $ .75 $ .66 Cumulative effect of accounting changes* ..... - (.21) Net income ................................. $ .75 $ .45 * 1993 restated to reflect adoption of SFAS 112. EX-12 4 EXH. 12 FOR FORM 10-Q 3/31/94 - AMERICAN GENERAL AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Exhibit 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES CONSOLIDATED OPERATIONS (Unaudited) ($ in millions) Three Months Ended March 31, 1994 1993 Income before income tax expense and cumulative effect ........................... $253 $223 Fixed charges deducted from income Interest expense ............................ 120 123 Implicit interest in rents .................. 4 4 Total fixed charges deducted from income .................................. 124 127 Earnings available for fixed charges .......... $377 $350 Fixed charges per above ....................... $124 $127 Capitalized interest .......................... 4 4 Total fixed charges ....................... $128 $131 Ratio of earnings to fixed charges ............ 3.0X 2.7X AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Exhibit 12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES CONSOLIDATED OPERATIONS, CORPORATE FIXED CHARGES ONLY (Unaudited) ($ in millions) Three Months Ended March 31, 1994 1993 Income before income tax expense and cumulative effect ............................. $253 $223 Corporate fixed charges deducted from income - corporate interest expense ........... 31 30 Earnings available for fixed charges ............ $284 $253 Ratio of earnings to fixed charges .............. 9.3X 8.4X AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1994 Exhibit 12.3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AMERICAN GENERAL FINANCE, INC. (Unaudited) ($ in millions) Three Months Ended March 31, 1994 1993 Income before income tax expense and cumulative effect ........................... $ 86 $77 Fixed charges deducted from income Interest expense ............................ 93 96 Implicit interest in rents .................. 3 2 Total fixed charges deducted from income .................................. 96 98 Earnings available for fixed charges .......... $182 $175 Ratio of earnings to fixed charges ............ 1.9X 1.8X -----END PRIVACY-ENHANCED MESSAGE-----