-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UrQlwODEdsJOF1iCTxv47t+tnphwu8woi5wQjkdXkcula5O3gKorANeB+ZkoHP3A fK7APie8S0Jdf1/VPaUMMA== 0000005103-99-000034.txt : 19990518 0000005103-99-000034.hdr.sgml : 19990518 ACCESSION NUMBER: 0000005103-99-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN GENERAL CORP /TX/ CENTRAL INDEX KEY: 0000005103 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 740483432 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07981 FILM NUMBER: 99624670 BUSINESS ADDRESS: STREET 1: 2929 ALLEN PKWY CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135221111 10-Q 1 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, 1999 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 April 30, 1999, there were 250,897,430 shares (excluding shares held in treasury and by a subsidiary) of American General's Common Stock and 2,317,701 shares of American General's 7% Convertible Preferred Stock outstanding. 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, 1999 and 1998 ............. 2 Consolidated Balance Sheet at March 31, 1999 and December 31, 1998 ................................ 3 Consolidated Statements of Shareholders' Equity and Comprehensive Income for the three months ended March 31, 1999 and 1998 .......................... 4 Consolidated Condensed Statement of Cash Flows for the three months ended March 31, 1999 and 1998 ... 5 Notes to Consolidated Financial Statements ......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 10 Part II. OTHER INFORMATION. Item 1. Legal Proceedings .................................. 23 Item 6. Exhibits and Reports on Form 8-K ................... 23 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AMERICAN GENERAL CORPORATION Consolidated Statement of Income (Unaudited) (In millions, except per share data) Three Months Ended March 31, 1999 1998 Revenues Premiums and other considerations ................ $ 924 $ 878 Net investment income ............................ 1,285 1,226 Finance charges .................................. 357 327 Realized investment gains (losses) ............... (2) 1 Other ............................................ 56 47 Total revenues ............................... 2,620 2,479 Benefits and expenses Insurance and annuity benefits ................... 1,313 1,224 Operating costs and expenses ..................... 392 382 Commissions ...................................... 278 249 Change in deferred policy acquisition costs and cost of insurance purchased ..................... (86) (34) Provision for finance receivable losses .......... 52 49 Goodwill amortization ............................ 12 9 Interest expense Corporate ....................................... 44 50 Consumer Finance ................................ 138 122 Total benefits and expenses .................. 2,143 2,051 Earnings Income before income tax expense ................. 477 428 Income tax expense ............................... 168 151 Income before minority interest and net dividends on preferred securities of subsidiaries ......... 309 277 Minority interest in net income of Western National Corporation ............................ - 11 Net dividends on preferred securities of subsidiaries .................................... 22 22 Net income ................................... $ 287 $ 244 Net income per share Basic ........................................... $ 1.14 $ .98 Diluted ......................................... $ 1.11 $ .96 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Balance Sheet (Unaudited) (In millions, except share data) March 31, December 31, 1999 1998 Assets Investments Fixed maturity securities (amortized cost: $60,668; $59,212) ........................ $ 62,881 $ 62,731 Mortgage loans on real estate .............. 3,301 3,368 Equity securities (cost: $277; $288) ....... 311 325 Policy loans ............................... 2,334 2,329 Investment real estate ..................... 222 226 Other long-term investments ................ 403 230 Short-term investments ..................... 1,248 654 Total investments ...................... 70,700 69,863 Cash ........................................ 221 341 Assets held in Separate Accounts ............ 17,490 16,158 Finance receivables, net .................... 9,421 9,275 Deferred policy acquisition costs ........... 3,652 3,253 Cost of insurance purchased ................. 1,067 956 Goodwill .................................... 1,577 1,590 Other assets ................................ 4,738 3,671 Total assets ........................... $108,866 $105,107 Liabilities Insurance and annuity liabilities ........... $ 63,732 $ 62,844 Liabilities related to Separate Accounts .... 17,490 16,158 Debt (short-term) Corporate ($1,710; $1,607) ................. 2,996 2,743 Consumer Finance ($3,507; $3,686) .......... 8,974 8,863 Income tax liabilities ...................... 1,420 1,543 Other liabilities ........................... 4,124 2,357 Total liabilities ...................... 98,736 94,508 Redeemable equity Company-obligated mandatorily redeemable preferred securities of subsidiaries holding solely company subordinated notes Non-convertible .......................... 1,481 1,480 Convertible .............................. 248 248 Total redeemable equity ................ 1,729 1,728 Shareholders' equity Convertible preferred stock (shares issued and outstanding: 2,317,701) ................ 85 85 Common stock (shares issued: 269,298,493; outstanding: 251,126,446; 251,804,294) ..... 921 939 Cost of treasury stock ...................... (829) (759) Retained earnings ........................... 7,193 7,007 Accumulated other comprehensive income ...... 1,031 1,599 Total shareholders' equity ............. 8,401 8,871 Total liabilities and equity ........... $108,866 $105,107 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Statements of Shareholders' Equity and Comprehensive Income (Unaudited) (In millions, except per share data) Three Months Ended March 31, Shareholders' Equity 1999 1998 Convertible preferred stock Balance at beginning and end of period .......... $ 85 $ 85 Common stock Balance at beginning of period .................. 939 326 Issuance of common shares for acquisition ....... - 580 Stock options issued for acquisition ............ - 37 Issuance of treasury shares ..................... (18) (15) Balance at end of period ........................ 921 928 Cost of treasury stock Balance at beginning of period .................. (759) (621) Share repurchases ............................... (104) (31) Issuance under employee benefit plans and other . 34 30 Balance at end of period ........................ (829) (622) Retained earnings Balance at beginning of period .................. 7,007 6,624 Net income ...................................... 287 244 Cash dividends (per share) Preferred ($.64; $.64) ......................... (1) (1) Common ($.40; $.38) ............................ (100) (91) Balance at end of period ........................ 7,193 6,776 Accumulated other comprehensive income Balance at beginning of period................... 1,599 1,169 Change in net unrealized gains (losses) on securities .................................. (568) 138 Balance at end of period ........................ 1,031 1,307 Total shareholders' equity .................... $ 8,401 $ 8,474 Comprehensive Income Net income ....................................... $ 287 $ 244 Other comprehensive income Gross change in unrealized gains (losses) on securities [pretax:$(878);$214] ............. (567) 138 Less: gains (losses) realized in net income ..... 1 - Change in net unrealized gains (losses) on securities [pretax:$(879);$215]............. (568) 138 Comprehensive income (loss).................... $ (281) $ 382 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Condensed Statement of Cash Flows (Unaudited) (In millions) Three Months Ended March 31, 1999 1998 Operating activities Net cash provided by operating activities ... $ 612 $ 628 Investing activities Investment purchases .............................. (5,591) (2,208) Investment dispositions and repayments ............ 4,170 1,675 Finance receivable originations and purchases ..... (1,452) (1,274) Finance receivable principal payments received .... 1,248 1,147 Net (increase) decrease in short-term investments . (594) 34 Acquisition of Western National Corporation ....... - (591) Other, net ........................................ (49) (70) Net cash used for investing activities ...... (2,268) (1,287) Financing activities Retirement Services and Life Insurance Policyholder account deposits ................... 1,444 931 Policyholder account withdrawals ................ (1,082) (920) Net policyholder account deposits ............ 362 11 Short-term collateralized financings ............ 1,133 315 Total Retirement Services and Life Insurance.. 1,495 326 Consumer Finance Net increase (decrease) in short-term debt ...... (179) 41 Long-term debt issuances ........................ 315 536 Long-term debt redemptions ...................... (26) (479) Total Consumer Finance ....................... 110 98 Corporate Net increase in short-term debt ................. 103 620 Long-term debt issuance ......................... 148 - Long-term debt redemptions ...................... - (354) Common stock repurchases ........................ (94) (31) Dividends on common and preferred stock ......... (101) (92) Other, net ...................................... (125) 58 Total Corporate .............................. (69) 201 Net cash provided by financing activities ... 1,536 625 Net decrease in cash ............................... (120) (34) Cash at beginning of period ........................ 341 263 Cash at end of period .............................. $ 221 $ 229 Supplemental disclosure of cash flow information: Cash paid (received) during the period for Income taxes .................................... $ (44) $ (98) Interest Corporate ...................................... 45 59 Consumer Finance ............................... 155 139 Dividends on preferred securities of subsidiaries ................................... 14 14 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Notes to Consolidated Financial Statements March 31, 1999 1. Accounting Policies. The accompanying unaudited consolidated financial statements of American General Corporation and its subsidiaries (American General or the company) have been prepared in accordance with generally accepted accounting principles for interim periods. In the opinion of management, these statements include all adjustments that are necessary for a fair presentation of the company's consolidated financial position at March 31, 1999, and the consolidated results of operations, shareholders' equity, comprehensive income, and cash flows for the three months ended March 31, 1999 and 1998. 2. Calculation of Earnings Per Share. The calculation of basic and diluted earnings per share was as follows: Three Months Ended (In millions, except share data) March 31, 1999 1998 Net income ......................... $ 287 $ 244 Net dividends on convertible preferred stock ................... (1) (1) Earnings available to common shareholders (a) .................. 286 243 Net dividends on dilutive securities Convertible preferred securities of subsidiary ................... 3 3 Convertible preferred stock ...... 1 1 Earnings available to common shareholders assuming dilution (b). $ 290 $ 247 Average shares outstanding (a)......251,369,312 247,255,973 Dilutive securities Convertible preferred securities of subsidiary ................... 6,144,016 6,144,016 Convertible preferred stock ...... 2,317,701 2,317,701 Stock options .................... 1,532,049 1,558,167 Restricted stock ................. 380,706 4,677 Average shares outstanding assuming dilution (b).............261,743,784 257,280,534 Net income per share Basic ............................. $1.14 $ .98 Diluted ........................... $1.11 $ .96 (a) Used to compute basic earnings per share. (b) Used to compute diluted earnings per share. Item 1. Financial Statements (continued). 3. Investing Activities. Cash flows related to investing activities were as follows: Dispositions and Purchases Repayments Three Months Ended Three Months Ended (In millions) March 31, March 31, 1999 1998 1999 1998 Fixed maturity securities $5,348 $2,134 $4,032 $1,510 Mortgage loans 58 38 77 130 Equity securities 6 1 19 5 Other 179 35 42 30 Total $5,591 $2,208 $4,170 $1,675 4. Derivative Financial Instruments. Derivative financial instruments did not have a material effect on net investment income, interest expense, or net income during the three months ended March 31, 1999 or 1998. Significant activity related to derivative financial instruments during the three months ended March 31, 1999 was as follows: During fourth quarter 1998, the company entered into interest rate swap agreements with notional amounts of $200 million to hedge against the risk of declining interest rates on anticipated security purchases. During first quarter 1999, the company purchased securities with maturities different from those of the anticipated purchases. As a result, the interest rate swap agreements were terminated, with an immaterial gain. During first quarter 1999, the company settled a treasury rate lock agreement with a notional amount of $123 million, which was outstanding at December 31, 1998. This agreement was used to hedge against the risk of rising interest rates on an anticipated issuance of debt. The company issued $150 million of long-term debt in February 1999. During first quarter 1999, call swaptions with notional amounts of $3.4 billion were purchased, while $1.3 billion expired. The company uses options to enter into interest rate swap agreements to limit its exposure to reduced spreads between investment yields and interest crediting rates should interest rates decrease or increase significantly over prolonged periods. Call and put swaptions with notional amounts of $6.0 billion and $4.2 billion, respectively, and average strike rates of 4.2% and 8.3%, respectively, were outstanding at March 31, 1999. These swaptions expire in 1999 and 2000. 5. Dollar Rolls. American General uses dollar roll agreements as part of its strategy to increase investment income. Dollar rolls are agreements to sell mortgage-backed securities (MBSs) and repurchase substantially the same securities at a specified price and date in the future. The dollar rolls are accounted for as short-term collateralized financings and are included in other liabilities. At March 31, 1999, the company had $1.1 billion of outstanding dollar roll agreements. The average amount outstanding and the weighted average interest rate on dollar rolls for the three months ended March 31, 1999 were $751 million and 4.6%, respectively. Item 1. Financial Statements (continued). 6. Legal Contingencies. Market Conduct. In recent years, various life insurance companies have been named as defendants in class action lawsuits relating to life insurance pricing and sales practices, and a number of these lawsuits have resulted in substantial settlements. Certain of American General's subsidiaries are defendants in similar purported class action lawsuits. On December 16, 1998, American General announced that certain of its life insurance subsidiaries had entered into agreements to resolve substantially all of the material pending market conduct class action lawsuits. The settlements are not final until approved by the courts and any appeals are resolved. If court approvals are obtained and appeals are not taken, it is expected the settlements will be final in third quarter 1999. In conjunction with the proposed settlements, the company recorded a charge of $378 million ($246 million aftertax) in fourth quarter 1998. The charge covers the cost of additional policyholder benefits and other anticipated expenses resulting from the proposed settlements, as well as other administrative and legal costs. Other. In addition to those lawsuits or proceedings disclosed herein, the company is party to various other lawsuits and proceedings arising in the ordinary course of business. Many of these lawsuits and proceedings arise in jurisdictions, such as Alabama and Mississippi, that permit damage awards disproportionate to the actual economic damages incurred. Based upon information presently available, the company believes that the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on the company's consolidated results of operations and financial position. However, it should be noted that the frequency of large damage awards, including large punitive damage awards, that bear little or no relation to actual economic damages incurred by plaintiffs in jurisdictions like Alabama and Mississippi continues to create the potential for an unpredictable judgment in any given suit. 7. Tax Return Examinations. American General and the majority of its subsidiaries file a consolidated Federal income tax return. The Internal Revenue Service (IRS) has completed examinations of the company's tax returns through 1988. During 1999, the company and the IRS reached a settlement of all contested issues through 1988, within the amounts previously recorded in the company's consolidated financial statements. To reflect this settlement, in second quarter 1999 the company will reduce goodwill by approximately $70 million, with a corresponding reduction of tax liabilities. The IRS is currently examining the company's tax returns for 1989 through 1996. Item 1. Financial Statements (continued). 8. Division Results. Results of each division include earnings from its business operations and earnings on that amount of equity considered necessary to support its business, excluding goodwill amortization, net realized investment gains (losses), and non-recurring items. Corporate operations include the cost of corporate debt and earnings on corporate assets. Division earnings information was as follows: Income Revenues Before Taxes Earnings Three Months Three Months Three Months Ended Ended Ended March 31, March 31, March 31, (In millions) 1999 1998 1999 1998 1999 1998 Retirement Services $ 845 $ 711 $ 211 $ 172 $ 142 $ 114 Life Insurance 1,356 1,363 265 245 173 161 Consumer Finance 421 389 82 74 53 47 Total divisions 2,622 2,463 558 491 368 322 Corporate operations - 15 (67) (46) (45) (30) Net dividends on preferred securities of subsidiaries - - - - (22) (22) Minority interest in net income of Western National Corporation - - - - - (11) Goodwill amortization - - (12) (9) (12) (9) Realized investment gains (losses) (2) 1 (2) 1 (2) - Non-recurring item - - - (9) - (6) Total consolidated $2,620 $2,479 $ 477 $ 428 $ 287 $ 244 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This item presents specific comments on material changes to the company's consolidated results of operations, capital resources, and liquidity for the periods reflected in the interim financial statements filed with this report. This analysis should be read in conjunction with the consolidated financial statements and related notes on pages 2 through 9 of this Quarterly Report on Form 10-Q. OVERVIEW American General reported financial highlights as follows: Three Months Ended (In millions, March 31, except share data) 1999 1998 Net income $ 287 $ 244 Net income per share (diluted) 1.11 .96 Revenues and deposits 4,965 4,426 Assets 108,866 96,051 Shareholders' equity 8,401 8,474 Net income increased $43 million, or 18%, for the three months ended March 31, 1999, compared to the same period in 1998, due to increases in earnings in the company's Retirement Services division (up 24%), Life Insurance division (up 7%), and Consumer Finance division (up 14%). Net income per share increased 16% compared to the 18% increase in net income due to the additional shares issued for the acquisition of American General Annuity on February 25, 1998. Revenues and deposits increased $539 million, or 12%, compared to the same period in 1998, primarily due to an increase in both fixed and variable deposits in the Retirement Services division. Asset growth of 13% from March 31, 1998 to March 31, 1999 was due to growth in business in the operating divisions. During the last twelve months, net income increased shareholders' equity by $807 million. This increase was offset by dividends to shareholders of $390 million, share repurchases of $268 million, and a decrease in the fair value adjustment on securities of $281 million. In 1999, the company purchased 1.5 million shares of its common stock for $104 million. BUSINESS DIVISIONS The company manages its business operations through three divisions, which are based on products and services offered. The results of each division for the quarters ended March 31, 1999 and 1998 are discussed below. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Retirement Services Retirement Services division results were as follows: Three Months Ended March 31, (In millions) 1999 1998 Earnings $ 142 $ 114 Assets Investments 40,494 35,343 Separate Accounts 15,973 12,466 Deposits Fixed Tax-qualified346 372 Non-qualified709 549 Variable (mainly tax-qualified) 780 551 Operating expenses 71 57 Earnings. Division earnings increased $28 million, or 24%, for the three months ended March 31, 1999 compared to the same period in 1998. Earnings growth was driven by continued growth in investments supporting fixed accounts, as well as growth in Separate Account assets, and higher fixed investment spread. Asset growth, excluding the fair value adjustment related to the division's securities, was 21% from March 31, 1998 to March 31, 1999. This growth was due to fixed and variable deposits, interest credited to fixed account deposits, investments acquired in a second quarter 1998 coinsurance transaction, and stock market appreciation on assets held in Separate Accounts, partially offset by account withdrawals. Deposits. Total deposits were $1.8 billion for first quarter 1999 compared to $1.5 billion for the same period of 1998. The 15% increase in fixed deposits was due to the division's continued success in marketing single premium fixed annuities through the financial institution distribution channel. Variable deposit growth of 41% in first quarter 1999, compared to first quarter 1998, reflects continued consumer interest in equity-based variable products and the introduction of Portfolio Director Plus, a new variable product line that includes expanded investment options. Fixed Investment Spread. Fixed investment spread represents the difference between the yield on invested assets and the average interest rate credited to policyholders' fixed accounts. Investment results and crediting rates on fixed accounts were as follows: Three Months Ended March 31, (In millions) 1999 1998 Net investment income $ 716 $ 646 Investment yield 7.66% 7.98% Average crediting rate 5.38 5.98 Fixed investment spread 2.28 2.00 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Net investment income increased 11% for the three months ended March 31, 1999 due to growth in invested assets, including $2.4 billion of investments acquired in a coinsurance transaction in April 1998. The 32 basis point decrease in yield primarily relates to the revaluation of American General Annuity's investments as of its February 25, 1998 acquisition date, as well as lower yields on new investments throughout 1998 and 1999. The net decrease in average crediting rate exceeded the decrease in investment yield, producing an increase in investment spread of 28 basis points, in first quarter 1999 compared to the same period in 1998. Separate Account Fees. Separate Account fees include mortality and expense risk fees. The increase in these fees of $9 million, or 29%, for the first three months of 1999, compared to the same period for 1998, was largely driven by growth in Separate Account assets. Surrenders. The division's rate of policyholder surrenders for tax-qualified accounts was 5.92% of average policyholders' account balances in first quarter 1999, compared to 5.45% for the same period in 1998. Factors contributing to higher surrenders included lower average interest crediting rates on fixed accounts and increased competition from other variable investment products. The policyholder surrender rate for non-qualified accounts was 8.12% for the three months ended March 31, 1999 compared to 10.84% for the same period of 1998. The decrease was due to growth in financial institution proprietary products which are still within the surrender charge period. Operating Expenses. Operating expenses increased $14 million for the three months ended March 31, 1999, compared to the same period of 1998, due to new marketing and sales initiatives, as well as infrastructure improvements including the establishment of a customer care center to upgrade customer service. The ratio of operating expenses to average assets increased to .49% for first quarter 1999 from .43% for first quarter 1998. Life Insurance Life Insurance division results were as follows: Three Months Ended March 31, (In millions) 1999 1998 Earnings $ 173 $ 161 Assets Investments 28,876 28,947 Separate Accounts 1,517 1,044 Insurance and annuity liabilities 25,900 25,328 Premiums and other considerations 759 776 Net investment income 555 548 Insurance and annuity benefits 733 731 Operating expenses 172 187 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Earnings. Division earnings for the three months ended March 31, 1999 increased $12 million, or 7%, compared to the same period in 1998. The increase was primarily due to increased investment margin and lower operating expenses resulting from operating efficiencies. Sales, Premiums, and Deposits. Sales and deposits of individual life insurance and annuities were as follows: Three Months Ended (In millions) March 31, 1999 1998 Individual life insurance Sales $ 164 $ 177 Deposits 364 340 Annuities Sales 143 109 Deposits 146 135 Individual life and annuity sales for first quarter 1999 were $307 million, an increase of 8% over first quarter 1998. Annualized life insurance sales of $164 million reflect sales gains in variable and indexed life insurance products, offset by lower sales of universal life insurance and large cases in the corporate executive benefits market. Sales related to corporate executive benefits can fluctuate significantly from quarter to quarter due to large case size. Annuity sales increased 33% in 1999 due to the continued strong sales of recently introduced variable annuity products. Premiums and other considerations decreased in 1999 compared to 1998 primarily due to lower traditional insurance premiums and deemphasis of non-strategic, non- life sales. Deposits in the first three months of 1999 were 7% higher than the same period of 1998, primarily due to increased variable annuity sales, and corporate executive benefits sales made in prior quarters. Investment Spread. Investment results and interest crediting rates were as follows: Three Months Ended March 31, 1999 1998 Investment yield 8.35% 8.34% Average crediting rate 5.93 6.04 Investment spread 2.42 2.30 Net investment income increased slightly in the first three months of 1999 compared to the same period of 1998 due to a $271 million increase in invested assets (excluding the fair value adjustment related to the division's securities), more active management of the division's investment portfolio, and lower investment expenses. The spread between investment yield and the average rate credited to policyholders increased due to reductions in crediting rates. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Mortality and Persistency. Death claims and premium termination rates were as follows: Three Months Ended March 31, 1999 1998 Death claims (in millions) $ 250 $ 251 Death claims per $1,000 in force $ 3.66 $ 3.64 Premium termination rate 12.42% 12.68% Death claims, included in insurance and annuity benefits, were essentially flat in first quarter 1999 compared to the same period in 1998. The lower premium termination rate for 1999 primarily reflects a lower interest rate environment and the sale of larger policies with lower expected lapse rates. Overall, mortality experience and persistency experience were within pricing assumptions. Operating Expenses. Operating expenses decreased $15 million for the first three months of 1999 compared to the same period in 1998. During first quarter 1999, the division benefited from efficiency gains related to centralization of common functions utilizing a shared services platform, as well as lower employee benefits expense. The ratio of operating expenses to direct premiums and deposits was 15.09% in 1999 compared to 16.60% in 1998, reflecting lower expenses and higher deposits in first quarter 1999. Consumer Finance Consumer Finance division results were as follows: Three Months Ended March 31, ($ in millions) 1999 1998 Earnings $ 53 $ 47 Average finance receivables 9,721 8,002 Yield on finance receivables 14.85% 16.48% Borrowing cost 6.22 6.71 Interest spread 8.63 9.77 Operating expenses $ 123 $ 119 Earnings. Division earnings increased 14% for the three months ended March 31, 1999, compared to the same period of 1998, primarily due to an increase in average finance receivables and improved credit quality. Finance Receivables. Finance receivables at March 31, 1999 increased $1.7 billion to $9.4 billion from March 31, 1998. Average finance receivables increased 21% in the first three months of 1999 compared to the same period in 1998 due to higher loan production in the division's branch offices, new sources of real estate loans, and acquisitions of real estate loan portfolios. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Credit Quality. Net charge-off and delinquency ratios reflect the quality of receivables, the success of collection efforts, and general economic conditions. Charge offs, delinquencies, and the allowance for finance receivable losses were as follows: Three Months Ended March 31, ($ in millions) 1999 1998 Charge offs $ 52 $ 54 % of average receivables 2.14% 2.70% March 31, December 31, 1999 1998 1998 Delinquencies $ 378 $ 303 $ 384 % of finance receivables 3.65% 3.49% 3.75% Allowance for finance receivables losses $ 384 $ 368 $ 382 % of finance receivables 3.92% 4.56% 3.96% The decrease in the charge off percentage for the first three months of 1999, compared to the same period in 1998, reflects the division's focus on improving credit quality, as well as the increase in average receivables. The improvement in credit quality resulted from the continued shift toward a higher percentage of real estate secured receivables and the division's strict adherence to its underwriting standards. At March 31, 1999, real estate loans represented 62% of total finance receivables, compared to 53% at March 31, 1998 and 60% at December 31, 1998. The increases in delinquencies and the delinquency ratio at March 31, 1999 compared to March 31, 1998 were due to the maturing of acquired real estate portfolios that were new originations when purchased and general economic conditions. The division maintains the allowance for finance receivable losses at an amount that management believes is adequate to absorb anticipated losses in the existing portfolio. The allowance as a percentage of finance receivables has continued to decline as the portfolio has grown and the credit quality has improved. Interest Spread. The spread between yield and borrowing cost decreased 114 basis points in the first three months of 1999 compared to 1998 due to lower yields, partially offset by lower borrowing costs. The lower yield on finance receivables reflects the increased proportion of real estate loans, which generally have lower yields due to their higher credit quality. Operating Expenses. Operating expenses were 5.06% of average finance receivables for the first three months of 1999 and 5.87% for the same period of 1998. This decrease reflects a 21% increase in average finance receivables compared to a 5% increase in operating expenses. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). INVESTMENTS Invested assets consist primarily of fixed maturity securities, mortgage loans on real estate, and policy loans. Fair Value of Securities. An increase in interest rates and resulting decreases in bond values in first quarter 1999 caused a $1.3 billion decrease in the fair value adjustment to fixed maturity securities and a related $566 million negative adjustment to shareholders' equity from December 31, 1998. The components of the fair value adjustment at March 31, 1999 and December 31, 1998, and the 1999 change, were as follows: March 31, December 31, (In millions) 1999 1998 Change Fair value adjustment to fixed maturity securities $ 2,215 $ 3,519 $(1,304) Decrease in deferred policy acquisition costs and cost of insurance purchased (655) (1,083) 428 Increase in deferred income taxes (551) (861) 310 Net unrealized gains Fixed maturity securities 1,009 1,575 (566) Equity securities 22 24 (2) Net unrealized gains on securities $ 1,031 $ 1,599 $ (568) Fixed Maturity Securities. At March 31, 1999, fixed maturity securities included $46.9 billion of corporate bonds, $13.2 billion of mortgage-backed securities, and $2.6 billion of bonds issued by governmental agencies. The average credit rating of the fixed maturity securities was A+ at March 31, 1999 and December 31, 1998. Average credit ratings by category at March 31, 1999 were as follows: March 31, Average Credit (In millions) 1999 % Rating Investment grade $46,165 73% A Mortgage-backed 13,210 21 AAA Below investment grade 3,506 6 BB- Total fixed maturity securities $62,881 100% A+ Below Investment Grade. Below investment grade securities have credit ratings below BBB-. Below investment grade securities were 5% of total invested assets at March 31, 1999 and December 31, 1998. The company invests in below investment grade securities to enhance the overall yield of the portfolio. Investment income from below investment grade securities was $85 million (10.0% yield) for the three months ended March 31, 1999 and $58 million (9.6% yield) for the same period in 1998. Realized investment losses on below investment grade securities were $15 million and $1 million in the first quarter of 1999 and 1998, respectively. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Non-Performing. Bonds are deemed to be non-performing when the payment of interest is sufficiently uncertain as to preclude accrual of interest. Non- performing bonds were less than 0.1% of total fixed maturity securities at March 31, 1999 and December 31, 1998. Mortgage Loans. Mortgage loans on real estate, consisting primarily of loans on office and retail properties, represented 5% of invested assets at March 31, 1999 and December 31, 1998. Mortgage loan statistics at March 31, 1999 and December 31, 1998 were as follows: March 31, December 31, (In millions) 1999 1998 Mortgage loans $ 3,333 $ 3,402 Allowance for losses (32) (34) Mortgage loans, net $ 3,301 $ 3,368 Percentage of mortgage loans Allowance for losses 1.0% 1.0% Restructured loans 2.1 2.1 Delinquent loans (60+ days) .6 .6 Watch list loans 2.7 2.4 The yield on restructured loans was 7.9% for the quarter ended March 31, 1999. The increase in watch list loans was due to an increase in loans that are potentially undercollateralized. CAPITAL RESOURCES Corporate Capital. American General's target capital structure consists of 25% corporate debt, 15% redeemable equity, and 60% shareholders' equity. At March 31, 1999, corporate capital totaling $12.1 billion, excluding the fair value adjustment on securities, consisted of $3.0 billion corporate debt (25%), $1.7 billion redeemable equity (14%), and $7.4 billion shareholders' equity (61%). Retirement Services and Life Insurance. The amount of statutory equity required to support the business of American General's retirement services and life insurance companies is principally a function of four factors: (1) the quality of the assets invested to support insurance and annuity reserves, (2) the mortality and other insurance-related risks, (3) the 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' (NAIC) risk-based capital (RBC) formula, used to evaluate the adequacy of a life insurance company's statutory equity. American General's target statutory equity for each of its retirement services and life insurance companies is 2.5 times the Company Action Level RBC (or 5.0 times the Authorized Control Level RBC). At March 31, 1999, American General's principal retirement services and life insurance companies, on a combined basis, had statutory equity of $4.6 billion, which was 2.7 times the Company Action Level RBC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Consumer Finance. The Consumer Finance division's capital varies directly with the amount of finance receivables. Consumer Finance capital of $10.2 billion at March 31, 1999 included $9.0 billion of Consumer Finance debt, which was not guaranteed by the parent company, and $1.2 billion of equity. The capital mix of Consumer Finance debt and equity is based primarily upon maintaining leverage at a level that supports cost-effective funding. The division's target ratio of debt to tangible net worth, a standard measure of financial risk in the consumer finance industry, is 7.5 to 1. The ratio equaled the target at March 31, 1999 and December 31, 1998. LIQUIDITY The company's overall liquidity is based on cash flows from the business divisions and its ability to borrow in both the long-term and short-term markets at competitive rates. At March 31, 1999, the company had committed and unused credit facilities of $5.0 billion, substantially all of which were to support the company's commercial paper borrowings. The company believes that its overall sources of liquidity will continue to be sufficient to satisfy its foreseeable financial obligations. Parent Company. The parent company paid $23 million of capital contributions, net of dividends, to subsidiaries during the three months ended March 31, 1999 and received $451 million of dividends, net of capital contributions, for the same period in 1998. Net capital contributions in 1999 were a result of surplus contributions required to fund market conduct- related costs in the Life Insurance division, which were necessary to maintain target capital levels. While state insurance regulations and long- term debt covenants restrict the amount of dividends subsidiaries may pay to the parent company, these restrictions are not expected to affect the company's ability to meet its cash obligations. Retirement Services. Principal sources of cash for the Retirement Services division were as follows: Three Months Ended March 31, (In millions) 1999 1998 Operating cash flow $ 504 $ 336 Fixed policyholder account deposits, net of withdrawals 292 12 Variable account deposits, net of withdrawals 655 540 Short-term collateralized financings 953 157 Net cash provided by operating activities increased $168 million in the first three months of 1999, compared to the same period of 1998, primarily due to growth in the single premium fixed annuity business sold through the financial institution distribution channel. The increase in net variable account deposits was a result of policyholders' continuing interest in equity-based investments and new product introductions. Because the investment risk on variable accounts lies predominately with the policyholder, deposits and Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). withdrawals related to Separate Accounts are not included in the company's consolidated condensed statement of cash flows. The increase in cash from short-term collateralized financings relates to the company's expanded use of dollar rolls as part of its investment strategy. The major uses of cash were the purchase of investments necessary to support increases in insurance and annuity liabilities, and dividends paid to the parent. The subsidiaries in this division paid net dividends of $42 million and $137 million in the first three months of 1999 and 1998, respectively. The decrease in dividends was due to higher levels of required surplus retained to support growth in the single premium fixed annuity business. Life Insurance. Principal sources of cash for the Life Insurance division were as follows: Three Months Ended March 31, (In millions) 1999 1998 Operating cash flow $ 7 $ 176 Fixed policyholder account deposits, net of withdrawals 70 (1) Variable account deposits, net of withdrawals 114 52 Short-term collateralized financings 180 158 Net cash provided by operating activities decreased $169 million in first quarter 1999 compared to first quarter 1998 primarily due to funding of market conduct-related costs. The $71 million increase in net fixed policyholder account deposits relates to deposits for corporate executive benefits sales made in prior quarters. The increase in net variable account deposits in the first quarter of 1999 compared to 1998 was a result of policyholders' continuing interest in equity-based investments and new product introductions. The major uses of cash were the purchase of investments necessary to support increases in insurance and annuity liabilities, and dividends paid to the parent. In the first three months of 1999, the subsidiaries in the Life Insurance division received capital contributions of $179 million to fund market conduct-related costs and paid dividends of $83 million for a net capital contribution of $96 million, compared to $275 million of net dividends paid in the same period of 1998. Consumer Finance. Principal sources of cash for the Consumer Finance division were as follows: Three Months Ended March 31, (In millions) 1999 1998 Operating cash flow $ 158 $ 118 Increase in debt 110 98 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Net cash provided by operating activities increased $40 million in first quarter 1999 compared to first quarter 1998 due to the increase in finance charges from higher average net receivables. Cash provided by borrowings increased in 1999 due to the growth in finance receivables. Net dividends paid to the parent company totaled $41 million and $32 million in the first three months of 1999 and 1998, respectively. YEAR 2000 Internal Systems. American General has numerous technology systems that are managed on a decentralized basis. The company's Year 2000 readiness efforts are therefore being undertaken by its key business units with centralized oversight. Each business unit has developed and is implementing a plan to minimize the risk of a significant negative impact on its operations. While the specifics of the plans vary, the plans include the following activities: (1) perform an inventory of the company's information technology and non-information technology systems; (2) assess which items in the inventory may expose the company to business interruptions due to Year 2000 issues; (3) reprogram or replace systems that are not Year 2000 ready; (4) test systems to prove that they will function into the next century as they do currently; and (5) return the systems to operations. As of December 31, 1998, these activities had been completed for substantially all of the company's critical systems, making them Year 2000 ready. Vendor upgrades for a small number of systems were either completed in first quarter 1999 or are expected to be completed by June 30, 1999; therefore, activities (3) through (5) are ongoing for some systems. The company will continue to test its systems throughout 1999 to maintain Year 2000 readiness. In addition, the company currently is developing plans for the century transition, which will restrict systems modifications from November 1999 through January 2000, create rapid response teams to address problems, and limit vacations for key technical personnel. Third Party Relationships. The company has relationships with various third parties who must also be Year 2000 ready. These third parties provide (or receive) resources and services to (or from) the company and include organizations with which the company exchanges information. Third parties include vendors of hardware, software, and information services; providers of infrastructure services such as voice and data communications and utilities for office facilities; investors; customers; distribution channels; and joint venture partners. Third parties differ from internal systems in that the company exercises less, or no, control over Year 2000 readiness. The company has developed a plan to assess and attempt to mitigate the risks associated with the potential failure of third parties to achieve Year 2000 readiness. The plan includes the following activities: (1) identify and classify third party dependencies; (2) research, analyze, and document Year 2000 readiness for critical third parties; and (3) test critical hardware and software products and electronic interfaces. As of April 30, 1999, the company has identified and assessed its critical third party dependencies. Of these critical dependencies, approximately 300 have been identified as being of a nature that required them to be covered in the company's contingency planning efforts. Due to the various stages of Year 2000 readiness for these critical third-party dependencies, the company's testing activities related to critical third parties will extend throughout 1999. Contingency Plans. The company has commenced contingency planning to reduce the risk of Year 2000-related business failures. The continency plans, which address both internal systems and third party relationships, include the following activities: (1) evaluate the consequences of failure of critical business processes with significant exposure to Year 2000 risk; (2) determine the probability of a Year 2000-related failure for those critical processes that have a high consequence of failure; (3) develop an action plan to complete contingency plans for critical processes that rank high in consequence and probability of failure; and (4) complete the applicable contingency plans. As of April 30, 1999, each business unit had completed its contingency plans. These plans will be tested during the second and third quarters of 1999. Risks and Uncertainties. Based on its plans to make internal systems ready for Year 2000, to deal with third party relationships, and to develop contingency actions, the company believes that it will experience at most isolated and minor disruptions of business processes following the turn of the century. Such disruptions are not expected to have a material effect on the company's future results of operations, liquidity, or financial condition. However, due to the magnitude and complexity of this project, risks and uncertainties exist and the company is not able to predict a most reasonably likely worst case scenario. If Year 2000 readiness is not achieved due to the company's failure to maintain critical systems as Year 2000 ready, failure of critical third parties to achieve Year 2000 readiness on a timely basis, failure of contingency plans to reduce Year 2000-related business failures, or other unforseen circumstances in completing the company's plans, the Year 2000 issues could have a material adverse impact on the company's operations following the turn of the century. Costs. Through March 31, 1999, the company has incurred and expensed $86 million (pretax) related to Year 2000 readiness, including $6 million incurred during first quarter 1999 and $9 million incurred in first quarter 1998. The first quarter 1998 expense, of which $3 million related to the Retirement Services division and $6 million related to the Life Insurance division, was excluded from 1998 division earnings, consistent with the manner in which management reviewed division results. In 1999, Year 2000 readiness expenses were included in division earnings. The company currently anticipates that it will incur future costs of approximately $10 million to $15 million (pretax) to maintain Year 2000 readiness, complete Year 2000 work on noncritical systems and testing of critical third party relationships, and continue contingency planning activities. The company has accelerated the replacement of certain systems as part of its Year 2000 activities. Costs of the replacement systems were capitalized and are being amortized over their useful lives, in accordance with the company's normal accounting policies. The total of such capitalizable costs was approximately $5 million at March 31, 1999. 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 the company's products and trends in the company's operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects upon the company. There can be no assurance that future developments affecting the company will be those anticipated by management. 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 new products and distribution channels; (3) competitive, regulatory, or tax changes that affect the cost of, or demand for, the company's products; (4) the company's ability or the ability of third parties to achieve and maintain Year 2000 readiness for critical systems and operations; and (5) adverse litigation results or resolution of litigation, including market conduct litigation. Investors are also directed to other risks and uncertainties discussed in other documents filed by the company with the Securities and Exchange Commission. The company undertakes no obligation to update or revise any forward-looking information, whether as a result of new information, future developments, or otherwise. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to Note 6 to the Registrant's Unaudited Consolidated Financial Statements in Part I of this Form 10-Q for the quarter ended March 31, 1999. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. Exhibit 11 Computation of Earnings per Share (included in Note 2 of Notes to Consolidated Financial Statements) Exhibit 12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Exhibit 27 Financial Data Schedule b. Reports on Form 8-K. The following report on Form 8-K was filed after December 31, 1998: 1. Current Report on Form 8-K dated February 11, 1999, with respect to authorization for issuance of $150 million of American General's 6-5/8% Notes Due 2029. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 14, 1999. AMERICAN GENERAL CORPORATION (Registrant) By: PAMELA J. PENNY Pamela J. Penny Vice President and Controller (Duly Authorized Officer and Chief Accounting Officer) EXHIBIT INDEX Exhibit 11 Computation of Earnings per Share (included in Note 2 of Notes to Consolidated Financial Statements) 12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 27 Financial Data Schedule EX-12 2 Exhibit 12 AMERICAN GENERAL CORPORATION Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (Unaudited) ($ in millions) Three Months Ended March 31, 1999 1998 Consolidated operations: Income before income tax expense, minority interest, and dividends on preferred securities ............. $ 477 $ 428 Fixed charges deducted from income Interest expense .................................. 182 172 Implicit interest in rents ........................ 5 5 Total fixed charges deducted from income ........ 187 177 Earnings available for fixed charges........... $ 664 $ 605 Fixed charges per above ............................. $ 187 $ 177 Dividends on preferred stock and securities ......... 37 37 Combined fixed charges and preferred stock dividends ................................. $ 224 $ 214 Ratio of earnings to fixed charges .................. 3.54 3.41 Ratio of earnings to combined fixed charges and preferred stock dividends ................. 2.96 2.83 Consolidated operations, corporate fixed charges and preferred stock dividends only: Income before income tax expense, minority interest, and dividends on preferred securities . $ 477 $ 428 Corporate fixed charges deducted from income - corporate interest expense ...................... 53 54 Earnings available for fixed charges .......... $ 530 $ 482 Total corporate fixed charges per above ........... $ 53 $ 54 Dividends on preferred stock and securities ....... 37 37 Combined corporate fixed charges and preferred stock dividends ..................... $ 90 $ 91 Ratio of earnings to corporate fixed charges....... 9.95 8.85 Ratio of earnings to combined corporate fixed charges and preferred stock dividends ..... 5.90 5.29 Exhibit 12 (continued) AMERICAN GENERAL CORPORATION Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (Unaudited) ($ in millions) Three Months Ended March 31, 1999 1998 American General Finance, Inc.: Income before income tax expense ................... $ 80 $ 71 Fixed charges deducted from income Interest expense ................................. 138 122 Implicit interest in rents ....................... 4 3 Total fixed charges deducted from income ....... 142 125 Earnings available for fixed charges ......... $ 222 $ 196 Ratio of earnings to fixed charges ................. 1.56 1.57 EX-27 3
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 62,881 0 0 311 3,301 222 70,700 221 0 4,719 108,866 60,499 190 471 2,572 11,970 1,729 85 921 7,395 108,866 924 1,285 (2) 413 1,313 148 (234) 477 168 287 0 0 0 287 1.14 1.11 0 0 0 0 0 0 0 ALL FIXED MATURITY SECURITIES ARE CLASSIFIED AS AVAILABLE-FOR-SALE AND RECORDED AT FAIR VALUE. INCLUDES COST OF INSURANCE PURCHASED (CIP). THE SUM OF POLICY LOSSES, UNEARNED PREMIUMS, POLICY-OTHER, AND POLICYHOLDER FUNDS COMPRISES INSURANCE AND ANNUITY LIABILITIES. CONSISTS OF NON-CONVERTIBLE AND CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES. CONSISTS OF CONVERTIBLE PREFERRED STOCK. CONSISTS OF NET OF THE FOLLOWING: COST OF TREASURY STOCK; RETAINED EARNINGS; AND ACCUMULATED OTHER COMPREHENSIVE INCOME. INCLUDES INSURANCE CHARGES. INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES. CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET ACCRETION OF INTEREST. CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP. EXCLUDES $34 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $12 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
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