-----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, RcxMMZBOxYrlemh9GP8zfFHgu66BCMjxQCMsMNdznIMH9cGDQ7aJ0iiZiUxOkh6N 2awdEh1SS9dZeoxYLq01pA== 0000950129-95-001432.txt : 19951119 0000950129-95-001432.hdr.sgml : 19951119 ACCESSION NUMBER: 0000950129-95-001432 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951113 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19951113 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN GENERAL CORP /TX/ CENTRAL INDEX KEY: 0000005103 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 740483432 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07981 FILM NUMBER: 95591031 BUSINESS ADDRESS: STREET 1: 2929 ALLEN PKWY CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135221111 8-K 1 AMERICAN GENERAL CORPORATION - 8-K DATED 11/13/95 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): NOVEMBER 13, 1995 AMERICAN GENERAL CORPORATION (Exact name of registrant as specified in its charter) TEXAS 1-7981 74-0483432 (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification Number)
2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 522-1111 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 AMERICAN GENERAL CORPORATION TABLE OF CONTENTS TO FORM 8-K
PAGE ---- Item 7. Financial Statements, Pro Forma Financial Information, and Exhibits........... 3 (b) Pro Forma Financial Information. Pro Forma Financial Information of American General Corporation.......... 3 Pro Forma Consolidated Balance Sheet at September 30, 1995 (Unaudited)... 4 Pro Forma Consolidated Statement of Income for the year ended December 31, 1994 (Unaudited)................................................... 5 Pro Forma Consolidated Statement of Income for the nine months ended September 30, 1995 (Unaudited)......................................... 6 Notes to Pro Forma Consolidated Financial Statements (Unaudited)......... 7 Signature..................................................................... 15
2 3 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION, AND EXHIBITS. (b) Pro Forma Financial Information of American General Corporation. On October 19, 1995, American General Corporation ("American General") and Independent Insurance Group, Inc. ("IIG") announced a definitive agreement under which American General will acquire IIG for a total consideration of $362 million or $27.50 per share. IIG's shareholders may elect to receive from among cash, American General common stock, and a new issue of 7% mandatorily convertible preferred stock of American General. Cash and preferred stock elections by IIG shareholders will each be limited to 50% of the aggregate consideration. The exchange ratio for American General common stock and the new preferred stock will be based on the 10-day average trading price of American General common stock five days prior to closing. The transaction, which is subject to approval by IIG's shareholders and requisite regulatory authorities, is expected to be completed in January 1996. On January 31, 1995, American General through its wholly-owned subsidiary, AGC Life Insurance Company ("AGC Life"), acquired American Franklin Company ("AFC"), the holding company of The Franklin Life Insurance Company ("Franklin Life"), pursuant to a Stock Purchase Agreement dated as of November 29, 1994, between American General and American Brands, Inc. ("American Brands"). The purchase price was $1.17 billion, consisting of $920 million in cash paid at closing and a $250 million cash dividend paid by AFC to American Brands prior to closing. The dividend was paid on January 30, 1995. On December 23, 1994, American General, through AGC Life, acquired a 40% interest in Western National Corporation ("WNC"), the holding company of Western National Life Insurance Company, through the acquisition of 24,947,500 shares of WNC common stock from Conseco, Inc. for $274 million in cash. American General filed Current Reports on Form 8-K on February 15, 1995, April 14, 1995, May 9, 1995, and August 23, 1995 that included 1993 and 1994 audited consolidated financial statements of AFC and various pro forma consolidated financial statements of American General. This Current Report on Form 8-K, updating the previously filed financial statements and reflecting the proposed acquisition of IIG, includes the pro forma consolidated financial statements of American General as of and for the nine months ended September 30, 1995 and for the year ended December 31, 1994, as follows: Balance Sheet. The unaudited pro forma consolidated balance sheet as of September 30, 1995 presents the historical consolidated balance sheets of American General and IIG. The purchase accounting and other pro forma adjustments, as described in the related notes, are calculated as if the IIG acquisition had been effective at September 30, 1995. Statement of Income for the Year Ended December 31, 1994. The unaudited pro forma consolidated statement of income for the year ended December 31, 1994 presents i) the consolidated results of operations of American General and AFC, and reflects American General's 40% equity in the earnings of WNC ("Pro Forma A"); and ii) the consolidated results of operations of these entities and IIG ("Pro Forma B"). The purchase accounting and other pro forma adjustments, as described in the related notes, are calculated as if the acquisitions had been effective January 1, 1994. Statement of Income for the Nine Months Ended September 30, 1995. The unaudited pro forma consolidated statement of income for the nine months ended September 30, 1995 presents i) the consolidated results of operations of American General, which includes the operations of AFC for February through September 1995 and American General's 40% equity in the earnings of WNC, and AFC for January 1995 ("Pro Forma A"); and ii) the consolidated results of operations of these entities and IIG ("Pro Forma B"). The purchase accounting and other pro forma adjustments, as described in the related notes, are calculated as if the AFC and IIG acquisitions had been effective January 1, 1994. 3 4 AMERICAN GENERAL CORPORATION PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1995 (UNAUDITED) (IN MILLIONS)
PRO FORMA ADJUSTMENTS HISTORICAL ---------- -------------------- RELATING AMERICAN TO IIG PRO FORMA GENERAL IIG ACQUISITION CONSOLIDATED ---------- ------ ----------- ------------ Assets Investments Fixed maturity securities.................... $ 35,916 $ 706 $ 7 (C) $ 36,629 Mortgage loans on real estate................ 3,126 141 (20)(D) 3,247 Equity securities............................ 227 207 (1)(D) 433 Policy loans................................. 1,592 35 2 (C) 1,629 Investment real estate....................... 545 14 (7)(D) 552 Other long-term investments.................. 205 - - 205 Short-term investments....................... 136 14 (5)(E) 145 ------- ------ ------- ------- Total investments....................... 41,747 1,117 (24) 42,840 Cash............................................ 56 6 - 62 Finance receivables, net........................ 8,139 - - 8,139 Investment in WNC............................... 365 - - 365 Deferred policy acquisition costs............... 1,916 173 (173)(F) 1,916 Cost of insurance purchased..................... 613 14 (14)(F) 886 273 (G) Acquisition-related goodwill.................... 582 17 (17)(F) 582 Other assets.................................... 1,820 89 (12)(D) 1,897 Assets held in Separate Accounts................ 4,659 - - 4,659 ------- ------ ------- ------- Total assets............................ $ 59,897 $1,416 $ 33 $ 61,346 ======= ====== ======= ======= Liabilities Insurance and annuity liabilities............... $ 37,396 $ 948 $ (31)(H) $ 38,313 Debt Corporate: Short-term................................. 744 - 181(I) 925 Long-term.................................. 1,170 - - 1,170 Consumer Finance (short-term: $2,591)........ 7,568 - - 7,568 Income tax liabilities.......................... 1,169 (1) 22(J) 1,190 Other liabilities............................... 936 133 16(K) 1,085 Liabilities related to Separate Accounts........ 4,659 - - 4,659 ------- ------ ------- ------- Total liabilities....................... 53,642 1,080 188 54,910 ------- ------ ------- ------- Redeemable equity Company-obligated mandatorily redeemable non- convertible preferred securities of subsidiary................................... 485 - - 485 Company-obligated mandatorily redeemable convertible preferred securities of subsidiary................................... 244 - - 244 Common stock subject to put contracts........... 14 - - 14 ------- ------ ------- ------- Total redeemable equity................. 743 - - 743 ------- ------ ------- ------- Shareholders' equity Mandatorily convertible preferred stock......... - - 90 (I) 90 Common stock.................................... 366 21 (21)(L) 383 17 (I) Net unrealized gains on securities.............. 732 27 (27)(L) 732 Retained earnings............................... 4,842 313 (313)(L) 4,842 Cost of treasury stock.......................... (428) (25) 25 (L) (354) 74 (I) ------- ------ ------- ------- Total shareholders' equity.............. 5,512 336 (155) 5,693 ------- ------ ------- ------- Total liabilities and equity............ $ 59,897 $1,416 $ 33 $ 61,346 ======= ====== ======= =======
See Notes to Pro Forma Consolidated Financial Statements. 4 5 AMERICAN GENERAL CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994 (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)
RELATING TO RELATING TO IIG AFC & WNC ACQUISITIONS ------------------------------- ACQUISITION AFC ----------------------- HISTORICAL PRO WNC IIG AMERICAN HISTORICAL FORMA PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA GENERAL AFC ADJUSTMENTS ADJUSTMENTS A IIG ADJUSTMENTS B -------- ------ ---- ----------- ----------- ---------- ----------- -------- Revenues Premiums and other considerations............... $ 1,210 $ 503 $ - $ - $ 1,713 $272 $ - $ 1,985 Net investment income........... 2,493 479 9 (M) (4)(U) 2,975 69 (2)(W) 3,042 (2)(N) Finance charges................. 1,248 - - - 1,248 - - 1,248 Realized investment gains (losses)..................... (172) (14) 14 (O) - (172) 4 (4)(X) (172) Equity in earnings of WNC....... - - - 27 (V) 27 - - 27 Other........................... 62 68 - - 130 10 - 140 -------- ------ ----- ----- ------- ----- ----- -------- Total revenues.......... 4,841 1,036 21 23 5,921 355 (6) 6,270 -------- ------ ----- ----- ------- ----- ----- -------- Benefits and expenses Insurance and annuity benefits..................... 2,224 721 5 (P) - 2,950 132 (13)(Y) 3,069 Operating costs and expenses.... 1,013 108 (3)(Q) - 1,118 129 (1)(Z) 1,246 Commission expense.............. 400 126 - - 526 67 - 593 Change in deferred policy acquisition costs............ (142) (40) (71)(Q) - (253) 9 (24)(Z) (268) Amortization of cost of insurance purchased.......... 18 9 (9)(Q) - 59 2 (2)(Z) 90 41 (R) 31(AA) Interest expense Corporate.................... 110 - 32 (S) 11 (U) 153 - 10 (BB) 163 Consumer Finance............. 416 - - - 416 - - 416 -------- ------ ----- ----- ------- ----- ----- -------- Total benefits and expenses.............. 4,039 924 (5) 11 4,969 339 1 5,309 -------- ------ ----- ----- ------- ----- ----- -------- Earnings Income before income tax expense...................... 802 112 26 12 952 16 (7) 961 Income tax expense.............. 289 44 9 (CC) (5)(CC) 345 5 (3)(CC) 347 8 (V) -------- ------ ----- ----- ------- ----- ----- -------- Income before net dividends on preferred securities of subsidiary................... 513 68 17 9 607 11 (4) 614 Net dividends on preferred securities of subsidiary..... - - 27 (T) - 27 - - 27 -------- ------ ----- ----- ------- ----- ----- -------- Net income.............. $ 513 $ 68 $(10) $ 9 $ 580 $ 11 $ (4) $ 587 ======== ====== ===== ===== ======= ===== ===== ======== Earnings per share and average shares outstanding: Primary: Net income................... $ 2.45 $ 2.77 $ 2.73 ======== ======= ======== Average shares outstanding (in thousands)............. 209,403 209,403 214,767 ======== ======= ======== Fully diluted: Net income................... $ 2.45 $ 2.77 $ 2.73 ======== ======= ======== Average shares outstanding (in thousands)............. 209,420 209,420 214,784 ======== ======= ========
Pro Forma A represents American General, AFC, and WNC. Pro Forma B represents American General, AFC, WNC, and IIG. See Notes to Pro Forma Consolidated Financial Statements. 5 6 AMERICAN GENERAL CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)
RELATING TO AFC ACQUISITION RELATING TO IIG --------------------------- ACQUISITION HISTORICAL JANUARY 1995 ------------------------- AMERICAN HISTORICAL PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA GENERAL AFC ADJUSTMENTS A IIG ADJUSTMENTS B ---------- ------------ ----------- ---------- ---------- ----------- --------- Revenues Premiums and other considerations............ $ 1,297 $ 35 $ - $ 1,332 $196 $ - $ 1,528 Net investment income........ 2,291 41 1 (M) 2,332 51 (1)(W) 2,382 (1)(N) Finance charges.............. 1,113 - - 1,113 - - 1,113 Realized investment gains (losses).................. 8 1 (1)(O) 8 (2) 2 (X) 8 Equity in earnings of WNC.... 31 - - 31 - - 31 Other........................ 78 4 - 82 8 - 90 ------- --- ---- ------- ---- ---- ------- Total revenues....... 4,818 81 (1) 4,898 253 1 5,152 ------- --- ---- ------- ---- ---- ------- Benefits and expenses Insurance and annuity benefits.................. 2,239 55 - 2,294 96 (9)(Y) 2,381 Operating costs and expenses.................. 987 11 - 998 85 (1)(Z) 1,082 Commission expense........... 388 8 - 396 53 - 449 Change in deferred policy acquisition costs......... (157) (3) (6)(Q) (166) - (17)(Z) (183) Amortization of cost of insurance purchased....... 29 1 (1)(Q) 32 1 (1)(Z) 52 3 (R) 20 (AA) Interest expense Corporate................. 123 - (6)(S) 117 - 8 (BB) 125 Consumer Finance.......... 386 - - 386 - - 386 ------- --- ---- ------- ---- ---- ------- Total benefits and expenses........... 3,995 72 (10) 4,057 235 - 4,292 ------- --- ---- ------- ---- ---- ------- Earnings Income before income tax expense................... 823 9 9 841 18 1 860 Income tax expense........... 277 3 3 (CC) 283 6 - (CC) 289 ------- --- ---- ------- ---- ---- ------- Income before net dividends on preferred securities of subsidiaries.............. 546 6 6 558 12 1 571 Net dividends on preferred securities of subsidiaries.............. 10 - 15 (T) 25 - - 25 ------- --- ---- ------- ---- ---- ------- Net income........... $ 536 $ 6 $ (9) $ 533 $ 12 $ 1 $ 546 ======= === ==== ======= ==== ==== ======= Earnings per share and average shares outstanding: Primary: Net income................ $ 2.61 $ 2.60 $ 2.59 ======= ======= ======= Average shares outstanding (in thousands).......... 205,247 205,247 210,611 ======= ======= ======= Fully diluted: Net income................ $ 2.59 $ 2.58 $ 2.57 ======= ======= ======= Average shares outstanding (in thousands).......... 208,168 208,168 213,532 ======= ======= =======
Pro forma A represents American General and AFC. Pro forma B represents American General, AFC, and IIG. See Notes to Pro Forma Consolidated Financial Statements. 6 7 AMERICAN GENERAL CORPORATION NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A. BASIS OF PRESENTATION On October 19, 1995, American General and IIG announced a definitive agreement under which American General will acquire IIG for a total consideration of $362 million or $27.50 per share. IIG's shareholders may elect to receive from among cash, American General common stock, and a new issue of 7% mandatorily convertible preferred stock of American General. Cash and preferred stock elections by IIG shareholders will each be limited to 50% of the aggregate consideration. The exchange ratio for American General common stock and the new preferred stock will be based on the 10-day average trading price of American General common stock five days prior to closing. The transaction, which is subject to approval by IIG's shareholders and requisite regulatory authorities, is expected to be completed in January 1996. On January 31, 1995, American General through its wholly-owned subsidiary, AGC Life, acquired AFC, the holding company of Franklin Life, pursuant to a Stock Purchase Agreement dated as of November 29, 1994, between American General and American Brands. The purchase price was $1.17 billion, consisting of $920 million in cash paid at closing and a $250 million cash dividend paid by AFC to American Brands prior to closing. The dividend was paid on January 30, 1995. The permanent financing of the AFC acquisition, including related issue costs, consists of $503 million of company-obligated mandatorily redeemable preferred securities ("non-convertible preferred securities of subsidiary"), $300 million of long-term debt, and $150 million of short-term debt (see Notes S and T). On December 23, 1994, American General, through AGC Life, acquired a 40% interest in WNC, the holding company of Western National Life Insurance Company, through the acquisition of 24,947,500 shares of WNC common stock from Conseco, Inc. for $274 million in cash. Included on the following pages is information related to these acquisitions, as follows: Balance Sheet. The unaudited pro forma consolidated balance sheet as of September 30, 1995 presents the historical consolidated balance sheets of American General and IIG. The purchase accounting and other pro forma adjustments, as described in the related notes, are calculated as if the IIG acquisition had been effective at September 30, 1995. Statement of Income for the Year Ended December 31, 1994. The unaudited pro forma consolidated statement of income for the year ended December 31, 1994 presents i) the consolidated results of operations of American General and AFC, and reflects American General's 40% equity in the earnings of WNC ("Pro Forma A"); and ii) the consolidated results of operations of these entities and IIG ("Pro Forma B"). The purchase accounting and other pro forma adjustments, as described in the related notes, are calculated as if the acquisitions had been effective January 1, 1994. Statement of Income for the Nine Months Ended September 30, 1995. The unaudited pro forma consolidated statement of income for the nine months ended September 30, 1995 presents i) the consolidated results of operations of American General, which includes the operations of AFC for February through September 1995 and American General's 40% equity in the earnings of WNC, and AFC for January 1995 ("Pro Forma A"); and ii) the consolidated results of operations of these entities and IIG ("Pro Forma B"). The purchase accounting and other pro forma adjustments, as described in the related notes, are calculated as if the AFC and IIG acquisitions had been effective January 1, 1994. The unaudited pro forma consolidated financial statements and the related notes reflect the application of the purchase method of accounting for the AFC and IIG acquisitions. Under this method, the purchase prices were allocated to the assets acquired and liabilities assumed based on their respective estimated fair values at January 31, 1995 for AFC (the actual acquisition date), and September 30, 1995 for IIG (the assumed acquisition date for purposes of the pro forma consolidated balance sheet) (see Note B), including an adjustment for income tax effects for the difference between the assigned values and the tax bases of the assets 7 8 AMERICAN GENERAL CORPORATION NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) acquired and liabilities assumed. The purchase method of accounting was also applied to the financial statements of WNC before recording American General's 40% equity in the earnings of WNC using the equity method of accounting. The unaudited pro forma consolidated financial statements will change due to IIG's results of operations and varying market conditions from September 30, 1995 through the actual date of acquisition. Prior to completion of accounting for the acquisitions, changes to the purchase accounting adjustments included in the unaudited pro forma consolidated financial statements are anticipated as the valuations of acquired assets and assumed liabilities are finalized. Accordingly, the actual consolidated financial statements of American General reflecting the AFC, WNC, and IIG acquisitions may differ from the pro forma financial statements included herein. The unaudited pro forma consolidated financial statements are intended for informational purposes only and may not necessarily be indicative of American General's future financial position or future results of operations. American General anticipates first year cost savings of $5 million related to the AFC acquisition, primarily from centralizing AFC's investment management function at American General immediately following the acquisition. This expected savings has been included in the pro forma consolidated financial statements (see Note N). American General projects additional future cost savings. The extent and timing of these additional cost savings, however, may vary from management's expectations, and therefore, no adjustment has been included in the pro forma consolidated financial statements. American General plans to consolidate IIG's operations into those of its Nashville-based life insurance subsidiary, American General Life & Accident Insurance Company. The consolidation is expected to take 18 to 24 months and, when completed, should result in annual cost savings of $75 million. The extent and timing of the cost savings, however, may vary from management's expectations, and therefore, no adjustment has been included in the pro forma consolidated financial statements. 8 9 AMERICAN GENERAL CORPORATION NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE B. ALLOCATION OF IIG PURCHASE PRICE The total acquisition cost of IIG is allocated as follows:
SEPTEMBER 30, (IN MILLIONS) 1995 ------------- Net assets purchased.................................................... $ 336 Increase (decrease) in IIG's net asset value to estimated fair value: Held-to-maturity fixed maturity securities......................... 7 Mortgage loans on real estate...................................... (20) Equity securities.................................................. (1) Policy loans....................................................... 2 Investment real estate............................................. (7) Deferred policy acquisition costs.................................. (173) Cost of insurance purchased (historical)........................... (14) Cost of insurance purchased........................................ 273 Acquisition-related goodwill....................................... (17) Other assets....................................................... (12) Insurance and annuity liabilities.................................. 31 Income tax liabilities............................................. (22) Other liabilities.................................................. (16) ----- Total estimated fair value adjustments........................ 31 American General transaction costs...................................... (5) ----- Purchase price..................................................... $ 362 =====
Each of the above allocations is described in more detail in the following notes to the pro forma consolidated financial statements. As explained in Note A, purchase accounting adjustments will change as additional information becomes available, affecting the ultimate allocation of the purchase price. NOTE C. FIXED MATURITY SECURITIES AND POLICY LOANS IIG's held-to-maturity fixed maturity securities and policy loans are restated to fair value as of the assumed date of acquisition to reflect premiums of $7 million and $2 million, respectively. In addition, all fixed maturity securities are classified as available-for-sale in the consolidated pro forma financial statements. NOTE D. MORTGAGE LOANS ON REAL ESTATE, EQUITY SECURITIES, INVESTMENT REAL ESTATE, AND OTHER ASSETS The consolidated pro forma financial statements are adjusted to reflect write-downs on IIG's mortgage loans on real estate of $20 million, real estate partnerships (included in equity securities) of $1 million, investment real estate of $7 million, and other assets of $12 million. NOTE E. SHORT-TERM INVESTMENTS Short-term investments are adjusted to reflect the liquidation of securities to fund $5 million in projected transaction costs for legal and investment banking expenses associated with the IIG acquisition. 9 10 AMERICAN GENERAL CORPORATION NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE F. DEFERRED POLICY ACQUISITION COSTS ("DPAC"), HISTORICAL COST OF INSURANCE PURCHASED ("CIP"), AND ACQUISITION-RELATED GOODWILL DPAC and historical CIP of IIG are eliminated since these amounts are reflected in the determination of new CIP (see Note G). Goodwill recorded on IIG's historical consolidated financial statements is eliminated under purchase accounting. No goodwill is associated with the acquisition because the excess of the cost of the investment in IIG over the fair value of the tangible net assets acquired is fully reflected in CIP. NOTE G. NEW CIP CIP reflects the estimated fair value of the business in force and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from insurance contracts existing at the assumed date of the acquisition. Such value is the actuarially-determined amount that, when amortized into income, results in expected earnings that meet the profit objective of American General. This profit objective is an expected aftertax rate of return of 13% on capital required to support the business in force. This rate of return is believed to be appropriate based on considerations of the relative risk associated with realizing the expected cash flows, the cost of capital to American General to fund the acquisition, and the operating environment of IIG, namely, the regulatory and tax factors affecting future profitability and the profit objectives of American General for newly issued policies. The value allocated to CIP is based on a preliminary valuation; accordingly, this amount will be adjusted after final determination of the value. On a pro forma basis, assuming that the IIG acquisition occurred at September 30, 1995, expected gross amortization using current assumptions and accretion of interest based on an interest rate equal to the liability rate (6 1/2%), for each of the years in the five-year period ending September 30, 2000, is as follows:
(IN MILLIONS) YEAR ENDING BEGINNING GROSS ACCRETION NET ENDING SEPTEMBER 30, BALANCE AMORTIZATION OF INTEREST AMORTIZATION BALANCE --------------- --------- ------------ ----------- ------------ ------- 1996.......................... $ 273 $ 49 $18 $ 31 $ 242 1997.......................... 242 42 16 26 216 1998.......................... 216 36 14 22 194 1999.......................... 194 33 13 20 174 2000.......................... 174 30 12 18 156
NOTE H. INSURANCE AND ANNUITY LIABILITIES IIG's insurance and annuity liabilities are restated as of the assumed acquisition date to a value that reflects changes due to purchase accounting, primarily related to IIG's life insurance contracts. 10 11 AMERICAN GENERAL CORPORATION NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE I. SHORT-TERM DEBT, MANDATORILY CONVERTIBLE PREFERRED STOCK, COMMON STOCK, AND COST OF TREASURY STOCK Short-term debt, mandatorily convertible preferred stock, and common stock are increased, and cost of treasury stock is decreased, at September 30, 1995 to reflect the expected components of the total consideration to be paid for IIG (see Note A). For purposes of the consolidated pro forma financial statements, the $362 million in consideration is assumed to consist of 50% short-term debt, 25% mandatorily convertible preferred stock, and 25% common stock, as follows:
(DOLLARS IN MILLIONS) NUMBER STATED OR OF AMOUNT ASSUMED TYPE OF ISSUE SHARES OUTSTANDING RATE ------------- --------- ----------- --------- Short-term floating-rate corporate debt............ $181 5.75% Mandatorily convertible preferred stock............ 2,681,759 90 7.00% Common stock....................................... 2,681,759 91 ---- Total.................................... $362 ====
The exchange ratio for the American General common stock and mandatorily convertible preferred stock is assumed to be .8148 shares for each share of IIG common stock based on an assumed American General common stock price of $33.75, the closing market price on November 10, 1995 (see Note A). The assumed rate for the short-term floating-rate corporate debt is based on American General's portfolio rate with a 28 day average portfolio maturity. The rate for the mandatorily convertible preferred stock is 7% as stated in the definitive agreement between American General and IIG. Common stock is assumed to be issued out of treasury at an average cost of $27.49 per share. NOTE J. INCOME TAX LIABILITIES Deferred taxes are adjusted to reflect differences between the assigned values and tax bases of IIG's assets acquired and liabilities assumed. NOTE K. OTHER LIABILITIES Other liabilities are increased to reflect accruals primarily related to IIG's severance program. NOTE L. SHAREHOLDERS' EQUITY IIG's historical shareholders' equity is eliminated in consolidation. NOTE M. ACCRETION OF DISCOUNT ON FIXED MATURITY SECURITIES AND MORTGAGE LOANS ON REAL ESTATE -- AFC AFC's historical consolidated financial statements accrete the difference between par value and amortized cost of fixed maturity securities and mortgage loans into income on an effective yield basis over the remaining lives of the individual fixed maturity securities and mortgage loans. The pro forma consolidated financial statements are adjusted to reflect additional accretion of the difference, at the assumed acquisition date, between amortized cost and fair value of these same fixed maturity securities and mortgage loans. Expected incremental accretion of the discount on fixed maturity securities and mortgage loans for the next five years is $9 million, $11 million, $14 million, $16 million, and $19 million (pretax), respectively. 11 12 AMERICAN GENERAL CORPORATION NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE N. NET INVESTMENT INCOME -- AFC The liquidation by AFC of its investments to fund the $250 million cash dividend paid to its shareholder prior to the acquisition (see Note A) is expected to reduce net investment income by $6 million (pretax) per year. The liquidation of $25 million of short-term investments to fund transaction and acquisition-related costs is expected to reduce interest income by $1 million (pretax) per year. Annual projected expense savings of $5 million, primarily associated with centralizing AFC's investment management function at American General immediately following the acquisition, are included in the pro forma consolidated financial statements. NOTE O. REALIZED INVESTMENT GAINS (LOSSES) -- AFC Realized and unrealized investment losses of $31 million and gains of $1 million (pretax) on trading securities recorded by AFC in 1994 and January 1995, respectively, are reversed since equity securities were assumed to be liquidated prior to the acquisition to fund the cash dividend to AFC's shareholder (see Note A). For purposes of the pro forma consolidated financial statements, the dividend is assumed to occur on January 1, 1994. Realized investment gains of $17 million (pretax) on fixed maturity securities recorded by AFC in 1994 are reversed for purposes of the pro forma consolidated financial statements, since they will not be a component of total revenues in the future. The gains realized by AFC were indicative of the low interest rate environment that prevailed in early 1994. Assuming the acquisition occurred at January 1, 1994, these gains would not have been realized because American General's purchased bases in the securities sold would have been higher. NOTE P. INSURANCE AND ANNUITY BENEFITS -- AFC AFC's historical insurance and annuity benefits are increased primarily to reflect the change in the pattern of reserving for future benefits, primarily for AFC's participating life insurance contracts. NOTE Q. AMORTIZATION EXPENSE -- DPAC, CIP, AND ACQUISITION-RELATED GOODWILL -- AFC The expense recorded on AFC's historical consolidated financial statements for the amortization of DPAC, historical CIP, and acquisition-related goodwill is reversed to reflect the elimination of the related intangible assets under purchase accounting. NOTE R. AMORTIZATION OF CIP -- AFC CIP is amortized in relation to estimated profits on the policies purchased with interest equal to the liability or contract rates (5% to 8%). Expected net amortization of CIP for the next five years is $41 million, $40 million, $39 million, $37 million, and $34 million (pretax), respectively. 12 13 AMERICAN GENERAL CORPORATION NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE S. INTEREST EXPENSE -- AFC Interest expense is increased to reflect the issuance of senior long-term fixed-rate corporate debt and short-term floating-rate corporate debt assuming the permanent financing of the AFC acquisition had been effective on January 1, 1994 (see Note A). The components of pretax interest expense for 1994, including the amortization of settlement costs of derivative financial instruments related to the senior long-term debt, are as follows:
(IN MILLIONS) ANNUAL AMOUNT INTEREST TYPE OF ISSUE RATE OUTSTANDING EXPENSE ------------- --------- ----------- -------- Short-term floating-rate corporate debt.............. 5.75% $150 $ 9 Senior debt due June 15, 2005........................ 6.75% 150 11 Senior debt due July 15, 2025........................ 7.50% 150 12 ---- --- $450 $32 ==== ===
Interest expense for the nine months ended September 30, 1995 is adjusted to reflect the incremental decrease in interest expense assuming the permanent financing of the AFC acquisition had been effective on January 1, 1994. A 1% increase/decrease in the short-term floating rate would increase/decrease the above pro forma annual interest expense by approximately $2 million (pretax) per year. NOTE T. NET DIVIDENDS ON NON-CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY -- AFC Net dividends on non-convertible preferred securities of subsidiary, assuming the permanent financing of the AFC acquisition had been effective on January 1, 1994 (see Note A), are as follows:
(IN MILLIONS) AMOUNT PRETAX TAX NET RATE OUTSTANDING DIVIDENDS BENEFIT DIVIDENDS ---- ----------- --------- ------- --------- Non-convertible preferred securities of subsidiary due June 5, 2025................................ 8.45% $288 $24 $ 8 $16 Non-convertible preferred securities of subsidiary due September 30, 2025.......................... 8.125% 215 17 6 11 ---- --- --- --- $503 $41 $14 $27 ==== === === ===
Net dividends on non-convertible preferred securities of subsidiary for the nine months ended September 30, 1995 are adjusted to reflect the incremental increase assuming the permanent financing of the AFC acquisition had been effective on January 1, 1994. NOTE U. INTEREST EXPENSE AND NET INVESTMENT INCOME -- WNC Interest expense is increased by $11 million (pretax), and net investment income is reduced by $4 million (pretax), in 1994 to reflect the liquidation of investments and the issuance of short-term debt to fund the acquisition of the 40% interest in WNC. NOTE V. EQUITY IN EARNINGS OF WNC The pro forma consolidated financial statements for 1994 are adjusted to reflect American General's 40% equity in the earnings of WNC, after purchase accounting and other pro forma adjustments. The equity in earnings of WNC is tax effected by American General at 35%, less an estimated dividends received deduction. 13 14 AMERICAN GENERAL CORPORATION NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE W. AMORTIZATION OF PREMIUM ON FIXED MATURITY SECURITIES -- IIG IIG's historical consolidated financial statements amortize the difference between par value and amortized cost of fixed maturity securities on an effective yield basis over the remaining lives of the individual fixed maturity securities. The pro forma consolidated financial statements are adjusted to reflect additional amortization of the difference, at the assumed acquisition date, between amortized cost and fair value of these same fixed maturity securities on a straight-line basis over an assumed period of 10 years. Expected incremental amortization of the premium (see Note C), including unrealized gains (losses) on available-for-sale fixed maturity securities, is $2 million (pretax) per year. NOTE X. REALIZED INVESTMENT GAINS -- IIG Realized investment gains of $4 million and losses of $2 million (pretax) recorded by IIG in 1994 and 1995, respectively, are reversed for purposes of the pro forma consolidated financial statements, since they will not be a component of total revenues in the future. NOTE Y. INSURANCE AND ANNUITY BENEFITS -- IIG IIG's historical insurance and annuity benefits are decreased by $13 million and $9 million (pretax) in 1994 and 1995, respectively, primarily to reflect the change in the pattern of reserving for future benefits, primarily for IIG's life insurance contracts (see Note H). NOTE Z. AMORTIZATION EXPENSE -- DPAC, CIP, AND ACQUISITION-RELATED GOODWILL -- IIG The expense recorded on IIG's historical consolidated financial statements for the amortization of DPAC associated with long-duration life and accident & health insurance policies, historical CIP, and acquisition-related goodwill is reversed to reflect the elimination of the related intangible assets under purchase accounting (see Note F). NOTE AA. AMORTIZATION OF CIP -- IIG CIP is amortized in relation to estimated profits on the policies purchased, with accretion of interest based on an interest rate equal to the liability rate of 6 1/2% (see Note G). NOTE BB. INTEREST EXPENSE -- IIG Interest expense is increased by $10 million (pretax) per year to reflect the issuance of $181 million of short-term floating-rate corporate debt at a rate of 5.75% assuming the IIG acquisition had been effective on January 1, 1994 (see Note I). A 1% increase/decrease in the short-term floating-rate would increase/decrease pro forma interest expense by approximately $2 million (pretax) per year. NOTE CC. INCOME TAX EXPENSE All of the applicable pro forma consolidated financial statement adjustments, except goodwill amortization, are tax effected at an assumed effective income tax rate of 36% for AFC and 35% for WNC and IIG. 14 15 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 hereunto duly authorized. AMERICAN GENERAL CORPORATION By: /s/ AUSTIN P. YOUNG -------------------------------- Austin P. Young Senior Vice President and Chief Financial Officer Dated: November 13, 1995 15 -----END PRIVACY-ENHANCED MESSAGE-----