-----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, LUhkQErtRN+Ou2Id6dWEzGlEqNhm1B1OMz/Wmu7WgFtXHsh7quDysJHDjdohQPcs vwQHStkeRywRjfFHNA09UA== 0000950129-98-001275.txt : 19980330 0000950129-98-001275.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950129-98-001275 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 22 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE SROS: PCX 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-K405 SEC ACT: SEC FILE NUMBER: 001-07981 FILM NUMBER: 98575337 BUSINESS ADDRESS: STREET 1: 2929 ALLEN PKWY CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135221111 10-K405 1 AMERICAN GENERAL CORPORATION - 12/31/97 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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)
Registrant's telephone number, including area code: (713) 522-1111 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------------------------- ------------------------------------ [ New York Stock Exchange Common Stock, Par Value $.50 [ Pacific Stock Exchange Preferred Share Purchase Rights (one Right attached to [ New York Stock Exchange each share of Common Stock) [ Pacific Stock Exchange 7% Convertible Preferred Stock, Par Value $1.50 [ New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value based on published prices as of February 28, 1998 of American General's voting Common Stock held by non-affiliates was approximately $14.7 billion. As of February 28, 1998, there were 253,609,260 shares of American General's Common Stock and 2,317,701 shares of American General's 7% Convertible Preferred Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE
PART OF THE FORM 10-K DOCUMENT INTO WHICH INCORPORATED -------- ----------------------- Portions of American General's 1997 Annual Report to Shareholders Parts I, II, and IV Portions of American General's definitive Proxy Statement dated March 17, 1998, for the Annual Meeting of Shareholders to be held April 30, 1998 Part III
1997 FORM 10-K 1 2 PART I ITEM 1. BUSINESS GENERAL American General Corporation (American General) is one of the nation's largest diversified financial services organizations. American General's operating subsidiaries are leading providers of retirement services, life insurance, and consumer loans. American General was incorporated as a general business corporation in Texas in 1980 and is the successor to American General Insurance Company, an insurance company incorporated in Texas in 1926. Financial data of American General and its subsidiaries (collectively, the company) included in this Form 10-K includes the operations of USLIFE Corporation (USLIFE), acquired on June 17, 1997, in accordance with the pooling of interests method of accounting. Also included from their respective dates of acquisition are the operations of Home Beneficial Life Insurance Company, acquired April 16, 1997; The Independent Life and Accident Insurance Company, acquired February 29, 1996; and The Franklin Life Insurance Company (Franklin Life), acquired January 31, 1995. The company acquired a 40% investment in Western National Corporation (Western National) in 1994 and increased its ownership to 46% in 1996. These acquisitions were recorded on an equity basis. On February 25, 1998, the company acquired the remaining 54% equity interest. Western National's assets, liabilities, and results of operations will be consolidated in the company's financial statements effective January 1, 1998. Earnings attributable to minority interests through February 25, 1998 will be reflected as a charge against consolidated income. Much of the information provided in response to this Item 1 is incorporated herein by reference to selected portions of American General's 1997 Annual Report to Shareholders (ARS). Appropriate references to such incorporated information are specified throughout the text of this Item 1. Portions of American General's 1997 ARS are provided as Exhibit 13 to this Form 10-K. NEW ACCOUNTING STANDARD. During 1997, American General adopted Statement of Financial Accounting Standards 128, "Earnings per Share," which changed certain requirements for computing and disclosing earnings per share, retroactive for all periods presented. The change did not have a material impact on the company's reported earnings per share amounts. Information regarding this accounting standard is incorporated herein by reference to Notes 1.14 and 4.1 of Notes to Financial Statements in American General's 1997 ARS. CORPORATE DEVELOPMENT. Since December 1994, American General has completed or announced six acquisitions with total consideration (excluding assumed debt) of $5.7 billion, including $3.7 billion in 1997. Information regarding these transactions is incorporated herein by reference to Note 2 of Notes to Financial Statements in American General's 1997 ARS. BUSINESS DIVISIONS. The company reports the results of its operations in three business divisions: Retirement Services, Life Insurance, and Consumer Finance. A description of each business division, including principal products, methods of distribution, and principal markets, is incorporated herein by reference to Note 20.1 of Notes to Financial Statements in American General's 1997 ARS. Financial information for each business division is incorporated herein by reference to the sections "Business Divisions," "Capital Resources," "Asset/Liability Management," and "Liquidity" of Management's Discussion and Analysis (MD&A) and Note 20.2 of Notes to Financial Statements in American General's 1997 ARS, and to Schedule III of Item 14 of this Form 10-K. EMPLOYEES. As of December 31, 1997, the company employed approximately 16,200 full-time salaried employees. INSURANCE DEPOSITS AND PREMIUMS. The following table lists deposits and premiums and other considerations of American General's insurance and annuity subsidiaries for the past three years:
In millions 1997 1996 1995 - ------------------------------------------------------------------ Deposits* $5,046 $4,415 $4,306 - ------------------------------------------------------------------ Direct premiums and other considerations Individual life premiums $1,530 $1,462 $1,280 Insurance charges 768 698 612 Group and credit health premiums 564 550 556 Group and credit life premiums 279 258 257 Individual health premiums 174 188 160 Other premiums 227 271 242 - ------------------------------------------------------------------ Total direct premiums and other considerations 3,542 3,427 3,107 - ------------------------------------------------------------------ Reinsurance premiums assumed 119 125 155 Reinsurance premiums ceded (299) (308) (293) - ------------------------------------------------------------------ Premiums and other considerations $3,362 $3,244 $2,969 - ------------------------------------------------------------------
* Represents premiums received for interest-sensitive life insurance and annuity products. AMERICAN GENERAL CORPORATION 2 3 - -------------------------------------------------------------------------------- LIFE INSURANCE SALES AND IN FORCE. The following table summarizes the face amounts of life insurance sales and life insurance in force for American General's insurance subsidiaries for the past three years:
In millions 1997 1996 1995 - ------------------------------------------------------------------- Individual life insurance sales: Permanent (non-participating) Interest-sensitive $ 13,293 $ 13,289 $ 14,970 Guaranteed-cost 4,062 3,598 4,531 Term 23,269 22,753 24,979 Permanent (participating) 5,778 5,710 5,114 Group life insurance sales 8,428 6,777 6,548 Credit life insurance sales 9,098 8,266 10,570 - ------------------------------------------------------------------- Total 63,928 60,393 66,712 Reinsurance assumed 386 351 2,882 - ------------------------------------------------------------------- Total, excluding reinsurance assumed(a) $ 63,542 $ 60,042 $ 63,830 - ------------------------------------------------------------------- Individual life insurance in force (at December 31): Permanent (non-participating) Interest-sensitive $103,069 $ 97,120 $ 90,343 Guaranteed-cost 36,806 38,281 34,293 Term 98,267 96,971 91,771 Permanent (participating) 28,686 25,810 22,047 Group life insurance in force 50,854 45,774 41,860 Credit life insurance in force 13,994 13,068 13,610 - ------------------------------------------------------------------- Total(a)(b) $331,676 $317,024 $293,924 - -------------------------------------------------------------------
(a) Before deductions for reinsurance ceded. (b) Includes reinsurance assumed. ANNUITY PRODUCTS. The following table summarizes annuity liabilities by product type for American General's Retirement Services division and Life Insurance division for the past three years:
In millions 1997 1996 1995 - ------------------------------------------------------------------- Retirement Services division Fixed $21,995 $21,068 $20,147 Variable 10,564 7,134 4,541 - ------------------------------------------------------------------- Total annuity liabilities $32,559 $28,202 $24,688 - ------------------------------------------------------------------- Life Insurance division Fixed $ 5,263 $ 5,857 $ 6,281 Variable 721 602 518 Payout annuities 1,952 1,600 1,246 - ------------------------------------------------------------------- Total annuity liabilities $ 7,936 $ 8,059 $ 8,045 - -------------------------------------------------------------------
The primary products offered by the Retirement Services division are retirement annuities which qualify for tax deferral under the Internal Revenue Code. These products are provided to employees of educational, health care, public sector, and other not-for-profit organizations. Policyholders may select either fixed or variable account options. Fixed accounts have minimum guaranteed interest crediting rates ranging from 3.0% to 5.5%. During 1997, actual interest crediting rates on fixed accounts ranged from 5.8% to 7.5%. These annuities are generally issued on a group basis, for which there are no scheduled maturities. The companies in the Life Insurance division offer a variety of annuity products. Individual fixed annuities comprised approximately 58% of the division's annuity liabilities at December 31, 1997. These annuities are primarily used for retirement funding purposes and generally continue for the life of the policyholder. Minimum guaranteed interest crediting rates on these annuities range from 2.5% to 5.5%; actual interest crediting rates during 1997 ranged from 2.5% to 7.0%. Payout annuities, those currently paying out the annuity value, represented approximately 25% of the Life Insurance division's annuity liabilities at December 31, 1997. Payout annuities consist primarily of structured settlements of indemnity claims and pension buyouts used by employer-sponsored pension plans to fund pension obligations. Interest is credited to these annuities at fixed rates determined when the contracts are issued, consistent with the related investment yield at the time. Interest crediting rates ranged from 2.0% to 13.5% during 1997. These contracts will continue until all obligations are extinguished. Both the Retirement Services and Life Insurance divisions offer variable annuity accounts, in which the investment risk lies solely with the policyholder. Assets and liabilities related to these accounts are included in Separate Account assets and liabilities in the company's consolidated balance sheet. INVESTMENTS Information regarding investments is incorporated here- in by reference to the sections "Investments" and "Asset/ Liability Management" of MD&A and Notes 1.2, 5, and 17 of Notes to Financial Statements in American General's 1997 ARS, and to Schedule I of Item 14 of this Form 10-K. INSURANCE AND ANNUITY RESERVING METHODS Individual life insurance reserves are based on assumptions similar to those used to establish premium rates. Further information regarding reserving methods is incorporated herein by reference to Note 1.8 of Notes to Financial Statements in American General's 1997 ARS. REINSURANCE Information regarding reinsurance is incorporated herein by reference to Note 1.11 of Notes to Financial Statements in American General's 1997 ARS, and to Schedule IV of Item 14 of this Form 10-K. 1997 FORM 10-K 3 4 - -------------------------------------------------------------------------------- PART I (Continued) FACTORS AFFECTING PRICING OF PRODUCTS INSURANCE AND ANNUITY PRODUCTS. Premium rates are based on assumptions, which American General's insurance subsidiaries believe to be realistic, as to future mortality, investment yields, expenses, and lapses. In addition, the pricing is influenced by competition and the company's objectives for return on capital. Although a profit margin is included in the price of the products, the actual profitability of the products can be significantly affected by the variation between actual and assumed experience. CONSUMER FINANCE PRODUCTS. Pricing of consumer finance products is influenced by such factors as cost of borrowed funds, credit risk, competition, the expense of operations, and the company's objectives for return on capital. In addition, pricing is affected by state regulation of interest rates based on contractual terms and loan amounts, charges for individual loans, and insurance premium rates. COMPETITION Competition in life insurance and financial services markets and the recent trend of consolidations in the industry may affect, among other matters, corporate development activities, business growth, distribution methods, and the pricing of products and services. American General's life insurance and annuity businesses operate in a highly competitive industry that consists of a large number of insurance companies, other financial institutions, mutual fund companies, and banks. No single competitor nor any small group of competitors dominates any of the markets in which the company operates. Principal competitive factors include price, financial and claims-paying ability ratings, selection of products, quality of service, and, with respect to variable insurance and annuity products, investment management performance. American General's consumer finance business competes with other consumer finance companies and other types of financial institutions that offer similar products and services, including industrial banks, industrial loan companies, commercial banks, sales finance companies, savings and loan associations, and credit unions. Competition in the financial services industry is intense due to the increasing number of companies offering financial products and services, the sophistication of those products, technological improvements, and more rapid communication. REGULATION INSURANCE. American General's insurance subsidiaries are subject to state regulation in the jurisdictions in which they do business. Information concerning regulatory compliance is incorporated herein by reference to the sections "Capital Resources - Retirement Services and Life Insurance" and "Regulation and Other - Regulation" of MD&A in American General's 1997 ARS. Information regarding statutory accounting practices is incorporated herein by reference to Note 16 of Notes to Financial Statements in American General's 1997 ARS. Most states also regulate affiliated groups such as American General and its subsidiaries under insurance holding company laws. Additional information regarding dividend restrictions is incorporated herein by reference to Note 19.1 of Notes to Financial Statements in American General's 1997 ARS. All 50 states have laws requiring life insurance companies to pay assessments to state guaranty associations to protect the interests of policyholders of insolvent life insurance companies. A portion of these assessments can be recovered against the payment of future premium taxes; however, changes in state laws could decrease the amount available for recovery. Further information about state guaranty assessments is incorporated herein by reference to Note 10 of Notes to Financial Statements in American General's 1997 ARS. REGISTERED PRODUCTS. Certain of American General's subsidiaries are subject to various federal securities laws and regulations related to investment companies. Separate Accounts, which are maintained to fund variable life and annuity products, function as investment companies and, therefore, are subject to such laws and regulations, in particular the Investment Company Act of 1940. Variable life and annuity products are marketed by licensed insurance agents who are registered representatives of the company's wholly owned broker-dealer subsidiaries. These broker-dealers are member firms of the National Association of Securities Dealers and subject to its rules and regulations. CONSUMER FINANCE. American General's consumer finance subsidiaries are subject to various types of federal regulation including the Federal Consumer Credit Protection Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, certain Federal Trade Commission rules, and state laws that regulate the consumer loan and retail sales finance businesses. In addition, American General's AMERICAN GENERAL CORPORATION 4 5 - -------------------------------------------------------------------------------- thrift subsidiary, which engages in the consumer finance business and accepts insured deposits, is subject to regulation by and reporting requirements of the Federal Deposit Insurance Corporation and is subject to regulatory codes in the state of Utah. TAXATION. Tax laws affect not only the way the company is taxed but also the design of many of its products. Changes in tax laws or regulations could adversely affect operating results. ENVIRONMENTAL. The company's principal exposure to environmental regulation arises from its ownership of investment real estate. Probable costs related to environmental cleanup are immaterial. ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT Information as of March 5, 1998 regarding the 17 executive officers of the company is as follows:
Present Principal Position with the Company and Name and Age Other Material Positions Held during Last Five Years - ----------------------------------------------------------------------------------------------- ROBERT M. DEVLIN (57) Chairman (since 1997) and Chief Executive Officer (since 1996), Director (since 1993), President (1995-97), and Vice Chairman (1993-95), American General Corporation; President and Chief Executive Officer (1986-93), American General Life Insurance Company, Houston, Texas, a subsidiary of American General Corporation. Director, Cooper Industries, Inc. JON P. NEWTON (56) Vice Chairman and Director (since 1995), Vice Chairman and General Counsel (1995-97), and Senior Vice President and General Counsel (1993-95), American General Corporation. Partner (1985-93), Clark, Thomas, Winters & Newton, Austin, Texas. Director, Newmark Homes Corp. JAMES S. D'AGOSTINO JR. (51) President (since 1997) and Director (since 1996), American General Corporation; Chairman (1995-97), Chief Executive Officer (1993-97), and President (1993-95), American General Life and Accident Insurance Company, Nashville, Tennessee, a subsidiary of American General Corporation; Executive Vice President - Administration (1993), American General Corporation. MARK S. BERG (39) Executive Vice President and General Counsel (1998) and Senior Vice President and General Counsel (1997-98), American General Corporation. Partner (1991-97), Vinson & Elkins L.L.P., Houston, Texas. FREDERICK W. GEISSINGER (52) President and Chief Executive Officer (since 1995), American General Finance, Inc., Evansville, Indiana, a subsidiary of American General Corporation; President and Chief Executive Officer (1994-95), American General Land Development, Inc., Houston, Texas, a subsidiary of American General Corporation. Independent Consultant (1992-94), New York, New York. SUSAN A. JACOBS (51) Senior Vice President (since 1998), Deputy General Counsel, and Corporate Secretary (since 1997), Associate General Counsel, (1986-97), American General Corporation. JOE KELLEY (50) President (since 1995) and Chief Executive Officer (since 1997), American General Life and Accident Insurance Company, Nashville, Tennessee, a subsidiary of American General Corporation; Senior Vice President and Chief Marketing Officer (1994-95), American General Life Insurance Company, Houston, Texas, a subsidiary of American General Corporation. Senior Vice President (1992-94), Prudential Preferred Financial Services, Houston, Texas. RODNEY O. MARTIN JR. (45) President (since 1998), American General Life Insurance Division; President (since 1997), American General Independent Producer Division, Houston, Texas, a subsidiary of American General Corporation; President and Chief Executive Officer (since 1996), American General Life Insurance Company, Houston, Texas, a subsidiary of American General Corporation; President and Chief Executive Officer (1995-96), American General Life Insurance Company of New York, Syracuse, New York, a subsidiary of American General Corporation. President (1993-95), Connecticut Mutual Insurance Services, Hartford, Connecticut. Senior Vice President - Corporate Distribution (1992-93), Connecticut Mutual Life Insurance Company, Hartford, Connecticut. ELLEN H. MASTERSON (47) Senior Vice President and Chief Financial Officer (since 1997), American General Corporation. Partner (1985-97), Coopers & Lybrand L.L.P., Dallas, Texas. ROBERT D. MRLIK (39) Senior Vice President - Corporate Relations (since 1998), Vice President - Investor Relations (1994-98), and Director, Investor Relations (1989-94), American General Corporation. NICHOLAS R. RASMUSSEN (51) Senior Vice President (since 1983) and Senior Vice President - Corporate Development (since 1993), and Senior Vice President - Group Executive (1990-93), American General Corporation. CARL J. SANTILLO (48) Senior Vice President (since 1996), and Senior Vice President - Finance (1996-97), American General Corporation. Senior Vice President - Life & Health Operations (1993-96), Nationwide Life Insurance Company, Columbus, Ohio. President (1993-96), Employers Life of Wausau, Wausau, Wisconsin. Executive Vice President - Operations (1987-93), Wausau Insurance Companies, Wausau, Wisconsin. RICHARD W. SCOTT (44) Executive Vice President and Chief Investment Officer (since 1998), American General Corporation. Executive Vice President, General Counsel, and Chief Investment Officer (1994-98), Western National Corporation, Houston, Texas. Partner (1982-93), Vinson & Elkins L.L.P., Houston, Texas.
1997 FORM 10-K 5 6 PART I (Continued)
Present Principal Position with the Company and Name and Age Other Material Positions Held during Last Five Years - ----------------------------------------------------------------------------------------------- JULIA S. TUCKER (49) Senior Vice President - Investments (since 1997) and Vice President - Investments (1984-97), American General Corporation. PETER V. TUTERS (45) Senior Vice President - Investments (since 1992) and Chief Investment Officer (1993-98), American General Corporation. THOMAS L. WEST JR. (60) Chairman and Chief Executive Officer (since 1998), American General Retirement Services Division; President (since 1994) and Chief Executive Officer (since 1997), The Variable Annuity Life Insurance Company, Houston, Texas, a subsidiary of American General Corporation. Senior Vice President, Annuity Operations (1991-94), Aetna Life & Casualty Company, Hartford, Connecticut. THOMAS M. ZUREK (49) Senior Vice President and Deputy General Counsel (since 1998), American General Corporation. Partner (1992-98), Nyemaster, Goode, McLaughlin, Voigts, Hansel & O'Brien, PC, Des Moines, Iowa.
ITEM 2. PROPERTIES The company's corporate headquarters is located in the American General Center, a complex of office buildings on a 46-acre tract near downtown Houston. American General and certain subsidiaries either own or lease pursuant to a sale-leaseback arrangement all of the buildings and underlying land in the complex. The company occupies approximately 46% of the total office space available in the American General Center. American General's subsidiaries also own various other properties, including properties held for investment, branch office buildings, and the home office buildings of: (1) American General Finance, Inc. in Evansville, Indiana; (2) American General Life and Accident Insurance Company in Nashville, Tennessee; (3) Franklin Life in Springfield, Illinois; and (4) The Old Line Life Insurance Company of America in Milwaukee, Wisconsin. ITEM 3. LEGAL PROCEEDINGS OCHOA. In March 1994, two subsidiaries of American General were named as defendants in a lawsuit, The People of the State of California (California) v. Luis Ochoa, Skeeters Automotive, Morris Plan, Creditway of America, Inc. and American General Finance, filed in the Superior Court of California, County of San Joaquin, Case No. 271130. California is seeking injunctive relief, a civil penalty of not less than $5,000 per day or not less than $250,000 for violation of its Health and Safety Code in connection with the failure to register and remove underground storage tanks on property acquired through a foreclosure proceeding by a subsidiary of American General, and a civil penalty of $2,500 for each act of unfair competition prohibited by its Business and Professions Code, but not less than $250,000, plus costs. PEBBLE CREEK. Various violations of operating permits held by Pebble Creek Service Corporation (Pebble Creek), an indirect wholly owned subsidiary of American General, are being addressed by Pebble Creek with the United States Environmental Protection Agency (EPA). These violations include inaccurate reporting of test results by a former plant operator and violations of effluent parameters in connection with its wastewater treatment plant. In 1994, Pebble Creek attended a meeting to show cause why the EPA should not initiate enforcement proceedings against Pebble Creek. To date, Pebble Creek has not been made aware of the EPA's decision. The company believes that penalties in excess of $100,000 could be assessed against Pebble Creek. 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 such purported class action lawsuits filed in 1996 and 1997, asserting claims related to pricing and sales practices. These claims are being defended vigorously by the subsidiaries. Given the uncertain nature of litigation and the early stages of this litigation, the outcome of these actions cannot be predicted at this time. American General nevertheless believes that the ultimate outcome of all such pending litigation should not have a material adverse effect on American General's consolidated financial position. It is possible that settlements or adverse determinations in one or more of these actions or other future proceedings could have a material adverse effect on American General's consolidated results of operations for a given period. No provision for any adverse determinations in this pending litigation has been made in the consolidated financial statements because the amount of the loss, if any, from these actions cannot be reasonably estimated at this time. OTHER. In addition to those lawsuits or proceedings disclosed herein, the company is a party to various other lawsuits and proceedings arising in the ordinary course of AMERICAN GENERAL CORPORATION 6 7 business. Many of these lawsuits and proceedings arise in jurisdictions, such as Alabama, 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 continues to increase and creates the potential for an unpredictable judgment in any given suit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during fourth quarter 1997. 1997 FORM 10-K 7 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The quarterly high and low market prices of American General's common stock as quoted by the New York Stock Exchange and restrictions on retained earnings for the payment of dividends are incorporated herein by reference to Notes 21 and 19.1, respectively, of Notes to Financial Statements in American General's 1997 ARS. Common stock was owned by 31,987 shareholders of record and approximately 76,000 beneficial owners at February 28, 1998. The quarterly cash dividends paid on common stock are incorporated herein by reference to Note 21 of Notes to Financial Statements in American General's 1997 ARS. The common stock of American General is traded in the United States on the New York Stock Exchange and the Pacific Stock Exchange. The common stock is also traded on the London Stock Exchange and the Swiss Stock Exchanges of Basel, Geneva, and Zurich. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data is derived from the consolidated financial statements of the company. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included or incorporated by reference herein.
Years Ended December 31, --------------------------------------------------- In millions, except per share data 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------- Revenues $ 8,927 $ 8,714 $ 8,236 $ 6,492 $ 6,430 Income before cumulative effect of accounting changes 542(a) 653(b) 650(c) 609(d) 347(e) Income per common share before cumulative effect of accounting changes Basic 2.21 2.67 2.68 2.47 .70 Diluted 2.19(a) 2.63(b) 2.66(c) 2.46(d) .70(e) Assets(f) 80,620 74,134 69,083 53,300 51,003 Debt Corporate 1,916 2,102 2,295 2,381 2,200 Consumer Finance 7,266 7,630 7,470 7,090 5,843 Redeemable equity 1,726 1,227 729 47 - Shareholders' equity(f) 7,583 6,844 7,109 4,334 6,274 Cash dividends per common share(g) 1.40 1.30 1.24 1.16 1.10 - -----------------------------------------------------------------------------------------------------------
(a) Includes $247 million ($.99 per share) aftertax merger-related costs, $73 million ($.29 per share) aftertax loss on sale of non-strategic assets, and $33 million ($.13 per share) aftertax litigation settlement. (b) Includes $111 million ($.44 per share) aftertax loss on sale of non-strategic assets and $32 million ($.13 per share) aftertax write-down of USLIFE group business. (c) Includes $140 million ($.57 per share) aftertax adjustment to the allowance for finance receivable losses. (d) Includes aftertax net realized investment losses of $115 million ($.47 per share). Net realized investment gains for 1997, 1996, 1995, and 1993 were immaterial. (e) Includes $300 million ($1.18 per share) write-down of goodwill and $30 million ($.12 per share) charge for tax rate related adjustment. (f) Includes fair value adjustment related to securities. Additional information is incorporated herein by reference to the section "Investments - Fair Value of Securities" of MD&A in American General's 1997 ARS. (g) Excludes dividends paid by USLIFE. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference to "Management's Discussion and Analysis" on pages 21-31 in American General's 1997 ARS. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk are incorporated herein by reference to "Investments," "Capital Resources - Corporate Capital," and "Asset/Liability Management" of MD&A in American General's 1997 ARS. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data are incorporated herein by reference to pages 32-52 in American General's 1997 ARS. The ratios of earnings to fixed charges are incorporated herein by reference to Exhibit 12 of Item 14 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. AMERICAN GENERAL CORPORATION 8 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing in the section "Election of Directors" in American General's definitive Proxy Statement dated March 17, 1998 (1998 Proxy Statement) is incorporated herein by reference. Information regarding the company's 17 executive officers is included in Part I, Item 1A of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information appearing in the sections "Governance of the Company" and "Compensation of Executive Officers" in American General's 1998 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing in the sections "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in American General's 1998 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing in the section "Certain Relationships and Transactions" in American General's 1998 Proxy Statement is incorporated herein by reference. 1997 FORM 10-K 9 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report.
Page Reference ---------------------------------- 1997 Form 10-K Annual Report - ------------------------------------------------------------------------------------------------ 1. Financial Statements Report of Ernst & Young LLP, Independent Auditors - 53 Consolidated Financial Statements Statement of Income - 32 Balance Sheet - 33 Statements of Shareholders' Equity and Common Stock Activity - 34 Statement of Cash Flows - 35 Notes to Financial Statements - 36-52 2. Financial Statement Schedules Schedule I - Summary of Investments - Other than Investments in Affiliates 13 - Schedule II - Condensed Financial Information of Registrant 14-16 - Schedule III - Supplementary Insurance Information 17 - Schedule IV - Reinsurance 18 - Schedule V - Valuation and Qualifying Accounts 19 -
All other financial statement schedules have been omitted because they are inapplicable. 3. Exhibits
Exhibit Number - ------------------------------------------------------------------------------------------------ 3.1 Restated Articles of Incorporation of American General Corporation (including Statement of Resolution Establishing Series of Shares of Series A Junior Participating Preferred Stock) 3.2 Statement of Resolution Establishing Series of Shares of Series A Cumulative Convertible Preferred Stock 3.3 Statement of Resolution Establishing Series of Shares of 7% Convertible Preferred Stock 3.4 Resolutions Establishing American General's 6% Series A Convertible Junior Subordinated Debentures 3.5 Amended and Restated Bylaws of American General Corporation 4.1 There have not been filed as exhibits to this Form 10-K certain long-term debt instruments, none of which relates to authorized indebtedness that exceeds 10% of the consolidated assets of the company. The company hereby agrees to furnish a copy of any such instrument to the Commission upon request. 4.2 Rights Agreement, dated as of July 27, 1989, between American General and Texas Commerce Bank, as Rights Agent (Rights Agreement) 4.3 First Amendment to Rights Agreement, dated as of October 26, 1992, between American General and First Chicago Trust Company of New York, as Rights Agent 4.4 Junior Subordinated Indenture, dated as of May 15, 1995, between American General and The Chase Manhattan Bank (formerly Chemical Bank), as Trustee, relating to American General's 6% Series A Convertible Junior Subordinated Debentures Filed Herewith(*), Nonapplicable (NA), or Incorporated by Reference to ----------------------------------------------------------------------- Exhibit American General Number Exhibit Registration No. or Report - ------------------------ ----------------------------------------------------------------------- 3.1 4.1 33-33115 3.2 4(o) 33-58317 3.3 4(d) 333-00513 3.4 4(k) 333-00513 3.5 3 Form 10-Q for Third Quarter 1997 4.1 NA NA 4.2 4 Form 10-Q for Second Quarter 1989 4.3 19 Form 10-Q for Third Quarter 1992 4.4 4(g) 333-00513
(continued on next page) 10 AMERICAN GENERAL CORPORATION 11 - --------------------------------------------------------------------------------
Exhibit Number - ------------------------------------------------------------------------------------------ 4.5 Terms of the 6% Convertible Monthly Income Preferred Securities, Series A, of American General Delaware, L.L.C. 4.6 Guarantee of American General with respect to the 6% Convertible Monthly Income Preferred Securities, Series A, of American General Delaware, L.L.C. 10.1 1984 Stock and Incentive Plan 10.2 1984 Stock and Incentive Plan (Amended and Restated Effective as of February 8, 1994) 10.3 American General Corporation 1997 Stock and Incentive Plan 10.4 Restoration of Retirement Income Plan for Certain Employees Participating in the Restated American General Retirement Plan (Restoration of Retirement Income Plan) 10.5 First Amendment to Restoration of Retirement Income Plan 10.6 Second Amendment to Restoration of Retirement Income Plan 10.7 Third Amendment to Restoration of Retirement Income Plan 10.8 American General Supplemental Thrift Plan 10.9 First Amendment to American General Supplemental Thrift Plan 10.10 Second Amendment to American General Supplemental Thrift Plan 10.11 Third Amendment to American General Supplemental Thrift Plan 10.12 Employment Agreement, dated as of February 1, 1998, between American General and Robert M. Devlin 10.13 Employment Agreement, dated as of February 1, 1998, between American General and Jon P. Newton 10.14 Employment Agreement, dated as of February 1, 1998, between American General and James S. D'Agostino Jr. 10.15 Supplemental Executive Retirement Agreement, dated as of February 1, 1998, between American General and Robert M. Devlin 10.16 Supplemental Executive Retirement Agreement, dated as of February 1, 1998, between American General and Jon P. Newton 10.17 Supplemental Executive Retirement Agreement, dated as of February 1, 1998, between American General and James S. D'Agostino Jr. 10.18 American General Corporation Retirement Plan for Directors (as amended and restated) 10.19 American General Corporation Performance-Based Plan for Executive Officers, Amended and Restated Effective January 1, 1995 Filed Herewith(*), Nonapplicable (NA), or Incorporated by Reference to ---------------------------------------- American General Exhibit Registration No. or Number Exhibit Report - ------------------------ ---------------------------------------- 4.5 4(i) 333-00513 4.6 4(j) 333-00513 10.1 10.5 Form 10-K for 1984 10.2 10.2 Form 10-K for 1993 10.3 10.3 Form 10-K for 1996 10.4 10.3 Form 10-K for 1993 10.5 10.4 Form 10-K for 1993 10.6 10.5 Form 10-K for 1993 10.7 10.7 Form 10-K for 1996 10.8 10.6 Form 10-K for 1993 10.9 10.7 Form 10-K for 1993 10.10 10.8 Form 10-K for 1993 10.11 10.9 Form 10-K for 1993 10.12 10.12* NA 10.13 10.13* NA 10.14 10.14* NA 10.15 10.15* NA 10.16 10.16* NA 10.17 10.17* NA 10.18 10.18* NA 10.19 10.19 Form 10-K for 1994
(continued on next page) 1997 FORM 10-K 11 12 PART IV (Continued)
Exhibit Number - ------------------------------------------------------------------------------------------ 10.20 Letter Agreement dated September 11, 1997 between American General and Michael J. Poulos 10.21 Supplemental Retirement Agreement between American General and Michael J. Poulos 10.22 Western National Corporation (WNC) Supplemental Plan 10.23 Western National Corporation Supplemental Plan Trust Agreement 10.24 Western National Corporation 1993 Stock and Incentive Plan, as amended 11 Computation of Earnings per Share (included in Note 4 of Notes to Financial Statements in American General's 1997 ARS) 12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 13 Portions of American General's 1997 Annual Report to Shareholders that are expressly incorporated herein by reference in this Form 10-K. Other sections of the Annual Report furnished for the information of the Commission are not deemed "filed" as part of this Form 10-K. 21 Subsidiaries of American General 23 Consent of Ernst & Young LLP, Independent Auditors 24 Powers of attorney for the directors signing this Form 10-K 27 Financial Data Schedule Filed Herewith(*), Nonapplicable (NA), or Incorporated by Reference to ---------------------------------------- American General Exhibit Registration No. or Number Exhibit Report - ------------------------ ---------------------------------------- 10.20 10.20* NA 10.21 10.13 Form 10-Q for Third Quarter 1990 10.22 10.37 to WNC NA annual report on Form 10-K for 1994 10.23 10.17 to WNC NA annual report on Form 10-K for 1995 10.24 10.18 to WNC NA annual report on Form 10-K for 1995 11 NA NA 12 12* NA 13 13* NA 21 21* NA 23 23* NA 24 24* NA 27 27* NA
Any Exhibit not included with this Form 10-K will be furnished to any shareholder of record on written request and payment of up to $.25 per page plus postage. Such requests should be directed to American General Corporation, Investor Relations, P.O. Box 3247, Houston, Texas 77253-3247. (b) Reports on Form 8-K. The following reports on Form 8-K were filed after September 30, 1997: (1) Current Report on Form 8-K dated October 10, 1997, with respect to the filing of American General's consolidated balance sheets as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, common stock activity, and cash flows, and Management's Discussion and Analysis, for the three years ended December 31, 1996, restated to include the acquisition of USLIFE under the pooling of interests method of accounting. (2) Current Report on Form 8-K dated January 26, 1998, with respect to certain executive compensation information for the year ended December 31, 1997. (3) Current Report on Form 8-K dated January 27, 1998, with respect to issuance of an earnings release announcing certain unaudited financial results for the year ended December 31, 1997. (4) Current Report on Form 8-K dated February 19, 1998, with respect to issuance of a press release announcing the closing date and exchange ratio in connection with the acquisition of WNC. (5) Current Report on Form 8-K dated February 25, 1998, with respect to adoption of SFAS 128, "Earnings per Share," effective December 31, 1997. AMERICAN GENERAL CORPORATION 12 13 AMERICAN GENERAL CORPORATION SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES In millions
At December 31, 1997 ------------------------------------------------------ Amount Cost Shown in or Consolidated Amortized Fair Balance Type of Investment Cost Value Sheet - ------------------------------------------------------------------------------------------------------------------ Fixed maturity securities Bonds and notes U.S. government obligations $ 740 $ 831 $ 831 States and political subdivisions 546 579 579 Foreign governments 834 920 920 Mortgage-backed securities 8,919 9,428 9,428 Public utilities 4,366 4,678 4,678 All other corporate 29,452 31,204 31,204 Redeemable preferred stocks 104 107 107 - ------------------------------------------------------------------------------------------------------------------ Total fixed maturity securities 44,961 47,747 47,747 - ------------------------------------------------------------------------------------------------------------------ Equity securities Common stocks 20 29 29 Perpetual preferred stocks 73 87 87 - ------------------------------------------------------------------------------------------------------------------ Total equity securities 93 116 116 - ------------------------------------------------------------------------------------------------------------------ Mortgage loans on real estate* 3,272 3,272 Investment real estate* Investment properties 156 156 Acquired in satisfaction of debt 77 77 Policy loans 2,156 2,156 Other long-term investments 176 176 Short-term investments 306 306 - ------------------------------------------------------------------------------------------------------------------ Total investments $ 51,197 $ 54,006 - ------------------------------------------------------------------------------------------------------------------
* Net of applicable allowance for losses. See Schedule V of this Form 10-K. 1997 FORM 10-K 13 14 PART IV (Continued) AMERICAN GENERAL CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF INCOME OF AMERICAN GENERAL CORPORATION (PARENT ONLY)
For the Years Ended December 31, In millions 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- Revenues Dividends - affiliated $ 827 $ 464 $ 445 Interest income - affiliated 138 120 130 Net realized investment gains (losses) 16 21 (1) Other income Affiliated 57 39 36 Other 1 2 6 - ---------------------------------------------------------------------------------------------------------------------- Total revenues 1,039 646 616 - ---------------------------------------------------------------------------------------------------------------------- Expenses Operating costs and expenses Affiliated 20 10 7 Other 118 69 77 Interest expense Affiliated* 165 84 46 Other 140 123 156 Other charges Merger-related costs 102 - - Loss on sale of non-strategic assets 13 20 - - ---------------------------------------------------------------------------------------------------------------------- Total expenses 558 306 286 - ---------------------------------------------------------------------------------------------------------------------- Income before income tax benefit and equity in undistributed net income of subsidiaries 481 340 330 Income tax benefit 107 34 35 Equity in undistributed net income of subsidiaries (net of dividends paid to parent) (46) 279 285 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 542 $ 653 $ 650 - ----------------------------------------------------------------------------------------------------------------------
* Includes $141 million in 1997, $74 million in 1996, and $36 million in 1995 related to subordinated debentures issued in conjunction with the issuances of preferred securities of subsidiaries. Additional information is incorporated herein by reference to Note 12 of Notes to Financial Statements in American General's 1997 ARS. 14 AMERICAN GENERAL CORPORATION 15 - -------------------------------------------------------------------------------- AMERICAN GENERAL CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) BALANCE SHEET OF AMERICAN GENERAL CORPORATION (PARENT ONLY)
At December 31, In millions 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- Assets Investments Subsidiaries, at equity $ 10,251 $ 8,181 $ 8,018 Other 9 8 35 Indebtedness from subsidiaries 1,585 1,555 1,473 Cash - - 1 Other 228 90 115 - ---------------------------------------------------------------------------------------------------- Total assets $ 12,073 $ 9,834 $ 9,642 - ---------------------------------------------------------------------------------------------------- Liabilities Short-term debt $ 575 $ 153 $ 240 Long-term debt(a) Senior(b) 1,351 1,182 1,180 Subordinated, held by subsidiaries(c) 2,021 1,505 993 Indebtedness to subsidiaries 360 21 23 Federal income taxes (10) 39 28 Other 193 90 69 - ---------------------------------------------------------------------------------------------------- Total liabilities 4,490 2,990 2,533 - ---------------------------------------------------------------------------------------------------- Shareholders' equity Convertible preferred stock 85 85 - Common stock 326 572 532 Net unrealized gains on securities(d) 1,169 627 1,296 Retained earnings 6,624 6,420 6,071 Cost of treasury stock(e) (621) (860) (790) - ---------------------------------------------------------------------------------------------------- Total shareholders' equity 7,583 6,844 7,109 - ---------------------------------------------------------------------------------------------------- Total liabilities and equity $ 12,073 $ 9,834 $ 9,642 - ----------------------------------------------------------------------------------------------------
(a) The five-year schedule of maturities of debt is as follows: 1998, $357 million; 1999, $103 million; 2000, $353 million; 2001, $3 million; and 2002, $35 million. (b) The principal amount of American General senior notes held by subsidiaries was $10 million at December 31, 1997, 1996, and 1995. (c) Includes $1,974 million in 1997, $1,458 million in 1996, and $943 million in 1995 of subordinated debentures issued in conjunction with the issuances of preferred securities of subsidiaries. Additional information is incorporated herein by reference to Note 12 of Notes to Financial Statements in American General's 1997 ARS. (d) Includes fair value adjustment related to securities. Additional information is incorporated herein by reference to the section "Investments - Fair Value of Securities" of MD&A in American General's 1997 ARS. (e) Includes 699,614 shares at a cost of $8 million in 1997, 1996, and 1995 which are held by a subsidiary. The 1996 and 1995 amounts include 25,536,200 shares at a cost of $346 million and 25,456,146 shares at a cost of $339 million, respectively, which were held by a subsidiary and retired in 1997. 1997 FORM 10-K 15 16 PART IV (Continued) AMERICAN GENERAL CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) STATEMENT OF CASH FLOWS OF AMERICAN GENERAL CORPORATION (PARENT ONLY)
For the Years Ended December 31, In millions 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Operating activities Net income $ 542 $ 653 $ 650 Reconciling adjustments Equity in undistributed net income of subsidiaries (net of dividends paid to parent) 46 (279) (285) Other, net (64) 54 4 - -------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 524 428 369 - -------------------------------------------------------------------------------------------------------------- Investing activities Net increase in indebtedness from subsidiaries (30) (82) (694) Capital contributions to subsidiaries (667) (311) (368) Return of capital from subsidiaries 10 53 113 Acquisitions (283) (106) - Net decrease in other investments 16 48 31 Net increase (decrease) in indebtedness to subsidiaries 339 (2) (12) Other, net 46 (11) (4) - -------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (569) (411) (934) - -------------------------------------------------------------------------------------------------------------- Financing activities Net increase (decrease) in short-term debt 421 (90) (405) Long-term debt issuances 515 516 1,376 Long-term debt redemptions (133) - (100) Common stock repurchases (467) (191) (40) Dividends on common and preferred stock (335) (304) (285) Other, net 44 51 20 - -------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 45 (18) 566 - -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash - (1) 1 Cash at beginning of year - 1 - - -------------------------------------------------------------------------------------------------------------- Cash at end of year $ - $ - $ 1 - --------------------------------------------------------------------------------------------------------------
16 AMERICAN GENERAL CORPORATION 17 AMERICAN GENERAL CORPORATION SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION In millions
At December 31, For the Years Ended December 31, ----------------------- ---------------------------------------------------------------- Amorti- zation Premiums of Deferred Insurance and Insurance Deferred Policy and Other Net and Policy Other Acquisition Annuity Consider- Investment Annuity Acquisition Operating Division Costs(a)(b) Liabilities(c) ations Income(d) Benefits Costs(b)(e) Expenses - ------------------------------------------------------------------------------------------------------------------------- 1997 Retirement Services $ 392 $ 21,995 $ 113 $ 1,706 $ 1,286 $ 42 $ 133 Life Insurance 2,995 25,283 3,065 2,099 2,949 494 978 Consumer Finance 10 443 184 69 93 9 10 Other(f) 1 (62) - 146 4 1 801 - ------------------------------------------------------------------------------------------------------------------------- Consolidated $ 3,398 $ 47,659 $ 3,362 $ 4,020 $ 4,332 $ 546 $1,922 - ------------------------------------------------------------------------------------------------------------------------- 1996 Retirement Services $ 558 $ 21,067 $ 78 $ 1,652 $ 1,244 $ 31 $ 126 Life Insurance 3,140 24,550 2,964 2,016 2,880(g) 490(g) 940 Consumer Finance 11 463 202 66 103 9 11 Other(f) - (58) - 39 4 1 975 - ------------------------------------------------------------------------------------------------------------------------- Consolidated $ 3,709 $ 46,022 $ 3,244 $ 3,773 $ 4,231 $ 531 $2,052 - ------------------------------------------------------------------------------------------------------------------------- 1995 Retirement Services $ 183 $ 20,147 $ 50 $ 1,597 $ 1,204 $ 17 $ 129 Life Insurance 2,652 23,139 2,701 1,872 2,761 386 783 Consumer Finance 12 494 217 63 116 9 12 Other(f) - (62) 1 52 4 - 1,090 - ------------------------------------------------------------------------------------------------------------------------- Consolidated $ 2,847 $ 43,718 $ 2,969 $ 3,584 $ 4,085 $ 412 $2,014 - -------------------------------------------------------------------------------------------------------------------------
(a) Includes fair value adjustment related to securities. Additional information is incorporated herein by reference to the section "Investments - Fair Value of Securities" of MD&A in American General's 1997 ARS. (b) Includes cost of insurance purchased. (c) Includes unearned premiums, other policy claims and benefits payable, and other policyholder funds, which are not significant relative to insurance and annuity liabilities. (d) Represents earnings and related expenses on those investments considered necessary to support each division's business operations. (e) Net of accretion of interest. (f) Represents Consumer Finance non-insurance operations, Corporate operations, and interdivision eliminations. (g) Insurance and annuity benefits and amortization of deferred policy acquisition costs include $13 million and $37 million, respectively, for write-down of USLIFE group business. 1997 FORM 10-K 17 18 - -------------------------------------------------------------------------------- PART IV (Continued) AMERICAN GENERAL CORPORATION SCHEDULE IV - REINSURANCE In millions
Percentage of Ceded to Assumed Amount Gross Other from Other Net Assumed Description Amount Companies Companies Amount to Net - ------------------------------------------------------------------------------------------------------------- 1997 Life insurance in force at year end $ 310,162 $ 45,124 $ 21,514 $ 286,552 7.5% Premiums and other considerations for the year Life insurance and annuities $ 2,640 $ 178 $ 67 $ 2,529 2.7% Accident and health insurance 782 113 11 680 1.7 Property-liability insurance 120 8 41 153 26.7 - ------------------------------------------------------------------------------------------------------------- Total premiums and other considerations $ 3,542 $ 299 $ 119 $ 3,362 3.5% - ------------------------------------------------------------------------------------------------------------- 1996 Life insurance in force at year end $ 297,219 $ 42,155 $ 19,805 $ 274,869 7.2% Premiums and other considerations for the year Life insurance and annuities $ 2,535 $ 144 $ 67 $ 2,458 2.7% Accident and health insurance 786 146 18 658 2.7 Property-liability insurance 106 18 40 128 31.0 - ------------------------------------------------------------------------------------------------------------- Total premiums and other considerations $ 3,427 $ 308 $ 125 $ 3,244 3.9% - ------------------------------------------------------------------------------------------------------------- 1995 Life insurance in force at year end $ 274,958 $ 30,760 $ 18,966 $ 263,164 7.2% Premiums and other considerations for the year Life insurance and annuities $ 2,288 $ 123 $ 74 $ 2,239 3.3% Accident and health insurance 770 169 44 645 6.8 Property-liability insurance 49 1 37 85 43.6 - ------------------------------------------------------------------------------------------------------------- Total premiums and other considerations $ 3,107 $ 293 $ 155 $ 2,969 5.2% - -------------------------------------------------------------------------------------------------------------
AMERICAN GENERAL CORPORATION 18 19 - -------------------------------------------------------------------------------- AMERICAN GENERAL CORPORATION SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS In millions
Additions ------------------------------------------------ Charged to Charged to Balance at Provision for Realized Charged to Balance at Beginning Finance Receivable Investment Other Deduc- End of Description of Year Losses (Gains)/Losses Accounts tions(a) Year - ----------------------------------------------------------------------------------------------------------------------- 1997 Allowance for losses on: Finance receivables $ 395 $ 248 $ - $ - $ 270 $ 373 Mortgage loans on real estate 84 - (20) - 10 54 Investment real estate 34 - 8 - 24 18 Other long-term investments 1 - - - 1 - Valuation allowance on deferred tax asset 46 - - 22(b) - 68 - ----------------------------------------------------------------------------------------------------------------------- Total $ 560 $ 248 $ (12) $ 22 $ 305 $ 513 - ----------------------------------------------------------------------------------------------------------------------- 1996 Allowance for losses on: Finance receivables $ 492 $ 417 $ - $ - $ 514(c) $ 395 Mortgage loans on real estate 96 - 2 - 14 84 Investment real estate 55 - 3 - 24 34 Other long-term investments 48 - - 1 48 1 Valuation allowance on deferred tax asset 42 - - 4(b) - 46 - ----------------------------------------------------------------------------------------------------------------------- Total $ 733 $ 417 $ 5 $ 5 $ 600 $ 560 - ----------------------------------------------------------------------------------------------------------------------- 1995 Allowance for losses on: Finance receivables $ 226 $ 574 $ - $ - $ 308 $ 492 Mortgage loans on real estate 101 - 28 - 33 96 Investment real estate 349 - 21 - 315(d) 55 Other long-term investments 65 - 1 - 18 48 Valuation allowance on deferred tax asset 331 - - 26(b) 315 42 - ----------------------------------------------------------------------------------------------------------------------- Total $1,072 $ 574 $ 50 $ 26 $ 989 $ 733 - -----------------------------------------------------------------------------------------------------------------------
(a) Resulting from write-offs of uncollectible receivables, mortgage loan payoffs, sales of real estate, and foreclosures of real estate. (b) Relates to operating loss carryovers not expected to be utilized, charged to deferred tax expense. (c) Includes $70 million reclassified to assets held for sale. (d) Includes $243 million reclassified to reduce cost basis. 1997 FORM 10-K 19 20 - -------------------------------------------------------------------------------- AMERICAN GENERAL CORPORATION SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 March 27, 1998. AMERICAN GENERAL CORPORATION By: /s/ Pamela J. Penny ---------------------------------------- Pamela J. Penny (Vice President and Controller) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 1998. Robert M. Devlin* - ----------------------------------------------------------------- Robert M. Devlin (Chairman, Chief Executive Officer, and Director - Principal Executive Officer) /s/ Ellen H. Masterson - ----------------------------------------------------------------- Ellen H. Masterson (Senior Vice President and Chief Financial Officer - Principal Financial Officer) /s/ Pamela J. Penny - ----------------------------------------------------------------- Pamela J. Penny (Vice President and Controller - Principal Accounting Officer) J. Evans Attwell* - ----------------------------------------------------------------- J. Evans Attwell (Director) Brady F. Carruth* - ----------------------------------------------------------------- Brady F. Carruth (Director) James S. D'Agostino Jr.* - ----------------------------------------------------------------- James S. D'Agostino Jr. (Director) W. Lipscomb Davis Jr.* - ----------------------------------------------------------------- W. Lipscomb Davis Jr. (Director) Larry D. Horner* - ----------------------------------------------------------------- Larry D. Horner (Director) Richard J.V. Johnson* - ----------------------------------------------------------------- Richard J.V. Johnson (Director) Michael E. Murphy* - ----------------------------------------------------------------- Michael E. Murphy (Director) Jon P. Newton* - ----------------------------------------------------------------- Jon P. Newton (Director) Michael J. Poulos* - ----------------------------------------------------------------- Michael J. Poulos (Director) Robert E. Smittcamp* - ----------------------------------------------------------------- Robert E. Smittcamp (Director) Anne M. Tatlock* - ----------------------------------------------------------------- Anne M. Tatlock (Director) *By: /s/ Mark S. Berg - ----------------------------------------------------------------- Mark S. Berg (Attorney-in-fact) AMERICAN GENERAL CORPORATION 20 21 EXHIBIT INDEX
Filed Herewith(*), Nonapplicable (NA), or Incorporated by Reference to --------------------------------------- American General Exhibit Registration No. or Number Exhibit Report - ----------------------------------------------------------------------------------------------------------------------------------- 3.1 Restated Articles of Incorporation of American General 4.1 33-33115 Corporation (including Statement of Resolution Establishing Series of Shares of Series A Junior Participating Preferred Stock) 3.2 Statement of Resolution Establishing Series of Shares of Series A 4(o) 33-58317 Cumulative Convertible Preferred Stock 3.3 Statement of Resolution Establishing Series of Shares of 7% 4(d) 333-00513 Convertible Preferred Stock 3.4 Resolutions Establishing American General's 6% Series A 4(k) 333-00513 Convertible Junior Subordinated Debentures 3.5 Amended and Restated Bylaws of American General Corporation 3 Form 10-Q for Third Quarter 1997 4.1 There have not been filed as exhibits to this Form 10-K certain NA NA long-term debt instruments, none of which relates to authorized indebtedness that exceeds 10% of the consolidated assets of the company. The company hereby agrees to furnish a copy of any such instrument to the Commission upon request. 4.2 Rights Agreement, dated as of July 27, 1989, between American 4 Form 10-Q General and Texas Commerce Bank, as Rights Agent (Rights for Second Agreement) Quarter 1989 4.3 First Amendment to Rights Agreement, dated as of October 26, 19 Form 10-Q 1992, between American General and First Chicago Trust Company of for Third New York, as Rights Agent Quarter 1992 4.4 Junior Subordinated Indenture, dated as of May 15, 1995, between 4(g) 333-00513 American General and The Chase Manhattan Bank (formerly Chemical Bank), as Trustee, relating to American General's 6% Series A Convertible Junior Subordinated Debentures 4.5 Terms of the 6% Convertible Monthly Income Preferred Securities, 4(i) 333-00513 Series A, of American General Delaware, L.L.C. 4.6 Guarantee of American General with respect to the 6% Convertible 4(j) 333-00513 Monthly Income Preferred Securities, Series A, of American General Delaware, L.L.C. 10.1 1984 Stock and Incentive Plan 10.5 Form 10-K for 1984 10.2 1984 Stock and Incentive Plan (Amended and Restated Effective as 10.2 Form 10-K of February 8, 1994) for 1993 10.3 American General Corporation 1997 Stock and Incentive Plan 10.3 Form 10-K for 1996 10.4 Restoration of Retirement Income Plan for Certain Employees 10.3 Form 10-K Participating in the Restated American General Retirement Plan for 1993 (Restoration of Retirement Income Plan) 10.5 First Amendment to Restoration of Retirement Income Plan 10.4 Form 10-K for 1993 10.6 Second Amendment to Restoration of Retirement Income Plan 10.5 Form 10-K for 1993 10.7 Third Amendment to Restoration of Retirement Income Plan 10.7 Form 10-K for 1996 10.8 American General Supplemental Thrift Plan 10.6 Form 10-K for 1993 10.9 First Amendment to American General Supplemental Thrift Plan 10.7 Form 10-K for 1993 10.10 Second Amendment to American General Supplemental Thrift Plan 10.8 Form 10-K for 1993
22
Filed Herewith(*), Nonapplicable (NA), or Incorporated by Reference to --------------------------------------- American General Exhibit Registration No. or Number Exhibit Report - ----------------------------------------------------------------------------------------------------------------------------------- 10.11 Third Amendment to American General Supplemental Thrift Plan 10.9 Form 10-K for 1993 10.12 Employment Agreement, dated as of February 1, 1998, between 10.12* NA American General and Robert M. Devlin 10.13 Employment Agreement, dated as of February 1, 1998, between 10.13* NA American General and Jon P. Newton 10.14 Employment Agreement, dated as of February 1, 1998, between 10.14* NA American General and James S. D'Agostino Jr. 10.15 Supplemental Executive Retirement Agreement, dated as of February 10.15* NA 1, 1998, between American General and Robert M. Devlin 10.16 Supplemental Executive Retirement Agreement, dated as of February 10.16* NA 1, 1998, between American General and Jon P. Newton 10.17 Supplemental Executive Retirement Agreement, dated as of February 10.17* NA 1, 1998, between American General and James S. D'Agostino Jr. 10.18 American General Corporation Retirement Plan for Directors (as 10.18* NA amended and restated) 10.19 American General Corporation Performance-Based Plan for Executive 10.19 Form 10-K Officers, Amended and Restated Effective January 1, 1995 for 1994 10.20 Letter Agreement dated September 11, 1997 between American 10.20* NA General and Michael J. Poulos 10.21 Supplemental Retirement Agreement between American General and 10.13 Form 10-Q for Third Michael J. Poulos Quarter 1990 10.22 Western National Corporation (WNC) Supplemental Plan 10.37 to WNC NA annual report on Form 10-K for 1994 10.23 Western National Corporation Supplemental Plan Trust Agreement 10.17 to WNC NA annual report on Form 10-K for 1995 10.24 Western National Corporation 1993 Stock and Incentive Plan, as 10.18 to WNC NA amended annual report on Form 10-K for 1995 11 Computation of Earnings per Share (included in Note 4 of Notes to NA NA Financial Statements in American General's 1997 ARS) 12 Computation of Ratio of Earnings to Fixed Charges and Ratio of 12* NA Earnings to Combined Fixed Charges and Preferred Stock Dividends 13 Portions of American General's 1997 Annual Report to Shareholders 13* NA that are expressly incorporated herein by reference in this Form 10-K. Other sections of the Annual Report furnished for the information of the Commission are not deemed "filed" as part of this Form 10-K. 21 Subsidiaries of American General 21* NA
23
Filed Herewith(*), Nonapplicable (NA), or Incorporated by Reference to --------------------------------------- American General Exhibit Registration No. or Number Exhibit Report - ----------------------------------------------------------------------------------------------------------------------------------- 23 Consent of Ernst & Young LLP, Independent Auditors 23* NA 24 Powers of attorney for the directors signing this Form 10-K 24* NA 27 Financial Data Schedule 27* NA
Any Exhibit not included with this Form 10-K will be furnished to any shareholder of record on written request and payment of up to $.25 per page plus postage. Such requests should be directed to American General Corporation, Investor Relations, P.O. Box 3247, Houston, Texas 77253-3247. EX-10.12 2 EMPLOYMENT AGREEMENT, BETWEEN ROBERT M. DEVLIN 1 EXHIBIT 10.12 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of February 1, 1998 (the "Effective Date"), by and between Robert M. Devlin (the "Executive") and American General Corporation, a Texas corporation (the "Company"). WHEREAS, during the course of Executive's employment with the Company, the Executive has performed outstanding services for the Company; and WHEREAS, it is deemed by the Company to be in the best interests of the Company to assure continuation of Executive's employment; and WHEREAS, the Company and the Executive have determined to enter into this Agreement pursuant to which the Company will continue to employ the Executive on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement (if not provided where a capitalized term initially appears) are provided in the last Section hereof. 2. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby accepts such employment, on the terms and conditions hereinafter set forth. 3. Term. (a) Duration of Term. Unless earlier terminated as provided in Section 3(b) hereof, the Executive's employment with the Company under this Agreement shall commence at the Effective Date and shall end on the final day of the Term. For purposes of this Agreement, the "Term" shall mean the full three-year term of the Agreement from the Effective Date until the day before the third anniversary thereof, plus any extensions made as provided in this Section 3. On the first day of each month occurring after the Effective Date, the Term shall automatically be extended for an additional month unless, prior to any such first day of a month, the Company or 2 the Executive shall have given notice not to extend the Term. Nothing in this Section shall limit the right of the Company or the Executive to terminate the Executive's employment hereunder on the terms and conditions set forth in Section 7 hereof. The Company and the Executive agree that any such notice by the Company shall not constitute Good Reason for the Executive to terminate his employment. (b) Termination of Employment during the Term. Nothing in this Section 3 shall limit the right of the Company or the Executive to terminate the Executive's employment under this Agreement during the Term hereof on the terms and conditions set forth in Section 7 hereof. Further, notwithstanding any other provision of this Agreement, the Company shall have the right to terminate the Executive's employment under this Agreement at any time prior to the expiration of the Term for any other reason whatsoever, including termination without Cause, in the sole discretion of the Company's Board of Directors (the "Board"); provided, however, that, any termination of the employment relationship by the Company prior to the expiration of the Term other than a termination by the Company on the terms and conditions set forth in Section 7 hereof shall be deemed to be a termination without Cause within the meanings of Sections 8(c) and 8(e) hereof. (c) After the Term: "At-Will" Relationship and Termination of Employment. If the Executive remains employed by the Company beyond the expiration of the Term, such employment shall automatically convert to an "at-will" relationship (upon the expiration of the Term hereof) terminable at any time by either the Company or the Executive for any reason whatsoever, with or without Cause. Upon a termination of employment after the Term hereof, the Company shall pay the Executive's full salary to the Executive through the date of such termination at the rate in effect immediately prior to such termination, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during the Executive's employment by the Company. In addition to any payments or benefits due hereunder upon such a termination, the Executive shall receive such post-termination compensation and benefits as shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and 2 3 arrangements as in effect immediately prior to such termination. 4. Position and Duties. On and after the Effective Date, the Executive shall serve as Chairman and Chief Executive Officer of the Company and shall have such additional duties and responsibilities as may be assigned to the Executive by the Board. The Executive shall report to the Board. The Executive agrees to devote substantially all the Executive's full working time, attention and energies during normal business hours to the performance of the Executive's duties for the Company, provided that the Executive may serve as a director on the boards of such companies and organizations as he may reasonably determine to be appropriate. 5. Place of Performance. The principal place of employment and office of the Executive shall be in Houston, Texas, or such other location as may be agreed to in writing by the Executive. 6. Compensation and Related Matters. (a) Base Salary. As compensation for the performance by the Executive of the Executive's duties hereunder, during the Employment Period the Company shall pay the Executive an annual base salary no less than the greater of the annual base salary in effect on the Effective Date or the annual base salary in effect on May 1, 1998 (such greater amount, as it may be increased from time to time, is hereinafter referred to as "Base Salary"). Base Salary shall be payable in accordance with the Company's normal payroll practices, shall be reviewed at least annually by the Personnel Committee and may be increased (but not decreased) upon review. (b) Annual Bonus. (i) The Executive shall be provided an opportunity for an annual bonus with respect to each fiscal year which ends within the Employment Period (the "Annual Bonus"), including, without limitation, the year which includes the Effective Date. Except with respect to any fiscal year during which the Executive participates in a Formula Annual Bonus Plan (as described in Section 6(b)(ii) hereof), the amount of an Annual Bonus with respect to any fiscal year shall be determined in the sole discretion of the Personnel Committee; provided, however, that, except with respect to any fiscal year 3 4 during which the Executive participates in a Formula Annual Bonus Plan, the amount of any such Annual Bonus shall not be less than seventy-five percent (75%) of the Base Salary in effect on the last day of the fiscal year with respect to which such Annual Bonus is awarded. (ii) Notwithstanding the second sentence of Section 6(b)(i) hereof, if the Executive participates in an Annual Bonus Plan under which performance objectives, Annual Bonus opportunities (or target bonuses) and levels of payment based on levels of achievement of the performance objectives are established for the Executive and other participants (a "Formula Annual Bonus Plan"), the Executive shall have an Annual Bonus opportunity (expressed as a percentage of then-current Base Salary) for the initial fiscal year during the Term covered by a Formula Annual Bonus Plan which is no less than (and which may be more than) the "Average Bonus Percentage". The "Average Bonus Percentage" (for purposes of this Section) shall be calculated by (i) dividing the actual bonus paid to the Executive with respect to each of the applicable "Three Years" by the Base Salary in effect on the last day of the respective year, and converting the result to a percentage, and (ii) adding the three percentages together and dividing by three. The "Three Years", for purposes of this Section, shall be the three fiscal years immediately preceding such initial fiscal year, or, if more favorable to the Executive, the three fiscal years immediately preceding the Effective Date hereof. The percentage of Base Salary which determines the Executive's Annual Bonus opportunity shall be reviewed by the Board annually and may be increased (but not decreased) upon review by the Board. Any Annual Bonus payable with respect to a fiscal year (whether or not pursuant to a Formula Annual Bonus Plan) shall be paid as soon as practicable after the end of such year. (c) Other Compensation and Benefit Plans and Arrangements; Fringe Benefits. During the Employment Period, the Executive shall be entitled to participate, at a level appropriate to the Executive's position with the Company, in such other employee benefit and compensation plans and arrangements and fringe benefits as are generally available to senior officers of the Company from time to time, and any successors thereto. 4 5 (d) Expenses. The Company shall reimburse the Executive for all reasonable business expenses incurred during the Employment Period, subject to the applicable and reasonable policies and procedures of the Company in force from time to time. (e) Office Facilities and Services Furnished. During the Employment Period, the Company shall furnish the Executive with appropriate office space and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of the Executive's duties as set forth in Section 4 hereof (including, without limitation, secretarial services and furniture, telephone, telefax and work station equipment), such office space and other facilities and services to be furnished at the location set forth in Section 5 hereof. (f) Automobile Allowance. At all times during the Employment Period, the Company will provide the Executive with an automobile (and pay related expenses) pursuant to the Company's policy as in effect on the Effective Date, as such policy may be amended from time to time (the "Automobile Policy"), provided, however, that in no event shall the automobile provided to the Executive pursuant to this Section 6(f) be of lesser quality than that available to the Executive pursuant to the Automobile Policy on the Effective Date. (g) Nonstatutory Options. Any nonstatutory options granted to the Executive during the Employment Period after the Effective Date hereof will, when (and to the extent that) they become exercisable, remain exercisable for their full term. 7. Termination. The Executive's employment hereunder may be terminated, and the Employment Period hereunder shall be ended, as follows: (a) Death. The Executive's employment shall terminate upon the Executive's death. Upon such a termination, the Executive's estate, designated beneficiary or surviving spouse, as the case may be, shall become entitled to the payments provided in Sections 8(b) and 8(e) hereof. (b) Disability. The Company may terminate the Executive's employment hereunder for Disability. During the Disability Period (as defined in Section 8(a) hereof) and upon such a termination, the Executive shall be entitled to the payments and benefits provided in 5 6 Sections 8(a) and 8(e) hereof in accordance with the terms of such Sections, provided, however, that during the thirty-six (36) month period immediately following the Date of Termination for Disability, the Company shall pay monthly to the Executive (in accordance with the Company's usual payroll practices) any additional amount necessary (the "Disability Supplement") so that the gross amount of (i) the Disability Supplement and (ii) the payments provided to the Executive following a termination of his employment for Disability pursuant to Sections 8(a) and 8(e) hereof is equal to (A) three times the Base Salary and the Average Annual Bonus, (B) divided by thirty-six (36). (c) Cause. The Company may terminate the Executive's employment hereunder for Cause. Upon such a termination, the Executive shall become entitled to the payments provided in Section 8(b) hereof. (d) Termination by the Executive. (i) The Executive may terminate the Executive's employment hereunder for Good Reason. The Executive may also terminate the Executive's employment hereunder without Good Reason by giving a Notice of Termination during the year immediately following a Change in Control (a "Special Termination"). Upon a Good Reason termination or a Special Termination, the Executive shall become entitled to the payments and benefits provided in Sections 8(c) and 8(e) hereof in accordance with the terms of such Sections. (ii) The Executive may terminate the Executive's employment hereunder without Good Reason and outside of the one-year period immediately following a Change in Control, upon giving notice of one month to the Company. In the event of such a termination, the Executive shall comply with any reasonable request of the Company to assist in providing for an orderly transition of authority, but such assistance shall not delay the Executive's termination of employment longer than six months beyond the giving of the Executive's Notice of Termination. Upon such a termination, the Executive shall become entitled to the payments and benefits provided in Sections 8(b) and 8(e)(iii) hereof in accordance with the terms of such Sections. 6 7 (e) Notice of Termination. Any purported termination of the Executive's employment (other than termination pursuant to Section 7(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 17 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause based on clause (ii) or (iii) of the definition of Cause herein is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (ii) or (iii) of the definition of Cause herein, and specifying the particulars thereof in detail. (f) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean the following: (i) if the Executive's employment is terminated by the Executive's death, the date of the Executive's death; (ii) if the Executive's employment is terminated for Disability pursuant to Section 7(b) hereof, thirty (30) days after the Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty-(30)-day period); (iii) if the Executive's employment is terminated for Cause pursuant to Section 7(c) hereof, the date specified in the Notice of Termination; (iv) if the Executive's employment is terminated pursuant to Section 7(d)(ii) hereof, the date determined in accordance with said Section, and (v) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7 8 (g) Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7(g)), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier to occur of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by the final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. (h) Compensation During Dispute. If the Date of Termination is extended in accordance with Section 7(g) hereof with respect to a Notice of Termination given after a Change in Control or within the six-month period immediately preceding a Change in Control, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given until the Date of Termination, as determined in accordance with Section 7(g) hereof. Amounts paid under this Section 7(h) are in addition to all other amounts due under this Agreement other than those due under Section 8(b)(i) or 8(c)(i) hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. Compensation During Disability or Upon Termination. (a) Disability Period and Termination for Disability. During any period during the Employment Period that the Executive fails to perform the Executive's full-time duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Company shall pay the Executive's full salary to the Executive at the rate in effect at the 8 9 commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability; provided, however, that such salary payments shall be reduced by the sum of the amounts, if any, payable to the Executive at or prior to the time of any such salary payment under disability benefit plans of the Company or under the Social Security disability insurance program, which amounts were not previously applied to reduce any such salary payment. Upon termination of the Executive's employment for Disability, the Company shall have no additional obligations to the Executive under this Agreement except to the extent provided in Sections 6(c), 6(d), 7(b), 8(e) and 15 hereof (and, to the extent applicable, Sections 9, 10 and 11 hereof) and to pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. (b) Termination (x) by the Company with Cause, (y) by the Executive without Good Reason in a Termination which is not a Special Termination, or (z) by Reason of Death. If the Executive's employment hereunder is terminated (x) by the Company with Cause, (y) by the Executive without Good Reason in a termination which is not a Special Termination, or (z) by reason of death, then: (i) as soon as practicable, the Company shall pay the Executive's Base Salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if 9 10 more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason; and (ii) the Company shall have no additional obligations to the Executive under this Agreement except to the extent provided in Sections 6(c), 6(d) and 15 hereof (and, to the extent applicable, Sections 8(e), 9, 10 and 11 hereof) and to pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. (c) Termination (x) by Company without Cause, (y) by the Executive with Good Reason, or (z) by the Executive in a Special Termination. For purposes of this Agreement, termination of the Executive's employment "by the Company without Cause" shall not include termination by the Company for Disability or termination by reason of the Executive's death. If the Executive's employment hereunder is terminated (x) by the Company without Cause, (y) by the Executive with Good Reason, or (z) by the Executive in a Special Termination, then: (i) the Company shall pay the Executive's Base Salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason; 10 11 (ii) notwithstanding any provision of any Annual Bonus plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (A) any Annual Bonus which has been allocated or awarded (but not yet paid) to the Executive for a completed fiscal year preceding the Date of Termination under any Annual Bonus plan, and (B) a pro rata portion to the Date of Termination of the Annual Bonus for the year in which the Date of Termination occurs, calculated by using a fraction (the numerator of which shall be the number of days of employment in such year up to and including the Date of Termination and the denominator of which shall be three-hundred-sixty-five (365)) to multiply (i) the award that the Executive would have earned for the entire year, assuming the achievement, at the target level, of any performance objectives established with respect to such award, or, (ii) if no such target level and performance objectives have been established, the Average Annual Bonus; provided, however, that any amount otherwise payable pursuant to this clause (B) of this Section 8(c)(ii) shall be reduced by any payment already received by the Executive pursuant to the applicable Annual Bonus plan with respect to the year in which the Date of Termination occurs; (iii) in lieu of any further salary or bonus payments as severance to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (x) the Executive's Base Salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (y) the Average Annual Bonus, as follows: (A) if the Date of Termination shall occur on or after a Change in Control (or be deemed to occur after a Change in Control pursuant to Section 8(d) hereof), the Company shall pay such amount in a lump sum severance payment, in cash; or (B) if the Date of Termination shall not occur on or after a Change in Control (and not be deemed to occur after a Change in 11 12 Control pursuant to Section 8(d) hereof), the Company shall pay such amount, in substantially equal monthly or more frequent installments over the three-year period immediately following the Date of Termination; (iv) The Company shall (i) either prepay all remaining premiums, or establish an irrevocable grantor trust holding an amount of assets sufficient to pay all such remaining premiums (which trust shall be required to pay such premiums), under any insurance policy insuring the life of the Executive under any "split-dollar" insurance arrangement in effect between the Executive and the Company, and (ii) shall transfer to the Executive any and all rights and incidents of ownership in such arrangements at no cost to the Executive. For the thirty-six (36) month period immediately following the Date of Termination, the Company shall also arrange to provide the Executive with life and accident insurance benefits substantially similar to those provided to the Executive (other than the "split-dollar" life insurance) immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence. Benefits otherwise receivable by the Executive pursuant to the immediately preceding sentence shall be reduced to the extent benefits of the same type are received by or made available to the Executive by a successor employer during the thirty-six (36) month period following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (v) The Company shall provide the Executive with outplacement services suitable to the Executive's position for a period of nine months or, 12 13 if earlier, until the first acceptance by the Executive of an offer of employment. (vi) The Company shall provide the Executive with the office facilities and services and the automobile allowance described in Section 6(e) and (f) hereof for the thirty-six (36) month period immediately following the Date of Termination. (vii) Notwithstanding anything which is more restrictive in any applicable plan or grant or award agreement or in any other provision of this Agreement, the Executive shall become fully vested in all outstanding stock options, restricted stock and other similar equity-based awards which are granted to him by the Company (whether before or after the Effective Date); in the case of performance awards, it shall be assumed that the applicable performance goals were attained at target levels and the Committee shall also have the discretion to increase the amount so payable by assuming attainment of the applicable performance goals at up to maximum level. (viii) the Company shall have no additional obligations to the Executive under this Agreement except to the extent provided in Sections 6(c), 6(d), 8(e) and 15 hereof (and, to the extent applicable, Sections 9, 10 and 11 hereof) and to pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. If such insurance, other compensation and benefit plans, programs and arrangements provide for different levels of benefits and coverage, post-termination benefits and coverage shall be the most comprehensive benefits and coverage available. 13 14 (d) Termination Deemed to be after Change in Control. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated after a Change in Control by the Company without Cause or after a Change in Control by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates the Executive's employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence made after the occurrence of a Change in Control or within the six-month period immediately preceding a Change in Control, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that such position is not correct. (e) Other Benefits upon Certain Terminations. (i) Upon any termination of the Executive's employment with the Company (whether or not occurring during the Term hereof), other than a termination during the Term by the Company with Cause or a termination during the Term by the Executive without Good Reason which is not a Special Termination, and continuing until the earlier of (i) the later of the death of the Executive or the death of the "Executive's Spouse", or (ii) the date substantially equivalent coverage and benefits are provided to the Executive (if then living) and the Executive's Spouse (if then living) by a subsequent employer (whether or not such coverage and benefits will be continued by the subsequent employer after any termination of the Executive's employment by the subsequent employer), the Company (at the Company's 14 15 sole expense) shall provide the Executive, the Executive's Spouse and the Executive's dependents with medical and dental insurance benefits substantially similar to those benefits "provided" to them immediately prior to the Date of Termination or, if more favorable to the Executive, those "provided" to them on the Effective Date hereof. In determining which benefits were "provided" at the applicable date, the Executive shall be deemed to have elected the most comprehensive benefits and coverage available to the Executive at that date (whether or not actually elected); further, such benefits shall include, without limitation, an unrestricted right for the Executive, the Executive's Spouse and the Executive's dependents to select their own care providers. The Company shall provide such post-termination benefits under its medical and dental plans, to the extent that the Executive's continued participation is possible under the general terms and provisions of such plans. To the extent that such participation is not possible, the Company shall arrange to otherwise provide the Executive with such post-termination benefits. If the Executive obtains other employment (and the Executive shall be under no obligation to do so), insurance obtained as a result of such other employment shall be the first line of insurance and insurance provided under this Section 8(e) shall only be supplementary or secondary. Also, to the extent that the Executive is, at any time, entitled to insurance under the Medicare program or its equivalent, the insurance under this Section 8(e) shall be only supplementary or secondary to the extent allowed by law. For purposes of this Section 8(e), "Executive's Spouse" shall refer to the Executive's spouse immediately prior to the termination of the Executive's employment with the Company. (ii) Subject to Section 8(c)(vii) hereof, but notwithstanding any more restrictive provision in the terms of the relevant document evidencing an equity-based award or the terms of the plan under which the equity-based award was granted, upon any termination described in the last sentence of this Section 8(e)(ii), (i) the Executive shall become fully vested in (and any restrictions shall lapse upon) all outstanding time-vesting stock options, restricted stock and other similar equity-based awards granted to 15 16 him by the Company (whether before or after the Effective Date), and (ii) the Executive shall become vested in a pro-rata portion of all equity-based performance awards granted to him by the Company (whether before or after the Effective Date), which pro-rata portion shall be based on the attainment of the performance goals relevant to such awards on the date of termination of the Executive's employment with the Company (and not based on the portion of the applicable performance period during which the Executive was employed by the Company), as determined by the Committee in its good faith discretion. The Committee shall also have the discretion to increase the amount, if any, payable pursuant to clause (ii) of the preceding sentence, up to the full amount of such award, assuming attainment of the applicable performance goals at target level. The terminations upon which the vesting described in this Section 8(e)(ii) shall occur are the following: any termination of the Executive's employment with the Company (whether or not occurring during the Term hereof) which occurs on or after the date on which the Executive attains age 60, other than a termination during the Term by the Company with Cause. (iii) Upon any termination of the Executive's employment with the Company (whether or not occurring during the Term hereof), other than a termination during the Term by the Company with Cause or a termination by reason of the Executive's death, the Company shall, until the earlier of the Executive's death or his becoming incapacitated, provide the Executive a private office at a mutually-agreed location, which is suitable for a former Chief Executive Officer and Chairman of the Board of the Company (including furniture, telephone, telefax and work station equipment) either within the Company campus or in comparable facilities outside the Company campus that are acceptable to both parties and shall also provide the Executive with the full and exclusive services of a secretary suitable for a former Chief Executive Officer and Chairman of the Board of the Company, which secretary shall be a Company employee with all of the benefits enjoyed by other Company secretarial employees. 9. Excise Tax Gross-Up Payment. (a) Whether or not the Executive becomes entitled to any payment pursuant to Section 8(c)(iii)(A) hereof, if any of the payments or benefits received or to be received by the Executive in connection with any Change in Control which occurs during the Term hereof or any termination of the Executive's employment which occurs during the Term hereof (whether pursuant to the 16 17 terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (such payments or benefits (excluding the payment or payments to be made pursuant to this Section 9) being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the payment or payments provided by this Section 9, shall be equal to the Total Payments. (b) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 9), net of the maximum reduction in federal 17 18 income taxes which could be obtained from deduction of such state and local taxes. (c) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within the five (5) business days immediately following the date that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to the amount of such reduction (including the Excise Tax component and the federal, state and local income and employment tax components of the Gross-Up Payment) to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within the five (5) business days immediately following the date that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 10. Time of Certain Payments. The payments provided to the Executive or for the Executive's benefit in Sections 9 and 8(c) (other than 8(c)(iii)(B), 8(c)(v), 8(c)(vi), and 8(c)(viii)) hereof shall be made not later than the fifth (5th) business day following the Date of Termination (or, if earlier, in the case of payments provided in Section 9 hereof, not later than the fifth (5th) business day following the Executive's receipt of an excess parachute payment, within the meaning of section 4999 of the Code); provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate of the payments under 18 19 Section 8(c), as determined in good faith by the Executive, and an estimate of the payments under Section 9 hereof, as determined in accordance with Section 9 hereof, the estimate in each case to be of the minimum amount of such payments to which the Executive is clearly entitled, and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination (or, if earlier, the thirtieth (30th) day after the date of the Executive's receipt of an excess parachute payment). In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 11. Legal and Arbitration Fees and Expenses. The Company also shall pay to the Executive all reasonable legal fees, arbitration fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. Notwithstanding the foregoing provisions of this Section 11, no such fees and expenses shall be paid unless the Executive prevails on at least one of the issues he raises. 19 20 12. No Mitigation; Limited Offset. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 7(h) or 8 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 8(e) or the second sentence of Section 8(c)(iv) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company (unless such amount is evidenced by a promissory note signed by the Executive), or otherwise. 13. Protection of Ideas, Noncompetition and Nonsolicitation. (a) Protection of Ideas. Both during the period of the Executive's employment by the Company and thereafter, Executive shall assist the Company or its nominees, at any time, in the protection of the Company's worldwide right, title, and interest in and to information, ideas, concepts, improvements, discoveries, and inventions, and its copyrighted works, including without limitation, the execution of all formal assignment documents requested by Company or its nominees and the execution of all lawful oaths and applications for applications for patents and registration of copyright in the United States and foreign countries. (b) Noncompetition. The Company shall disclose to the Executive, or place the Executive in a position to have access to or to develop, trade secrets or confidential information of the Company or its affiliates; and/or shall entrust the Executive with business opportunities of the Company or its affiliates; and/or shall place the Executive in a position to develop business good will on behalf of the Company or its affiliates. As part of the consideration for the compensation and benefits to be paid to the Executive hereunder, to protect the trade secrets and confidential information of the Company or its subsidiaries or affiliates or their customers or clients that have been and will in the future be disclosed or entrusted to the Executive, the business good will of the Company or its subsidiaries or affiliates that has been and will in the 20 21 future be developed in the Executive, or the business opportunities that have been and will in the future be disclosed or entrusted to the Executive by the Company or its subsidiaries or affiliates; and as an additional incentive for the Company to enter into this Agreement, the Executive agrees to the non-competition obligations hereunder. While the Executive continues to be an employee of the Company and, unless the Executive's termination of employment is by the Company without Cause or by the Executive with Good Reason or in a Special Termination, for the three-year period immediately following the Executive's Date of Termination, the Executive shall not, within any geographic region of the United States of America in which the Company then conducts business or in which the Company plans to conduct business pursuant to a business strategy adopted by the Board before the Executive's termination of employment, except as permitted by the Company upon its prior written consent, (i) enter, directly or indirectly, into the employ of, or render or engage in, directly or indirectly, any services to any person, firm or corporation which directly competes with the Company with respect to any business then conducted by the Company or any business which the Company plans to enter pursuant to a business strategy adopted by the Board before the Executive's termination of employment (a "Competitor"), or (ii) become interested, directly or indirectly, in any such Competitor as an individual, partner, shareholder, creditor, director, officer, principal, agent, employee, trustee, consultant, advisor or in any other relationship or capacity. The ownership of up to one percent (1%) of any class of the outstanding securities of any publicly traded corporation, even though such corporation may be a Competitor, shall not be deemed as constituting an interest in such Competitor which violates clause (ii) of the immediately preceding sentence. (c) While the Executive continues to be an employee of the Company and, unless the Executive's termination of employment is by the Company without Cause or by the Executive with Good Reason or in a Special Termination, for the three-year period immediately following the Executive's Date of Termination, the Executive shall not, except as permitted by the Company upon its prior written consent, (i) attempt, directly or indirectly, to induce any employee employed by or performing services for the Company (or its affiliates) to be employed or perform services elsewhere, 21 22 or (ii) solicit, directly or indirectly, the customers of the Company (or its affiliates), the suppliers of the Company (or its affiliates) or entities or individuals having other business relationships with the Company (or its affiliates) for the purpose of encouraging them to terminate (or reduce or detrimentally alter) their respective relationships with the Company (or its affiliates). (d) The Company shall have the right and remedy to have the provisions of this Section 13 specifically enforced, including by temporary and/or permanent injunction, it being acknowledged and agreed that any such violation may cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. 14. Independence and Severability of Section 13 Provisions. Each of the rights and remedies enumerated in Section 13 hereof shall be independent of the others and shall be severally enforceable and all of such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. If any of the covenants contained in Section 13 hereof or if any of the rights or remedies enumerated in Section 13 hereof, or any part of any of them, is hereafter construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants or rights or remedies which shall be given full effect without regard to the invalid portions. If any of the covenants contained in Section 13 is held to be unenforceable because of the duration of such provision or the area covered thereby, the parties agree that the court making such determination shall have the authority to reduce the duration and/or area of such provision, and in its reduced form said provision shall then be enforceable. 15. Indemnification. The Company shall indemnify the Executive to the full extent authorized by law and the Charter and By-Laws of the Company, as applicable, for all expenses, costs, liabilities and legal fees which the Executive may incur in the discharge of the Executive's duties hereunder. The Executive shall be insured under the Company's directors' and officers' liability insurance policy as in effect from time to time. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 15. 22 23 16. Successors; Binding Agreement. (a) In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason on or after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, each such amount, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 17. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the 23 24 other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: American General Corporation 2929 Allen Parkway Houston, Texas 77019 Attention: General Counsel 18. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party, including, without limitation, any employment memorandum, memorandum of understanding, or severance agreement. Captions and Section headings in this Agreement are provided merely for convenience and shall not affect the interpretation of any of the provisions herein. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 8 and 9 hereof) shall survive such expiration. 19. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 24 25 20. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 21. Settlement of Disputes; Arbitration. (a) All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Committee and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied. (b) Except for equitable relief as specified in Section 21(f) hereof and except for the Executive's claim under any Company benefit or compensation plans, programs, arrangements or awards (whether heretofore or hereafter established) which have a claim or dispute resolution procedure specifically applicable thereto, any dispute or controversy which is not resolved by agreement pursuant to Section 21(a) hereof, including all claims, demands, causes of action, disputes, controversies, and other matters in question arising out of or relating to this Agreement, any provision hereof, the alleged breach thereof, or in any way relating to the subject matter of this Agreement involving the Executive, the Company, and/or their respective representatives, even though some or all of such claims allegedly are extra-contractual in nature, whether such claims sound in contract, tort, or otherwise, at law or in equity, under state or federal law, whether provided by statute or the common law, for damages or any other relief, shall be resolved by binding arbitration pursuant to the Federal Arbitration Act in accordance with the Employment Dispute Resolution Rules then in effect with the American Arbitration Association. The arbitration proceeding shall be conducted in Houston, Texas. This agreement to arbitrate 25 26 shall be enforceable in either federal or state court. (c) The enforcement of this agreement to arbitrate and all procedural aspects of this agreement to arbitrate, including but not limited to, the construction and interpretation of this agreement to arbitrate, the issues subject to arbitration (i.e., arbitrability), the scope of the arbitrable issues, allegations of waiver, delay or defenses to arbitrability, and the rules governing the conduct of the arbitration, shall be governed by and construed pursuant to the Federal Arbitration Act and shall be decided by the arbitrators; provided, however, that the evidentiary standards set forth in this Agreement with respect to certain determinations made by the Board or the Committee shall apply to those determinations when made (or reviewed) by the arbitrators. In deciding the substance of any such claims, the arbitrators shall apply the substantive laws of the State of Texas (excluding Texas choice-of-law principles that might call for the application of some other state's law); provided, however, it is expressly agreed that the arbitrators shall have no authority to award treble, exemplary, or punitive damages under any circumstances regardless of whether such damages may be available under Texas law, the parties hereby waiving their right, if any, to recover treble, exemplary, or punitive damages in connection with any such claims. (d) The arbitration may be initiated by any party by providing to the other parties a written notice of arbitration specifying the claims. Within thirty (30) days of the notice of initiation of the arbitration procedure, (1) the Executive shall denominate one arbitrator and (2) the Company shall denominate one arbitrator. The two arbitrators shall select a third arbitrator failing agreement on which within sixty (60) days of the original notice, either the Executive or the Company shall apply to the Senior Active United States District Judge for the Southern District of Texas, who shall appoint a third arbitrator. While the third arbitrator shall be neutral, the two party-appointed arbitrators are not required to be neutral and it shall not be grounds for removal of either of the two party-appointed arbitrators or for vacating the arbitrators' award that either of such arbitrators has past or present minimal relationships with the party that appointed such arbitrator. Evident partiality on the part of an arbitrator exists only 26 27 where the circumstances are such that a reasonable person would have to conclude there in fact existed actual bias and a mere appearance or impression of bias will not constitute evident partiality or otherwise disqualify an arbitrator. (e) The three arbitrators shall by majority vote resolve all disputes between the parties. There shall be no transcript of the hearing before the arbitrators. The arbitrators' decision shall be in writing, but shall be as brief as possible. The arbitrators shall not assign the reasons for their decision. The arbitrators shall certify in their award that they have faithfully applied the terms and conditions of this Agreement and that no part of their award includes any amount for exemplary or punitive damages. All proceedings conducted hereunder and the decision of the arbitrators shall be kept confidential by the parties, e.g., the arbitrators' award shall not be released to the press or published in any of the various arbitration reporters. Judgment upon any award rendered in any such arbitration proceeding may be entered by any federal or state court having jurisdiction. (f) Notwithstanding any provision of this Agreement to the contrary, (i) in the event of a breach or threatened breach by the Executive of any of the covenants set forth in Section 13 hereof, the Company shall be entitled to seek equitable relief, including an injunction, in any court of proper jurisdiction to maintain the status quo pending the resolution of the dispute by binding arbitration as provided above, and (ii) the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. With respect to any such action, the Executive and the Company hereby irrevocably submit to the non-exclusive jurisdiction of any Federal or State court sitting in the City of Houston, Texas, and agree that process in any such action shall be valid and effective for all purposes if served upon the respective party in accordance with the notice provisions of Section 17 hereof. 22. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: 27 28 (a) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (b) "Auditor" shall have the meaning set forth in Section 9(b) hereof. (c) "Average Annual Bonus" shall mean the average annual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in which the Executive participated in respect of any of the three calendar years ending immediately prior to the calendar year in which occurs the Date of Termination or, if higher, immediately prior to the calendar year in which occurs the first event or circumstance constituting Good Reason; provided, however, that if there are fewer than three bonuses earned by the Executive in the applicable three- year period, the average annual bonus will be calculated by dividing the total amount of the bonuses paid by the number of bonuses paid. (d) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (e) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (f) "Board" shall mean the Board of Directors of the Company. (g) "Cause" for termination by the Company of the Executive's employment shall mean (i) conviction of the Executive for the commission of a felony, (ii) the willful gross neglect by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7(e) hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (iii) the engaging by the Executive in willful gross misconduct resulting in demonstrable and material economic harm to the Company or its subsidiaries. For purposes of clauses (ii) and 28 29 (iii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision after the occurrence of a Change in Control or within the six-month period immediately preceding a Change in Control, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (h) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or 29 30 (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation (or a share exchange between shareholders of the Company or any direct or indirect subsidiary of the Company and another corporation or entity pursuant to Article 5.02 (or any successor provision thereto) of the Texas Business Corporation Act), other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least fifty-one percent (51%) of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; or (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least fifty-one percent (51%) of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. 30 31 Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (j) "Committee" shall mean the Personnel Committee of the Board until six months prior to the occurrence of a Change in Control and thereafter shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Personnel Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)); provided, however, that the maximum number of individuals constituting the Committee shall not exceed five. (k) "Company" shall mean American General Corporation, a Texas corporation and, except in determining under Section 22(h) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (l) "Date of Termination" shall have the meaning set forth in Section 7(f) hereof. (m) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, (i) as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the 31 32 full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, (ii) a physician agreed upon by the Executive (or the Executive's legal representative) and the Company (or, if the parties hereto are unable to agree upon a single physician, a third physician agreed upon by two physicians, each of whom has been selected by either the Executive (or the Executive's legal representative) or the Company) shall have determined that the Executive will be incapable, due to physical or mental illness, of substantially performing the Executive's duties and responsibilities under this Agreement for the remainder of the Term, (iii) the Company shall have given the Executive a Notice of Termination for Disability, and (iv) within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (n) "Employment Period" shall mean the period (which in no event shall extend beyond the expiration of the Term and may end earlier pursuant to Section 3(b) hereof) during which Executive has an obligation to render services hereunder, as described in Section 4 hereof. (o) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (p) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (q) "Executive" shall mean the individual named in the first paragraph of this Agreement. (r) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI), (VII) or (VIII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: 32 33 (I) the assignment to the Executive of any duties inconsistent with the Executive's status as an executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the date hereof; (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than fifty (50) miles from the Executive's principal place of employment immediately prior to the date hereof or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) except for any changes required by applicable law, the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the date hereof which is material to the Executive's total compensation, including but not limited to the Company's Performance-Based Plan for Executive Officers, Supplemental Thrift Plan, Restoration of Retirement Income Plan, 1984 Stock and Incentive Plan, "1994 Stock and Incentive Plan", and 1997 Stock and Incentive Plan, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has 33 34 been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the date hereof; (VI) except for any changes required by applicable law, the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the date hereof, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive as of the date hereof, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect on the date hereof; prior to a Change in Control, notwithstanding the foregoing provisions of this Section 22(r)(VI), it shall not constitute Good Reason that the Executive's benefits under the Company's general medical, health and accident plans are no longer substantially similar to the benefits enjoyed by the Executive immediately prior to the date hereof, unless the changes in such benefits constitute a material adverse alteration thereof; (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7(e) hereof; for purposes of this Agreement, no such purported termination shall be effective, except as provided in Section 3(b) hereof; or 34 35 (VIII) the Company's breach of a material term or condition of the Agreement. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason which is made after the occurrence of a Change in Control or during the six-month period immediately preceding the occurrence of a Change in Control, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist. (s) "Gross-Up Payment" shall have the meaning set forth in Section 9 hereof. (t) "Normal Retirement Age" shall mean age 62. (u) "Notice of Termination" shall have the meaning set forth in Section 7(e) hereof. (v) "Pension Plans" shall mean all tax-qualified and non-qualified supplemental or excess benefit pension plans maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits. (w) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. 35 36 (x) "Tax Counsel" shall have the meaning set forth in Section 9 hereof. (y) "Term" shall mean the period of time described in Section 3 hereof (including any extension, 36 37 continuation or termination described therein). (z) "Total Payments" shall mean those payments so described in Section 9 hereof. American General Corporation By: /s/ LARRY D. HORNER ----------------------------- Name: Larry D. Horner Title: Chairman of the Personnel Committee /s/ ROBERT M. DEVLIN -------------------------------- Robert M. Devlin Address: --------------------------- --------------------------- --------------------------- (Please print carefully) 37 EX-10.13 3 EMPLOYMENT AGREEMENT, BETWEEN JON P. NEWTON 1 EXHIBIT 10.13 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of February 1, 1998 (the "Effective Date"), by and between Jon P. Newton (the "Executive") and American General Corporation, a Texas corporation (the "Company"). WHEREAS, during the course of Executive's employment with the Company, the Executive has performed outstanding services for the Company; and WHEREAS, it is deemed by the Company to be in the best interests of the Company to assure continuation of Executive's employment; and WHEREAS, the Company and the Executive have determined to enter into this Agreement pursuant to which the Company will continue to employ the Executive on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement (if not provided where a capitalized term initially appears) are provided in the last Section hereof. 2. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby accepts such employment, on the terms and conditions hereinafter set forth. 3. Term. (a) Duration of Term. Unless earlier terminated as provided in Section 3(b) hereof, the Executive's employment with the Company under this Agreement shall commence at the Effective Date and shall end on the final day of the Term. For purposes of this Agreement, the "Term" shall mean the full three-year term of the Agreement from the Effective Date until the day before the third anniversary thereof, plus any extensions made as provided in this Section 3. On the first day of each month occurring after the Effective Date, the Term shall automatically be extended for an additional month unless, prior to any such first day of a month, the Company or 2 the Executive shall have given notice not to extend the Term. Nothing in this Section shall limit the right of the Company or the Executive to terminate the Executive's employment hereunder on the terms and conditions set forth in Section 7 hereof. The Company and the Executive agree that any such notice by the Company shall not constitute Good Reason for the Executive to terminate his employment. (b) Termination of Employment during the Term. Nothing in this Section 3 shall limit the right of the Company or the Executive to terminate the Executive's employment under this Agreement during the Term hereof on the terms and conditions set forth in Section 7 hereof. Further, notwithstanding any other provision of this Agreement, the Company shall have the right to terminate the Executive's employment under this Agreement at any time prior to the expiration of the Term for any other reason whatsoever, including termination without Cause, in the sole discretion of the Company's Board of Directors (the "Board"); provided, however, that, any termination of the employment relationship by the Company prior to the expiration of the Term other than a termination by the Company on the terms and conditions set forth in Section 7 hereof shall be deemed to be a termination without Cause within the meanings of Sections 8(c) and 8(e) hereof. (c) After the Term: "At-Will" Relationship and Termination of Employment. If the Executive remains employed by the Company beyond the expiration of the Term, such employment shall automatically convert to an "at-will" relationship (upon the expiration of the Term hereof) terminable at any time by either the Company or the Executive for any reason whatsoever, with or without Cause. Upon a termination of employment after the Term hereof, the Company shall pay the Executive's full salary to the Executive through the date of such termination at the rate in effect immediately prior to such termination, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during the Executive's employment by the Company. In addition to any payments or benefits due hereunder upon such a termination, the Executive shall receive such post-termination compensation and benefits as shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and 2 3 arrangements as in effect immediately prior to such termination. 4. Position and Duties. On and after the Effective Date, the Executive shall serve as Vice Chairman of the Company and shall have such additional or different titles, positions, duties and responsibilities as may be assigned to the Executive by the Chief Executive Officer of the Company. The Executive shall report to the Chief Executive Officer of the Company. The Executive agrees to devote substantially all the Executive's full working time, attention and energies during normal business hours to the performance of the Executive's duties for the Company, provided that the Executive may serve as a director on the boards of such companies and organizations as may be agreed upon in writing by the Chief Executive Officer and the Executive. 5. Place of Performance. The principal place of employment and office of the Executive shall be in Houston, Texas, or such other location as may be determined by the Chief Executive Officer serving as of the Effective Date. 6. Compensation and Related Matters. (a) Base Salary. As compensation for the performance by the Executive of the Executive's duties hereunder, during the Employment Period the Company shall pay the Executive an annual base salary no less than the greater of the annual base salary in effect on the Effective Date or the annual base salary in effect on May 1, 1998 (such greater amount, as it may be increased from time to time, is hereinafter referred to as "Base Salary"). Base Salary shall be payable in accordance with the Company's normal payroll practices, shall be reviewed at least annually by the Personnel Committee and may be increased (but not decreased) upon review. (b) Annual Bonus. (i) The Executive shall be provided an opportunity for an annual bonus with respect to each fiscal year which ends within the Employment Period (the "Annual Bonus"), including, without limitation, the year which includes the Effective Date. Except with respect to any fiscal year during which the Executive participates in a Formula Annual Bonus Plan (as described in Section 6(b)(ii) hereof), the amount of an Annual Bonus 3 4 with respect to any fiscal year shall be determined in the sole discretion of the Personnel Committee; provided, however, that, except with respect to any fiscal year during which the Executive participates in a Formula Annual Bonus Plan, the amount of any such Annual Bonus shall not be less than seventy-five percent (75%) of the Base Salary in effect on the last day of the fiscal year with respect to which such Annual Bonus is awarded. (ii) Notwithstanding the second sentence of Section 6(b)(i) hereof, if the Executive participates in an Annual Bonus Plan under which performance objectives, Annual Bonus opportunities (or target bonuses) and levels of payment based on levels of achievement of the performance objectives are established for the Executive and other participants (a "Formula Annual Bonus Plan"), the Executive shall have an Annual Bonus opportunity (expressed as a percentage of then-current Base Salary) for the initial fiscal year during the Term covered by a Formula Annual Bonus Plan which is no less than (and which may be more than) the "Average Bonus Percentage". The "Average Bonus Percentage" (for purposes of this Section) shall be calculated by (i) dividing the actual bonus paid to the Executive with respect to each of the applicable "Three Years" by the Base Salary in effect on the last day of the respective year, and converting the result to a percentage, and (ii) adding the three percentages together and dividing by three. The "Three Years", for purposes of this Section, shall be the three fiscal years immediately preceding such initial fiscal year, or, if more favorable to the Executive, the three fiscal years immediately preceding the Effective Date hereof. The percentage of Base Salary which determines the Executive's Annual Bonus opportunity shall be reviewed by the Board annually and may be increased (but not decreased) upon review by the Board. Any Annual Bonus payable with respect to a fiscal year (whether or not pursuant to a Formula Annual Bonus Plan) shall be paid as soon as practicable after the end of such year. (c) Other Compensation and Benefit Plans and Arrangements; Fringe Benefits. During the Employment Period, the Executive shall be entitled to participate, at a level appropriate to the Executive's position with the Company, in such other employee benefit and compensation plans and arrangements and fringe benefits as are generally available to senior officers of the Company from time to time, and any successors thereto. 4 5 (d) Expenses. The Company shall reimburse the Executive for all reasonable business expenses incurred during the Employment Period, subject to the applicable and reasonable policies and procedures of the Company in force from time to time. (e) Office Facilities and Services Furnished. During the Employment Period, the Company shall furnish the Executive with appropriate office space and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of the Executive's duties as set forth in Section 4 hereof (including, without limitation, secretarial services and furniture, telephone, telefax and work station equipment), such office space and other facilities and services to be furnished at the location set forth in Section 5 hereof. (f) Automobile Allowance. At all times during the Employment Period, the Company will provide the Executive with an automobile (and pay related expenses) pursuant to the Company's policy as in effect on the Effective Date, as such policy may be amended from time to time (the "Automobile Policy"), provided, however, that in no event shall the automobile provided to the Executive pursuant to this Section 6(f) be of lesser quality than that available to the Executive pursuant to the Automobile Policy on the Effective Date. (g) Nonstatutory Options. Any nonstatutory options granted to the Executive during the Employment Period after the Effective Date hereof will, when (and to the extent that) they become exercisable, remain exercisable for their full term. 7. Termination. The Executive's employment hereunder may be terminated, and the Employment Period hereunder shall be ended, as follows: (a) Death. The Executive's employment shall terminate upon the Executive's death. Upon such a termination, the Executive's estate, designated beneficiary or surviving spouse, as the case may be, shall become entitled to the payments provided in Sections 8(b) and 8(e) hereof. (b) Disability. The Company may terminate the Executive's employment hereunder for Disability. During the Disability Period (as defined in Section 8(a) 5 6 hereof) and upon such a termination, the Executive shall be entitled to the payments and benefits provided in Sections 8(a) and 8(e) hereof in accordance with the terms of such Sections, provided, however, that during the thirty-six (36) month period immediately following the Date of Termination for Disability, the Company shall pay monthly to the Executive (in accordance with the Company's usual payroll practices) any additional amount necessary (the "Disability Supplement") so that the gross amount of (i) the Disability Supplement and (ii) the payments provided to the Executive following a termination of his employment for Disability pursuant to Sections 8(a) and 8(e) hereof is equal to (A) three times the Base Salary and the Average Annual Bonus, (B) divided by thirty-six (36). (c) Cause. The Company may terminate the Executive's employment hereunder for Cause. Upon such a termination, the Executive shall become entitled to the payments provided in Section 8(b) hereof. (d) Termination by the Executive. (i) The Executive may terminate the Executive's employment hereunder for Good Reason. The Executive may also terminate the Executive's employment hereunder without Good Reason by giving a Notice of Termination during the year immediately following a Change in Control (a "Special Termination"). Upon a Good Reason termination or a Special Termination, the Executive shall become entitled to the payments and benefits provided in Sections 8(c) and 8(e) hereof in accordance with the terms of such Sections. (ii) The Executive may terminate the Executive's employment hereunder without Good Reason and outside of the one-year period immediately following a Change in Control, upon giving notice of one month to the Company. In the event of such a termination, the Executive shall comply with any reasonable request of the Company to assist in providing for an orderly transition of authority, but such assistance shall not delay the Executive's termination of employment longer than six months beyond the giving of the Executive's Notice of Termination. Upon such a termination, the Executive shall become entitled to the payments and benefits provided in Section 8(b) hereof in accordance with the terms of such Section. 6 7 (e) Notice of Termination. Any purported termination of the Executive's employment (other than termination pursuant to Section 7(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 17 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause based on clause (ii) or (iii) of the definition of Cause herein is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (ii) or (iii) of the definition of Cause herein, and specifying the particulars thereof in detail. (f) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean the following: (i) if the Executive's employment is terminated by the Executive's death, the date of the Executive's death; (ii) if the Executive's employment is terminated for Disability pursuant to Section 7(b) hereof, thirty (30) days after the Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty-(30)-day period); (iii) if the Executive's employment is terminated for Cause pursuant to Section 7(c) hereof, the date specified in the Notice of Termination; (iv) if the Executive's employment is terminated pursuant to Section 7(d)(ii) hereof, the date determined in accordance with said Section, and (v) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7 8 (g) Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7(g)), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier to occur of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by the final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. (h) Compensation During Dispute. If the Date of Termination is extended in accordance with Section 7(g) hereof with respect to a Notice of Termination given after a Change in Control or within the six-month period immediately preceding a Change in Control, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given until the Date of Termination, as determined in accordance with Section 7(g) hereof. Amounts paid under this Section 7(h) are in addition to all other amounts due under this Agreement other than those due under Section 8(b)(i) or 8(c)(i) hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. Compensation During Disability or Upon Termination. (a) Disability Period and Termination for Disability. During any period during the Employment Period that the Executive fails to perform the Executive's full-time duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Company shall pay the Executive's full salary to the Executive at the rate in effect at the 8 9 commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability; provided, however, that such salary payments shall be reduced by the sum of the amounts, if any, payable to the Executive at or prior to the time of any such salary payment under disability benefit plans of the Company or under the Social Security disability insurance program, which amounts were not previously applied to reduce any such salary payment. Upon termination of the Executive's employment for Disability, the Company shall have no additional obligations to the Executive under this Agreement except to the extent provided in Sections 6(c), 6(d), 7(b), 8(e) and 15 hereof (and, to the extent applicable, Sections 9, 10 and 11 hereof) and to pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. (b) Termination (x) by the Company with Cause, (y) by the Executive without Good Reason in a Termination which is not a Special Termination, or (z) by Reason of Death. If the Executive's employment hereunder is terminated (x) by the Company with Cause, (y) by the Executive without Good Reason in a termination which is not a Special Termination, or (z) by reason of death, then: (i) as soon as practicable, the Company shall pay the Executive's Base Salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if 9 10 more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason; and (ii) the Company shall have no additional obligations to the Executive under this Agreement except to the extent provided in Sections 6(c), 6(d) and 15 hereof (and, to the extent applicable, Sections 8(e), 9, 10 and 11 hereof) and to pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. (c) Termination (x) by Company without Cause, (y) by the Executive with Good Reason, or (z) by the Executive in a Special Termination. For purposes of this Agreement, termination of the Executive's employment "by the Company without Cause" shall not include termination by the Company for Disability or termination by reason of the Executive's death. If the Executive's employment hereunder is terminated (x) by the Company without Cause, (y) by the Executive with Good Reason, or (z) by the Executive in a Special Termination, then: (i) the Company shall pay the Executive's Base Salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason; 10 11 (ii) notwithstanding any provision of any Annual Bonus plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (A) any Annual Bonus which has been allocated or awarded (but not yet paid) to the Executive for a completed fiscal year preceding the Date of Termination under any Annual Bonus plan, and (B) a pro rata portion to the Date of Termination of the Annual Bonus for the year in which the Date of Termination occurs, calculated by using a fraction (the numerator of which shall be the number of days of employment in such year up to and including the Date of Termination and the denominator of which shall be three-hundred-sixty-five (365)) to multiply (i) the award that the Executive would have earned for the entire year, assuming the achievement, at the target level, of any performance objectives established with respect to such award, or, (ii) if no such target level and performance objectives have been established, the Average Annual Bonus; provided, however, that any amount otherwise payable pursuant to this clause (B) of this Section 8(c)(ii) shall be reduced by any payment already received by the Executive pursuant to the applicable Annual Bonus plan with respect to the year in which the Date of Termination occurs; (iii) in lieu of any further salary or bonus payments as severance to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (x) the Executive's Base Salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (y) the Average Annual Bonus, as follows: (A) if the Date of Termination shall occur on or after a Change in Control (or be deemed to occur after a Change in Control pursuant to Section 8(d) hereof), the Company shall pay such amount in a lump sum severance payment, in cash; or (B) if the Date of Termination shall not occur on or after a Change in Control (and not be deemed to occur after a Change in 11 12 Control pursuant to Section 8(d) hereof), the Company shall pay such amount, in substantially equal monthly or more frequent installments over the three-year period immediately following the Date of Termination; (iv) The Company shall (i) either prepay all remaining premiums, or establish an irrevocable grantor trust holding an amount of assets sufficient to pay all such remaining premiums (which trust shall be required to pay such premiums), under any insurance policy insuring the life of the Executive under any "split-dollar" insurance arrangement in effect between the Executive and the Company, and (ii) shall transfer to the Executive any and all rights and incidents of ownership in such arrangements at no cost to the Executive. For the thirty-six (36) month period immediately following the Date of Termination, the Company shall also arrange to provide the Executive with life and accident insurance benefits substantially similar to those provided to the Executive (other than the "split-dollar" life insurance) immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence. Benefits otherwise receivable by the Executive pursuant to the immediately preceding sentence shall be reduced to the extent benefits of the same type are received by or made available to the Executive by a successor employer during the thirty-six (36) month period following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (v) The Company shall provide the Executive with outplacement services suitable to the Executive's position for a period of nine months or, 12 13 if earlier, until the first acceptance by the Executive of an offer of employment. (vi) The Company shall provide the Executive with the office facilities and services and the automobile allowance described in Section 6(e) and (f) hereof for the thirty-six (36) month period immediately following the Date of Termination. (vii) Notwithstanding anything which is more restrictive in any applicable plan or grant or award agreement or in any other provision of this Agreement, the Executive shall become fully vested in all outstanding stock options, restricted stock and other similar equity-based awards which are granted to him by the Company (whether before or after the Effective Date); in the case of performance awards, it shall be assumed that the applicable performance goals were attained at target levels and the Committee shall also have the discretion to increase the amount so payable by assuming attainment of the applicable performance goals at up to maximum level. (viii) the Company shall have no additional obligations to the Executive under this Agreement except to the extent provided in Sections 6(c), 6(d), 8(e) and 15 hereof (and, to the extent applicable, Sections 9, 10 and 11 hereof) and to pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. If such insurance, other compensation and benefit plans, programs and arrangements provide for different levels of benefits and coverage, post-termination benefits and coverage shall be the most comprehensive benefits and coverage available. 13 14 (d) Termination Deemed to be after Change in Control. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated after a Change in Control by the Company without Cause or after a Change in Control by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates the Executive's employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence made after the occurrence of a Change in Control or within the six-month period immediately preceding a Change in Control, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that such position is not correct. (e) Other Benefits upon Certain Terminations. (i) Upon any termination of the Executive's employment with the Company (whether or not occurring during the Term hereof), other than a termination during the Term by the Company with Cause or a termination during the Term by the Executive without Good Reason which is not a Special Termination, and continuing until the earlier of (i) the later of the death of the Executive or the death of the "Executive's Spouse", or (ii) the date substantially equivalent coverage and benefits are provided to the Executive (if then living) and the Executive's Spouse (if then living) by a subsequent employer (whether or not such coverage and benefits will be continued by the subsequent employer after any termination of the Executive's employment by the subsequent employer), the Company (at the Company's sole expense) shall provide the Executive, the Executive's Spouse and the Executive's dependents with 14 15 medical and dental insurance benefits substantially similar to those benefits "provided" to them immediately prior to the Date of Termination or, if more favorable to the Executive, those "provided" to them on the Effective Date hereof. In determining which benefits were "provided" at the applicable date, the Executive shall be deemed to have elected the most comprehensive benefits and coverage available to the Executive at that date (whether or not actually elected); further, such benefits shall include, without limitation, an unrestricted right for the Executive, the Executive's Spouse and the Executive's dependents to select their own care providers. The Company shall provide such post-termination benefits under its medical and dental plans, to the extent that the Executive's continued participation is possible under the general terms and provisions of such plans. To the extent that such participation is not possible, the Company shall arrange to otherwise provide the Executive with such post-termination benefits. If the Executive obtains other employment (and the Executive shall be under no obligation to do so), insurance obtained as a result of such other employment shall be the first line of insurance and insurance provided under this Section 8(e) shall only be supplementary or secondary. Also, to the extent that the Executive is, at any time, entitled to insurance under the Medicare program or its equivalent, the insurance under this Section 8(e) shall be only supplementary or secondary to the extent allowed by law. For purposes of this Section 8(e), "Executive's Spouse" shall refer to the Executive's spouse immediately prior to the termination of the Executive's employment with the Company. (ii) Subject to Section 8(c)(vii) hereof, but notwithstanding any more restrictive provision in the terms of the relevant document evidencing an equity-based award or the terms of the plan under which the equity-based award was granted, upon any termination described in the last sentence of this Section 8(e)(ii), (i) the Executive shall become fully vested in (and any restrictions shall lapse upon) all outstanding time-vesting stock options, restricted stock and other similar equity-based awards granted to him by the Company (whether before or after the Effective Date), and (ii) the Executive shall become vested in a pro-rata portion of all equity-based performance awards granted to him by the Company (whether before or after the Effective Date), which pro-rata portion shall be based on the 15 16 attainment of the performance goals relevant to such awards on the date of termination of the Executive's employment with the Company (and not based on the portion of the applicable performance period during which the Executive was employed by the Company), as determined by the Committee in its good faith discretion. The Committee shall also have the discretion to increase the amount, if any, payable pursuant to clause (ii) of the preceding sentence, up to the full amount of such award, assuming attainment of the applicable performance goals at target level. The terminations upon which the vesting described in this Section 8(e)(ii) shall occur are the following: any termination of the Executive's employment with the Company (whether or not occurring during the Term hereof) which occurs on or after the date on which the Executive attains Normal Retirement Age, other than a termination during the Term by the Company with Cause. 9. Excise Tax Gross-Up Payment. (a) Whether or not the Executive becomes entitled to any payment pursuant to Section 8(c)(iii)(A) hereof, if any of the payments or benefits received or to be received by the Executive in connection with any Change in Control which occurs during the Term hereof or any termination of the Executive's employment which occurs during the Term hereof (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (such payments or benefits (excluding the payment or payments to be made pursuant to this Section 9) being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the payment or payments provided by this Section 9, shall be equal to the Total Payments. (b) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by 16 17 the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 9), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (c) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within the five (5) business days immediately following the date that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to the amount of such reduction (including the Excise Tax component and the federal, state and local income and employment tax components of the Gross-Up Payment) to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including 17 18 by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within the five (5) business days immediately following the date that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 10. Time of Certain Payments. The payments provided to the Executive or for the Executive's benefit in Sections 9 and 8(c) (other than 8(c)(iii)(B), 8(c)(v), 8(c)(vi), and 8(c)(viii)) hereof shall be made not later than the fifth (5th) business day following the Date of Termination (or, if earlier, in the case of payments provided in Section 9 hereof, not later than the fifth (5th) business day following the Executive's receipt of an excess parachute payment, within the meaning of section 4999 of the Code); provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate of the payments under Section 8(c), as determined in good faith by the Executive, and an estimate of the payments under Section 9 hereof, as determined in accordance with Section 9 hereof, the estimate in each case to be of the minimum amount of such payments to which the Executive is clearly entitled, and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination (or, if earlier, the thirtieth (30th) day after the date of the Executive's receipt of an excess parachute payment). In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a 18 19 written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 11. Legal and Arbitration Fees and Expenses. The Company also shall pay to the Executive all reasonable legal fees, arbitration fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. Notwithstanding the foregoing provisions of this Section 11, no such fees and expenses shall be paid unless the Executive prevails on at least one of the issues he raises. 12. No Mitigation; Limited Offset. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 7(h) or 8 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 8(e) or the second sentence of Section 8(c)(iv) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company (unless such amount is evidenced by a promissory note signed by the Executive), or otherwise. 13. Protection of Ideas, Noncompetition and Nonsolicitation. (a) Protection of Ideas. Both during the period of the Executive's employment by the Company and thereafter, Executive shall assist the Company or 19 20 its nominees, at any time, in the protection of the Company's worldwide right, title, and interest in and to information, ideas, concepts, improvements, discoveries, and inventions, and its copyrighted works, including without limitation, the execution of all formal assignment documents requested by Company or its nominees and the execution of all lawful oaths and applications for applications for patents and registration of copyright in the United States and foreign countries. (b) Noncompetition. The Company shall disclose to the Executive, or place the Executive in a position to have access to or to develop, trade secrets or confidential information of the Company or its affiliates; and/or shall entrust the Executive with business opportunities of the Company or its affiliates; and/or shall place the Executive in a position to develop business good will on behalf of the Company or its affiliates. As part of the consideration for the compensation and benefits to be paid to the Executive hereunder, to protect the trade secrets and confidential information of the Company or its subsidiaries or affiliates or their customers or clients that have been and will in the future be disclosed or entrusted to the Executive, the business good will of the Company or its subsidiaries or affiliates that has been and will in the future be developed in the Executive, or the business opportunities that have been and will in the future be disclosed or entrusted to the Executive by the Company or its subsidiaries or affiliates; and as an additional incentive for the Company to enter into this Agreement, the Executive agrees to the non-competition obligations hereunder. While the Executive continues to be an employee of the Company and, unless the Executive's termination of employment is by the Company without Cause or by the Executive with Good Reason or in a Special Termination, for the three-year period immediately following the Executive's Date of Termination, the Executive shall not, within any geographic region of the United States of America in which the Company then conducts business or in which the Company plans to conduct business pursuant to a business strategy adopted by the Board before the Executive's termination of employment, except as permitted by the Company upon its prior written consent, (i) enter, directly or indirectly, into the employ of, or render or engage in, directly or indirectly, any services to any person, firm or corporation which directly competes with 20 21 the Company with respect to any business then conducted by the Company or any business which the Company plans to enter pursuant to a business strategy adopted by the Board before the Executive's termination of employment (a "Competitor"), or (ii) become interested, directly or indirectly, in any such Competitor as an individual, partner, shareholder, creditor, director, officer, principal, agent, employee, trustee, consultant, advisor or in any other relationship or capacity. The ownership of up to one percent (1%) of any class of the outstanding securities of any publicly traded corporation, even though such corporation may be a Competitor, shall not be deemed as constituting an interest in such Competitor which violates clause (ii) of the immediately preceding sentence. (c) While the Executive continues to be an employee of the Company and, unless the Executive's termination of employment is by the Company without Cause or by the Executive with Good Reason or in a Special Termination, for the three-year period immediately following the Executive's Date of Termination, the Executive shall not, except as permitted by the Company upon its prior written consent, (i) attempt, directly or indirectly, to induce any employee employed by or performing services for the Company (or its affiliates) to be employed or perform services elsewhere, or (ii) solicit, directly or indirectly, the customers of the Company (or its affiliates), the suppliers of the Company (or its affiliates) or entities or individuals having other business relationships with the Company (or its affiliates) for the purpose of encouraging them to terminate (or reduce or detrimentally alter) their respective relationships with the Company (or its affiliates). (d) The Company shall have the right and remedy to have the provisions of this Section 13 specifically enforced, including by temporary and/or permanent injunction, it being acknowledged and agreed that any such violation may cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. 14. Independence and Severability of Section 13 Provisions. Each of the rights and remedies enumerated in Section 13 hereof shall be independent of the others and shall be severally enforceable and all of such rights and remedies shall be in addition to, and 21 22 not in lieu of, any other rights and remedies available to the Company under law or in equity. If any of the covenants contained in Section 13 hereof or if any of the rights or remedies enumerated in Section 13 hereof, or any part of any of them, is hereafter construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants or rights or remedies which shall be given full effect without regard to the invalid portions. If any of the covenants contained in Section 13 is held to be unenforceable because of the duration of such provision or the area covered thereby, the parties agree that the court making such determination shall have the authority to reduce the duration and/or area of such provision, and in its reduced form said provision shall then be enforceable. 15. Indemnification. The Company shall indemnify the Executive to the full extent authorized by law and the Charter and By-Laws of the Company, as applicable, for all expenses, costs, liabilities and legal fees which the Executive may incur in the discharge of the Executive's duties hereunder. The Executive shall be insured under the Company's directors' and officers' liability insurance policy as in effect from time to time. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 15. 16. Successors; Binding Agreement. (a) In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason on or after a Change in Control, except that, for purposes of implementing the foregoing, the 22 23 date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, each such amount, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 17. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: American General Corporation 2929 Allen Parkway Houston, Texas 77019 Attention: General Counsel 18. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement 23 24 supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party, including, without limitation, any employment memorandum, memorandum of understanding, or severance agreement. Captions and Section headings in this Agreement are provided merely for convenience and shall not affect the interpretation of any of the provisions herein. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 8 and 9 hereof) shall survive such expiration. 19. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 20. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 21. Settlement of Disputes; Arbitration. (a) All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Committee and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied. 24 25 (b) Except for equitable relief as specified in Section 21(f) hereof and except for the Executive's claim under any Company benefit or compensation plans, programs, arrangements or awards (whether heretofore or hereafter established) which have a claim or dispute resolution procedure specifically applicable thereto, any dispute or controversy which is not resolved by agreement pursuant to Section 21(a) hereof, including all claims, demands, causes of action, disputes, controversies, and other matters in question arising out of or relating to this Agreement, any provision hereof, the alleged breach thereof, or in any way relating to the subject matter of this Agreement involving the Executive, the Company, and/or their respective representatives, even though some or all of such claims allegedly are extra-contractual in nature, whether such claims sound in contract, tort, or otherwise, at law or in equity, under state or federal law, whether provided by statute or the common law, for damages or any other relief, shall be resolved by binding arbitration pursuant to the Federal Arbitration Act in accordance with the Employment Dispute Resolution Rules then in effect with the American Arbitration Association. The arbitration proceeding shall be conducted in Houston, Texas. This agreement to arbitrate shall be enforceable in either federal or state court. (c) The enforcement of this agreement to arbitrate and all procedural aspects of this agreement to arbitrate, including but not limited to, the construction and interpretation of this agreement to arbitrate, the issues subject to arbitration (i.e., arbitrability), the scope of the arbitrable issues, allegations of waiver, delay or defenses to arbitrability, and the rules governing the conduct of the arbitration, shall be governed by and construed pursuant to the Federal Arbitration Act and shall be decided by the arbitrators; provided, however, that the evidentiary standards set forth in this Agreement with respect to certain determinations made by the Board or the Committee shall apply to those determinations when made (or reviewed) by the arbitrators. In deciding the substance of any such claims, the arbitrators shall apply the substantive laws of the State of Texas (excluding Texas choice-of-law principles that might call for the application of some other state's law); provided, however, it is expressly agreed that the 25 26 arbitrators shall have no authority to award treble, exemplary, or punitive damages under any circumstances regardless of whether such damages may be available under Texas law, the parties hereby waiving their right, if any, to recover treble, exemplary, or punitive damages in connection with any such claims. (d) The arbitration may be initiated by any party by providing to the other parties a written notice of arbitration specifying the claims. Within thirty (30) days of the notice of initiation of the arbitration procedure, (1) the Executive shall denominate one arbitrator and (2) the Company shall denominate one arbitrator. The two arbitrators shall select a third arbitrator failing agreement on which within sixty (60) days of the original notice, either the Executive or the Company shall apply to the Senior Active United States District Judge for the Southern District of Texas, who shall appoint a third arbitrator. While the third arbitrator shall be neutral, the two party-appointed arbitrators are not required to be neutral and it shall not be grounds for removal of either of the two party-appointed arbitrators or for vacating the arbitrators' award that either of such arbitrators has past or present minimal relationships with the party that appointed such arbitrator. Evident partiality on the part of an arbitrator exists only where the circumstances are such that a reasonable person would have to conclude there in fact existed actual bias and a mere appearance or impression of bias will not constitute evident partiality or otherwise disqualify an arbitrator. (e) The three arbitrators shall by majority vote resolve all disputes between the parties. There shall be no transcript of the hearing before the arbitrators. The arbitrators' decision shall be in writing, but shall be as brief as possible. The arbitrators shall not assign the reasons for their decision. The arbitrators shall certify in their award that they have faithfully applied the terms and conditions of this Agreement and that no part of their award includes any amount for exemplary or punitive damages. All proceedings conducted hereunder and the decision of the arbitrators shall be kept confidential by the parties, e.g., the arbitrators' award shall not be released to the press or published in any of the various arbitration reporters. Judgment upon any award 26 27 rendered in any such arbitration proceeding may be entered by any federal or state court having jurisdiction. (f) Notwithstanding any provision of this Agreement to the contrary, (i) in the event of a breach or threatened breach by the Executive of any of the covenants set forth in Section 13 hereof, the Company shall be entitled to seek equitable relief, including an injunction, in any court of proper jurisdiction to maintain the status quo pending the resolution of the dispute by binding arbitration as provided above, and (ii) the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. With respect to any such action, the Executive and the Company hereby irrevocably submit to the non-exclusive jurisdiction of any Federal or State court sitting in the City of Houston, Texas, and agree that process in any such action shall be valid and effective for all purposes if served upon the respective party in accordance with the notice provisions of Section 17 hereof. 22. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (a) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (b) "Auditor" shall have the meaning set forth in Section 9(b) hereof. (c) "Average Annual Bonus" shall mean the average annual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in which the Executive participated in respect of any of the three calendar years ending immediately prior to the calendar year in which occurs the Date of Termination or, if higher, immediately prior to the calendar year in which occurs the first event or circumstance constituting Good Reason; provided, however, that if there are fewer than three bonuses earned by the Executive in the applicable three year period, the average annual bonus will be calculated by dividing the total amount of the bonuses 27 28 paid by the number of bonuses paid. (d) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (e) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (f) "Board" shall mean the Board of Directors of the Company. (g) "Cause" for termination by the Company of the Executive's employment shall mean (i) conviction of the Executive for the commission of a felony, (ii) the willful gross neglect by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7(e) hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (iii) the engaging by the Executive in willful gross misconduct resulting in demonstrable and material economic harm to the Company or its subsidiaries. For purposes of clauses (ii) and (iii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision after the occurrence of a Change in Control or within the six-month period immediately preceding a Change in Control, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (h) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: 28 29 (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation (or a share exchange between shareholders of the Company or any direct or indirect subsidiary of the Company and another corporation or entity pursuant to Article 5.02 (or any successor provision thereto) of the Texas Business Corporation Act), other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee 29 30 or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least fifty-one percent (51%) of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; or (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least fifty-one percent (51%) of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. 30 31 (j) "Committee" shall mean the Personnel Committee of the Board until six months prior to the occurrence of a Change in Control and thereafter shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Personnel Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)); provided, however, that the maximum number of individuals constituting the Committee shall not exceed five. (k) "Company" shall mean American General Corporation, a Texas corporation and, except in determining under Section 22(h) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (l) "Date of Termination" shall have the meaning set forth in Section 7(f) hereof. (m) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, (i) as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, (ii) a physician agreed upon by the Executive (or the Executive's legal representative) and the Company (or, if the parties hereto are unable to agree upon a single physician, a third physician agreed upon by two physicians, each of whom has been selected by either the Executive (or the Executive's legal representative) or the Company) shall have determined that the Executive will be incapable, due to physical or mental illness, of substantially performing the Executive's duties and responsibilities under this Agreement for the remainder of the Term, (iii) the Company shall have given the Executive a Notice of Termination for Disability, and (iv) within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. 31 32 (n) "Employment Period" shall mean the period (which in no event shall extend beyond the expiration of the Term and may end earlier pursuant to Section 3(b) hereof) during which Executive has an obligation to render services hereunder, as described in Section 4 hereof. (o) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (p) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (q) "Executive" shall mean the individual named in the first paragraph of this Agreement. (r) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI), (VII) or (VIII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive on or after any Change in Control (or prior to a Change in Control under the circumstances described in clause (ii) or (iii) of the first sentence of Section 8(d) hereof) of any duties inconsistent with the Executive's status as an executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities during such period from those in effect immediately prior to the Change in Control (or, where applicable, immediately prior to the occurrence of an event or circumstance constituting Good Reason pursuant to clauses (ii) and (iii) of the first sentence of Section 8(d) hereof); 32 33 (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment after a Change in Control (or prior to a Change in Control under the circumstances described in clause (ii) or (iii) of the first sentence of Section 8(d) hereof) to a location more than fifty (50) miles from the Executive's principal place of employment immediately prior to the Change in Control (or, where applicable, immediately prior to the occurrence of an event or circumstance constituting Good Reason pursuant to clauses (ii) and (iii) of the first sentence of Section 8(d) hereof) or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) during such period except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) except for any changes required by applicable law, the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the date hereof which is material to the Executive's total compensation, including but not limited to the Company's Performance-Based Plan for Executive Officers, Supplemental Thrift Plan, Restoration of Retirement Income Plan, 1984 Stock and Incentive Plan, "1994 Stock and Incentive Plan", and 1997 Stock and Incentive Plan, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the 33 34 failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the date hereof; (VI) except for any changes required by applicable law, the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the date hereof, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive as of the date hereof, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect on the date hereof; prior to a Change in Control, notwithstanding the foregoing provisions of this Section 22(r)(VI), it shall not constitute Good Reason that the Executive's benefits under the Company's general medical, health and accident plans are no longer substantially similar to the benefits enjoyed by the Executive immediately prior to the date hereof, unless the changes in such benefits constitute a material adverse alteration thereof; (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7(e) hereof; for purposes of this Agreement, no such purported termination shall be effective, except as provided in Section 3(b) hereof; or 34 35 (VIII) the Company's breach of a material term or condition of the Agreement. It shall also constitute Good Reason for termination by the Executive of the Executive's employment if: (X) if, at any time during the Term hereof (whether or not a Change in Control shall have occurred), Robert M. Devlin is not serving as Chief Executive Officer of the Company (or, if a merger, consolidation or share exchange by the Company (or a Company subsidiary) with another corporation shall have occurred, as Chief Executive Officer or second-in-command of the Company), and (Y) (i) there is a material diminution in the duties, responsibilities or title of the Executive, (ii) a substantial adverse alteration is made in the nature or status of the Executive's responsibilities from those in effect immediately prior to Robert M. Devlin's ceasing to so serve, (iii) the Company relocates the Executive's principal place of employment to a location more than fifty (50) miles from the Executive's principal place of employment immediately prior to Robert M. Devlin's ceasing to so serve, or (iv) the Company requires the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. 35 36 For purposes of any determination regarding the existence of Good Reason which is made after the occurrence of a Change in Control or during the six-month period immediately preceding the occurrence of a Change in Control, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist. (s) "Gross-Up Payment" shall have the meaning set forth in Section 9 hereof. (t) "Normal Retirement Age" shall mean age 62. (u) "Notice of Termination" shall have the meaning set forth in Section 7(e) hereof. (v) "Pension Plans" shall mean all tax-qualified and non-qualified supplemental or excess benefit pension plans maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits. (w) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. (x) "Tax Counsel" shall have the meaning set forth in Section 9 hereof. (y) "Term" shall mean the period of time described in Section 3 hereof (including any extension, 36 37 continuation or termination described therein). (z) "Total Payments" shall mean those payments so described in Section 9 hereof. American General Corporation By: /s/ LARRY D. HORNER ----------------------------- Name: Larry D. Horner Title: Chairman of the Personnel Committee /s/ JON P. NEWTON -------------------------------- Jon P. Newton Address: --------------------------- --------------------------- --------------------------- (Please print carefully) 37 EX-10.14 4 EMPLOYMENT AGREEMENT, BETWEEN JAMES S. D'AGOSTINO 1 EXHIBIT 10.14 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of February 1, 1998 (the "Effective Date"), by and between James S. D'Agostino (the "Executive") and American General Corporation, a Texas corporation (the "Company"). WHEREAS, during the course of Executive's employment with the Company, the Executive has performed outstanding services for the Company; and WHEREAS, it is deemed by the Company to be in the best interests of the Company to assure continuation of Executive's employment; and WHEREAS, the Company and the Executive have determined to enter into this Agreement pursuant to which the Company will continue to employ the Executive on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement (if not provided where a capitalized term initially appears) are provided in the last Section hereof. 2. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby accepts such employment, on the terms and conditions hereinafter set forth. 3. Term. (a) Duration of Term. Unless earlier terminated as provided in Section 3(b) hereof, the Executive's employment with the Company under this Agreement shall commence at the Effective Date and shall end on the final day of the Term. For purposes of this Agreement, the "Term" shall mean the full three-year term of the Agreement from the Effective Date until the day before the third anniversary thereof, plus any extensions made as provided in this Section 3. On the first day of each month occurring after the Effective Date, the Term shall automatically be extended for an additional month unless, 2 prior to any such first day of a month, the Company or the Executive shall have given notice not to extend the Term. Nothing in this Section shall limit the right of the Company or the Executive to terminate the Executive's employment hereunder on the terms and conditions set forth in Section 7 hereof. The Company and the Executive agree that any such notice by the Company shall not constitute Good Reason for the Executive to terminate his employment. (b) Termination of Employment during the Term. Nothing in this Section 3 shall limit the right of the Company or the Executive to terminate the Executive's employment under this Agreement during the Term hereof on the terms and conditions set forth in Section 7 hereof. Further, notwithstanding any other provision of this Agreement, the Company shall have the right to terminate the Executive's employment under this Agreement at any time prior to the expiration of the Term for any other reason whatsoever, including termination without Cause, in the sole discretion of the Company's Board of Directors (the "Board"); provided, however, that, any termination of the employment relationship by the Company prior to the expiration of the Term other than a termination by the Company on the terms and conditions set forth in Section 7 hereof shall be deemed to be a termination without Cause within the meanings of Sections 8(c) and 8(e) hereof. (c) After the Term: "At-Will" Relationship and Termination of Employment. If the Executive remains employed by the Company beyond the expiration of the Term, such employment shall automatically convert to an "at-will" relationship (upon the expiration of the Term hereof) terminable at any time by either the Company or the Executive for any reason whatsoever, with or without Cause. Upon a termination of employment after the Term hereof, the Company shall pay the Executive's full salary to the Executive through the date of such termination at the rate in effect immediately prior to such termination, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during the Executive's employment by the Company. In addition to any payments or benefits due hereunder upon such a termination, the Executive shall receive such post-termination compensation and benefits as shall be determined under, and paid in accordance with, the Company's retirement, insurance 2 3 and other compensation or benefit plans, programs and arrangements as in effect immediately prior to such termination. 4. Position and Duties. On and after the Effective Date, the Executive shall serve as President of the Company and shall have such additional or different titles, positions, duties and responsibilities as may be assigned to the Executive by the Chief Executive Officer of the Company. The Executive shall report to the Chief Executive Officer of the Company. The Executive agrees to devote substantially all the Executive's full working time, attention and energies during normal business hours to the performance of the Executive's duties for the Company, provided that the Executive may serve as a director on the boards of such companies and organizations as may be agreed upon in writing by the Chief Executive Officer and the Executive. 5. Place of Performance. The principal place of employment and office of the Executive shall be in Houston, Texas, or such other location as may be determined by the Chief Executive Officer serving as of the Effective Date. 6. Compensation and Related Matters. (a) Base Salary. As compensation for the performance by the Executive of the Executive's duties hereunder, during the Employment Period the Company shall pay the Executive an annual base salary no less than the greater of the annual base salary in effect on the Effective Date or the annual base salary in effect on May 1, 1998 (such greater amount, as it may be increased from time to time, is hereinafter referred to as "Base Salary"). Base Salary shall be payable in accordance with the Company's normal payroll practices, shall be reviewed at least annually by the Personnel Committee and may be increased (but not decreased) upon review. (b) Annual Bonus. (i) The Executive shall be provided an opportunity for an annual bonus with respect to each fiscal year which ends within the Employment Period (the "Annual Bonus"), including, without limitation, the year which includes the Effective Date. Except with respect to any fiscal year during which the Executive participates in a Formula Annual Bonus Plan (as described in 3 4 Section 6(b)(ii) hereof), the amount of an Annual Bonus with respect to any fiscal year shall be determined in the sole discretion of the Personnel Committee; provided, however, that, except with respect to any fiscal year during which the Executive participates in a Formula Annual Bonus Plan, the amount of any such Annual Bonus shall not be less than seventy-five percent (75%) of the Base Salary in effect on the last day of the fiscal year with respect to which such Annual Bonus is awarded. (ii) Notwithstanding the second sentence of Section 6(b)(i) hereof, if the Executive participates in an Annual Bonus Plan under which performance objectives, Annual Bonus opportunities (or target bonuses) and levels of payment based on levels of achievement of the performance objectives are established for the Executive and other participants (a "Formula Annual Bonus Plan"), the Executive shall have an Annual Bonus opportunity (expressed as a percentage of then-current Base Salary) for the initial fiscal year during the Term covered by a Formula Annual Bonus Plan which is no less than (and which may be more than) the "Average Bonus Percentage". The "Average Bonus Percentage" (for purposes of this Section) shall be calculated by (i) dividing the actual bonus paid to the Executive with respect to each of the applicable "Three Years" by the Base Salary in effect on the last day of the respective year, and converting the result to a percentage, and (ii) adding the three percentages together and dividing by three. The "Three Years", for purposes of this Section, shall be the three fiscal years immediately preceding such initial fiscal year, or, if more favorable to the Executive, the three fiscal years immediately preceding the Effective Date hereof. The percentage of Base Salary which determines the Executive's Annual Bonus opportunity shall be reviewed by the Board annually and may be increased (but not decreased) upon review by the Board. Any Annual Bonus payable with respect to a fiscal year (whether or not pursuant to a Formula Annual Bonus Plan) shall be paid as soon as practicable after the end of such year. (c) Other Compensation and Benefit Plans and Arrangements; Fringe Benefits. During the Employment Period, the Executive shall be entitled to participate, at a level appropriate to the Executive's position with the Company, in such other employee benefit and compensation plans and arrangements and fringe benefits as are generally available to senior officers of the Company 4 5 from time to time, and any successors thereto. (d) Expenses. The Company shall reimburse the Executive for all reasonable business expenses incurred during the Employment Period, subject to the applicable and reasonable policies and procedures of the Company in force from time to time. (e) Office Facilities and Services Furnished. During the Employment Period, the Company shall furnish the Executive with appropriate office space and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of the Executive's duties as set forth in Section 4 hereof (including, without limitation, secretarial services and furniture, telephone, telefax and work station equipment), such office space and other facilities and services to be furnished at the location set forth in Section 5 hereof. (f) Automobile Allowance. At all times during the Employment Period, the Company will provide the Executive with an automobile (and pay related expenses) pursuant to the Company's policy as in effect on the Effective Date, as such policy may be amended from time to time (the "Automobile Policy"), provided, however, that in no event shall the automobile provided to the Executive pursuant to this Section 6(f) be of lesser quality than that available to the Executive pursuant to the Automobile Policy on the Effective Date. (g) Nonstatutory Options. Any nonstatutory options granted to the Executive during the Employment Period after the Effective Date hereof will, when (and to the extent that) they become exercisable, remain exercisable for their full term. 7. Termination. The Executive's employment hereunder may be terminated, and the Employment Period hereunder shall be ended, as follows: (a) Death. The Executive's employment shall terminate upon the Executive's death. Upon such a termination, the Executive's estate, designated beneficiary or surviving spouse, as the case may be, shall become entitled to the payments provided in Sections 8(b) and 8(e) hereof. 5 6 (b) Disability. The Company may terminate the Executive's employment hereunder for Disability. During the Disability Period (as defined in Section 8(a) hereof) and upon such a termination, the Executive shall be entitled to the payments and benefits provided in Sections 8(a) and 8(e) hereof in accordance with the terms of such Sections, provided, however, that during the thirty-six (36) month period immediately following the Date of Termination for Disability, the Company shall pay monthly to the Executive (in accordance with the Company's usual payroll practices) any additional amount necessary (the "Disability Supplement") so that the gross amount of (i) the Disability Supplement and (ii) the payments provided to the Executive following a termination of his employment for Disability pursuant to Sections 8(a) and 8(e) hereof is equal to (A) three times the Base Salary and the Average Annual Bonus, (B) divided by thirty-six (36). (c) Cause. The Company may terminate the Executive's employment hereunder for Cause. Upon such a termination, the Executive shall become entitled to the payments provided in Section 8(b) hereof. (d) Termination by the Executive. (i) The Executive may terminate the Executive's employment hereunder for Good Reason. The Executive may also terminate the Executive's employment hereunder without Good Reason by giving a Notice of Termination during the year immediately following a Change in Control (a "Special Termination"). Upon a Good Reason termination or a Special Termination, the Executive shall become entitled to the payments and benefits provided in Sections 8(c) and 8(e) hereof in accordance with the terms of such Sections. (ii) The Executive may terminate the Executive's employment hereunder without Good Reason and outside of the one-year period immediately following a Change in Control, upon giving notice of one month to the Company. In the event of such a termination, the Executive shall comply with any reasonable request of the Company to assist in providing for an orderly transition of authority, but such assistance shall not delay the Executive's termination of employment longer than six months beyond the giving of the Executive's Notice of Termination. Upon such a termination, the Executive shall become entitled to the payments and benefits provided in Section 8(b) hereof in accordance with the terms of such Section. 6 7 (e) Notice of Termination. Any purported termination of the Executive's employment (other than termination pursuant to Section 7(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 17 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause based on clause (ii) or (iii) of the definition of Cause herein is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (ii) or (iii) of the definition of Cause herein, and specifying the particulars thereof in detail. (f) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean the following: (i) if the Executive's employment is terminated by the Executive's death, the date of the Executive's death; (ii) if the Executive's employment is terminated for Disability pursuant to Section 7(b) hereof, thirty (30) days after the Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty-(30)-day period); (iii) if the Executive's employment is terminated for Cause pursuant to Section 7(c) hereof, the date specified in the Notice of Termination; (iv) if the Executive's employment is terminated pursuant to Section 7(d)(ii) hereof, the date determined in accordance with said Section, and (v) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7 8 (g) Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7(g)), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier to occur of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by the final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. (h) Compensation During Dispute. If the Date of Termination is extended in accordance with Section 7(g) hereof with respect to a Notice of Termination given after a Change in Control or within the six-month period immediately preceding a Change in Control, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given until the Date of Termination, as determined in accordance with Section 7(g) hereof. Amounts paid under this Section 7(h) are in addition to all other amounts due under this Agreement other than those due under Section 8(b)(i) or 8(c)(i) hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. Compensation During Disability or Upon Termination. (a) Disability Period and Termination for Disability. During any period during the Employment Period that the Executive fails to perform the Executive's full-time duties hereunder as a result of 8 9 incapacity due to physical or mental illness ("Disability Period"), the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability; provided, however, that such salary payments shall be reduced by the sum of the amounts, if any, payable to the Executive at or prior to the time of any such salary payment under disability benefit plans of the Company or under the Social Security disability insurance program, which amounts were not previously applied to reduce any such salary payment. Upon termination of the Executive's employment for Disability, the Company shall have no additional obligations to the Executive under this Agreement except to the extent provided in Sections 6(c), 6(d), 7(b), 8(e) and 15 hereof (and, to the extent applicable, Sections 9, 10 and 11 hereof) and to pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. (b) Termination (x) by the Company with Cause, (y) by the Executive without Good Reason in a Termination which is not a Special Termination, or (z) by Reason of Death. If the Executive's employment hereunder is terminated (x) by the Company with Cause, (y) by the Executive without Good Reason in a termination which is not a Special Termination, or (z) by reason of death, then: (i) as soon as practicable, the Company shall pay the Executive's Base Salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination 9 10 under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason; and (ii) the Company shall have no additional obligations to the Executive under this Agreement except to the extent provided in Sections 6(c), 6(d) and 15 hereof (and, to the extent applicable, Sections 8(e), 9, 10 and 11 hereof) and to pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. (c) Termination (x) by Company without Cause, (y) by the Executive with Good Reason, or (z) by the Executive in a Special Termination. For purposes of this Agreement, termination of the Executive's employment "by the Company without Cause" shall not include termination by the Company for Disability or termination by reason of the Executive's death. If the Executive's employment hereunder is terminated (x) by the Company without Cause, (y) by the Executive with Good Reason, or (z) by the Executive in a Special Termination, then: (i) the Company shall pay the Executive's Base Salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason; 10 11 (ii) notwithstanding any provision of any Annual Bonus plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (A) any Annual Bonus which has been allocated or awarded (but not yet paid) to the Executive for a completed fiscal year preceding the Date of Termination under any Annual Bonus plan, and (B) a pro rata portion to the Date of Termination of the Annual Bonus for the year in which the Date of Termination occurs, calculated by using a fraction (the numerator of which shall be the number of days of employment in such year up to and including the Date of Termination and the denominator of which shall be three-hundred-sixty-five (365)) to multiply (i) the award that the Executive would have earned for the entire year, assuming the achievement, at the target level, of any performance objectives established with respect to such award, or, (ii) if no such target level and performance objectives have been established, the Average Annual Bonus; provided, however, that any amount otherwise payable pursuant to this clause (B) of this Section 8(c)(ii) shall be reduced by any payment already received by the Executive pursuant to the applicable Annual Bonus plan with respect to the year in which the Date of Termination occurs; (iii) in lieu of any further salary or bonus payments as severance to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (x) the Executive's Base Salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (y) the Average Annual Bonus, as follows: (A) if the Date of Termination shall occur on or after a Change in Control (or be deemed to occur after a Change in Control pursuant to Section 8(d) hereof), the Company shall pay such amount in a lump sum severance payment, in cash; or 11 12 (B) if the Date of Termination shall not occur on or after a Change in Control (and not be deemed to occur after a Change in Control pursuant to Section 8(d) hereof), the Company shall pay such amount, in substantially equal monthly or more frequent installments over the three-year period immediately following the Date of Termination; (iv) The Company shall (i) either prepay all remaining premiums, or establish an irrevocable grantor trust holding an amount of assets sufficient to pay all such remaining premiums (which trust shall be required to pay such premiums), under any insurance policy insuring the life of the Executive under any "split-dollar" insurance arrangement in effect between the Executive and the Company, and (ii) shall transfer to the Executive any and all rights and incidents of ownership in such arrangements at no cost to the Executive. For the thirty-six (36) month period immediately following the Date of Termination, the Company shall also arrange to provide the Executive with life and accident insurance benefits substantially similar to those provided to the Executive (other than the "split-dollar" life insurance) immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence. Benefits otherwise receivable by the Executive pursuant to the immediately preceding sentence shall be reduced to the extent benefits of the same type are received by or made available to the Executive by a successor employer during the thirty-six (36) month period following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. 12 13 (v) The Company shall provide the Executive with outplacement services suitable to the Executive's position for a period of nine months or, if earlier, until the first acceptance by the Executive of an offer of employment. (vi) The Company shall provide the Executive with the office facilities and services and the automobile allowance described in Section 6(e) and (f) hereof for the thirty-six (36) month period immediately following the Date of Termination. (vii) Notwithstanding anything which is more restrictive in any applicable plan or grant or award agreement or in any other provision of this Agreement, the Executive shall become fully vested in all outstanding stock options, restricted stock and other similar equity-based awards which are granted to him by the Company (whether before or after the Effective Date); in the case of performance awards, it shall be assumed that the applicable performance goals were attained at target levels and the Committee shall also have the discretion to increase the amount so payable by assuming attainment of the applicable performance goals at up to maximum level. (viii) the Company shall have no additional obligations to the Executive under this Agreement except to the extent provided in Sections 6(c), 6(d), 8(e) and 15 hereof (and, to the extent applicable, Sections 9, 10 and 11 hereof) and to pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. If such insurance, other compensation and benefit plans, programs and arrangements provide for different levels of benefits and coverage, post-termination benefits and coverage shall be the most comprehensive benefits and coverage available. 13 14 (d) Termination Deemed to be after Change in Control. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated after a Change in Control by the Company without Cause or after a Change in Control by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates the Executive's employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence made after the occurrence of a Change in Control or within the six-month period immediately preceding a Change in Control, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that such position is not correct. (e) Other Benefits upon Certain Terminations. (i) Upon any termination of the Executive's employment with the Company (whether or not occurring during the Term hereof), other than a termination during the Term by the Company with Cause or a termination during the Term by the Executive without Good Reason which is not a Special Termination, and continuing until the earlier of (i) the later of the death of the Executive or the death of the "Executive's Spouse", or (ii) the date substantially equivalent coverage and benefits are provided to the Executive (if then living) and the Executive's Spouse (if then living) by a subsequent employer (whether or not such coverage and benefits will be continued by the subsequent employer after any termination of the Executive's employment by the subsequent employer), the Company (at the Company's 14 15 sole expense) shall provide the Executive, the Executive's Spouse and the Executive's dependents with medical and dental insurance benefits substantially similar to those benefits "provided" to them immediately prior to the Date of Termination or, if more favorable to the Executive, those "provided" to them on the Effective Date hereof. In determining which benefits were "provided" at the applicable date, the Executive shall be deemed to have elected the most comprehensive benefits and coverage available to the Executive at that date (whether or not actually elected); further, such benefits shall include, without limitation, an unrestricted right for the Executive, the Executive's Spouse and the Executive's dependents to select their own care providers. The Company shall provide such post-termination benefits under its medical and dental plans, to the extent that the Executive's continued participation is possible under the general terms and provisions of such plans. To the extent that such participation is not possible, the Company shall arrange to otherwise provide the Executive with such post-termination benefits. If the Executive obtains other employment (and the Executive shall be under no obligation to do so), insurance obtained as a result of such other employment shall be the first line of insurance and insurance provided under this Section 8(e) shall only be supplementary or secondary. Also, to the extent that the Executive is, at any time, entitled to insurance under the Medicare program or its equivalent, the insurance under this Section 8(e) shall be only supplementary or secondary to the extent allowed by law. For purposes of this Section 8(e), "Executive's Spouse" shall refer to the Executive's spouse immediately prior to the termination of the Executive's employment with the Company. (ii) Subject to Section 8(c)(vii) hereof, but notwithstanding any more restrictive provision in the terms of the relevant document evidencing an equity-based award or the terms of the plan under which the equity-based award was granted, upon any termination described in the last sentence of this Section 8(e)(ii), (i) the Executive shall become fully vested in (and any restrictions shall lapse upon) all outstanding time-vesting stock options, restricted stock and other similar equity-based awards granted to 15 16 him by the Company (whether before or after the Effective Date), and (ii) the Executive shall become vested in a pro-rata portion of all equity-based performance awards granted to him by the Company (whether before or after the Effective Date), which pro-rata portion shall be based on the attainment of the performance goals relevant to such awards on the date of termination of the Executive's employment with the Company (and not based on the portion of the applicable performance period during which the Executive was employed by the Company), as determined by the Committee in its good faith discretion. The Committee shall also have the discretion to increase the amount, if any, payable pursuant to clause (ii) of the preceding sentence, up to the full amount of such award, assuming attainment of the applicable performance goals at target level. The terminations upon which the vesting described in this Section 8(e)(ii) shall occur are the following: any termination of the Executive's employment with the Company (whether or not occurring during the Term hereof) which occurs on or after the date on which the Executive attains Normal Retirement Age, other than a termination during the Term by the Company with Cause. 9. Excise Tax Gross-Up Payment. (a) Whether or not the Executive becomes entitled to any payment pursuant to Section 8(c)(iii)(A) hereof, if any of the payments or benefits received or to be received by the Executive in connection with any Change in Control which occurs during the Term hereof or any termination of the Executive's employment which occurs during the Term hereof (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (such payments or benefits (excluding the payment or payments to be made pursuant to this Section 9) being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the payment or payments provided by this Section 9, shall be equal to the Total Payments. (b) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) 16 17 unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 9), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (c) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within the five (5) business days immediately following the date that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to the amount of such reduction (including the Excise Tax component and the federal, state and local income and employment tax components of the Gross-Up Payment) to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise 17 18 Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within the five (5) business days immediately following the date that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 10. Time of Certain Payments. The payments provided to the Executive or for the Executive's benefit in Sections 9 and 8(c) (other than 8(c)(iii)(B), 8(c)(v), 8(c)(vi), and 8(c)(viii)) hereof shall be made not later than the fifth (5th) business day following the Date of Termination (or, if earlier, in the case of payments provided in Section 9 hereof, not later than the fifth (5th) business day following the Executive's receipt of an excess parachute payment, within the meaning of section 4999 of the Code); provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate of the payments under Section 8(c), as determined in good faith by the Executive, and an estimate of the payments under Section 9 hereof, as determined in accordance with Section 9 hereof, the estimate in each case to be of the minimum amount of such payments to which the Executive is clearly entitled, and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination (or, if earlier, the thirtieth (30th) day after the date of the Executive's receipt of an excess parachute payment). In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the 18 19 Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 11. Legal and Arbitration Fees and Expenses. The Company also shall pay to the Executive all reasonable legal fees, arbitration fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. Notwithstanding the foregoing provisions of this Section 11, no such fees and expenses shall be paid unless the Executive prevails on at least one of the issues he raises. 12. No Mitigation; Limited Offset. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 7(h) or 8 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 8(e) or the second sentence of Section 8(c)(iv) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company (unless such amount is evidenced by a promissory note signed by the Executive), or otherwise. 13. Protection of Ideas, Noncompetition and Nonsolicitation. 19 20 (a) Protection of Ideas. Both during the period of the Executive's employment by the Company and thereafter, Executive shall assist the Company or its nominees, at any time, in the protection of the Company's worldwide right, title, and interest in and to information, ideas, concepts, improvements, discoveries, and inventions, and its copyrighted works, including without limitation, the execution of all formal assignment documents requested by Company or its nominees and the execution of all lawful oaths and applications for applications for patents and registration of copyright in the United States and foreign countries. (b) Noncompetition. The Company shall disclose to the Executive, or place the Executive in a position to have access to or to develop, trade secrets or confidential information of the Company or its affiliates; and/or shall entrust the Executive with business opportunities of the Company or its affiliates; and/or shall place the Executive in a position to develop business good will on behalf of the Company or its affiliates. As part of the consideration for the compensation and benefits to be paid to the Executive hereunder, to protect the trade secrets and confidential information of the Company or its subsidiaries or affiliates or their customers or clients that have been and will in the future be disclosed or entrusted to the Executive, the business good will of the Company or its subsidiaries or affiliates that has been and will in the future be developed in the Executive, or the business opportunities that have been and will in the future be disclosed or entrusted to the Executive by the Company or its subsidiaries or affiliates; and as an additional incentive for the Company to enter into this Agreement, the Executive agrees to the non-competition obligations hereunder. While the Executive continues to be an employee of the Company and, unless the Executive's termination of employment is by the Company without Cause or by the Executive with Good Reason or in a Special Termination, for the three-year period immediately following the Executive's Date of Termination, the Executive shall not, within any geographic region of the United States of America in which the Company then conducts business or in which the Company plans to conduct business pursuant to a business strategy adopted by the Board before the Executive's termination of employment, except as permitted by the Company upon its prior written consent, (i) enter, directly or indirectly, into the employ of, or render or 20 21 engage in, directly or indirectly, any services to any person, firm or corporation which directly competes with the Company with respect to any business then conducted by the Company or any business which the Company plans to enter pursuant to a business strategy adopted by the Board before the Executive's termination of employment (a "Competitor"), or (ii) become interested, directly or indirectly, in any such Competitor as an individual, partner, shareholder, creditor, director, officer, principal, agent, employee, trustee, consultant, advisor or in any other relationship or capacity. The ownership of up to one percent (1%) of any class of the outstanding securities of any publicly traded corporation, even though such corporation may be a Competitor, shall not be deemed as constituting an interest in such Competitor which violates clause (ii) of the immediately preceding sentence. (c) While the Executive continues to be an employee of the Company and, unless the Executive's termination of employment is by the Company without Cause or by the Executive with Good Reason or in a Special Termination, for the three-year period immediately following the Executive's Date of Termination, the Executive shall not, except as permitted by the Company upon its prior written consent, (i) attempt, directly or indirectly, to induce any employee employed by or performing services for the Company (or its affiliates) to be employed or perform services elsewhere, or (ii) solicit, directly or indirectly, the customers of the Company (or its affiliates), the suppliers of the Company (or its affiliates) or entities or individuals having other business relationships with the Company (or its affiliates) for the purpose of encouraging them to terminate (or reduce or detrimentally alter) their respective relationships with the Company (or its affiliates). (d) The Company shall have the right and remedy to have the provisions of this Section 13 specifically enforced, including by temporary and/or permanent injunction, it being acknowledged and agreed that any such violation may cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. 14. Independence and Severability of Section 13 Provisions. Each of the rights and remedies enumerated in Section 13 hereof shall be independent of the 21 22 others and shall be severally enforceable and all of such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. If any of the covenants contained in Section 13 hereof or if any of the rights or remedies enumerated in Section 13 hereof, or any part of any of them, is hereafter construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants or rights or remedies which shall be given full effect without regard to the invalid portions. If any of the covenants contained in Section 13 is held to be unenforceable because of the duration of such provision or the area covered thereby, the parties agree that the court making such determination shall have the authority to reduce the duration and/or area of such provision, and in its reduced form said provision shall then be enforceable. 15. Indemnification. The Company shall indemnify the Executive to the full extent authorized by law and the Charter and By-Laws of the Company, as applicable, for all expenses, costs, liabilities and legal fees which the Executive may incur in the discharge of the Executive's duties hereunder. The Executive shall be insured under the Company's directors' and officers' liability insurance policy as in effect from time to time. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 15. 16. Successors; Binding Agreement. (a) In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment 22 23 for Good Reason on or after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, each such amount, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 17. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: American General Corporation 2929 Allen Parkway Houston, Texas 77019 Attention: General Counsel 18. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver 23 24 of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party, including, without limitation, any employment memorandum, memorandum of understanding, or severance agreement. Captions and Section headings in this Agreement are provided merely for convenience and shall not affect the interpretation of any of the provisions herein. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 8 and 9 hereof) shall survive such expiration. 19. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 20. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 21. Settlement of Disputes; Arbitration. (a) All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Committee and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the 24 25 Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied. (b) Except for equitable relief as specified in Section 21(f) hereof and except for the Executive's claim under any Company benefit or compensation plans, programs, arrangements or awards (whether heretofore or hereafter established) which have a claim or dispute resolution procedure specifically applicable thereto, any dispute or controversy which is not resolved by agreement pursuant to Section 21(a) hereof, including all claims, demands, causes of action, disputes, controversies, and other matters in question arising out of or relating to this Agreement, any provision hereof, the alleged breach thereof, or in any way relating to the subject matter of this Agreement involving the Executive, the Company, and/or their respective representatives, even though some or all of such claims allegedly are extra-contractual in nature, whether such claims sound in contract, tort, or otherwise, at law or in equity, under state or federal law, whether provided by statute or the common law, for damages or any other relief, shall be resolved by binding arbitration pursuant to the Federal Arbitration Act in accordance with the Employment Dispute Resolution Rules then in effect with the American Arbitration Association. The arbitration proceeding shall be conducted in Houston, Texas. This agreement to arbitrate shall be enforceable in either federal or state court. (c) The enforcement of this agreement to arbitrate and all procedural aspects of this agreement to arbitrate, including but not limited to, the construction and interpretation of this agreement to arbitrate, the issues subject to arbitration (i.e., arbitrability), the scope of the arbitrable issues, allegations of waiver, delay or defenses to arbitrability, and the rules governing the conduct of the arbitration, shall be governed by and construed pursuant to the Federal Arbitration Act and shall be decided by the arbitrators; provided, however, that the evidentiary standards set forth in this Agreement with respect to certain determinations made by the Board or the Committee shall apply to those determinations when made (or reviewed) by the arbitrators. In deciding the substance of any such claims, the arbitrators shall apply the substantive laws of the State of Texas (excluding Texas choice-of-law principles that might 25 26 call for the application of some other state's law); provided, however, it is expressly agreed that the arbitrators shall have no authority to award treble, exemplary, or punitive damages under any circumstances regardless of whether such damages may be available under Texas law, the parties hereby waiving their right, if any, to recover treble, exemplary, or punitive damages in connection with any such claims. (d) The arbitration may be initiated by any party by providing to the other parties a written notice of arbitration specifying the claims. Within thirty (30) days of the notice of initiation of the arbitration procedure, (1) the Executive shall denominate one arbitrator and (2) the Company shall denominate one arbitrator. The two arbitrators shall select a third arbitrator failing agreement on which within sixty (60) days of the original notice, either the Executive or the Company shall apply to the Senior Active United States District Judge for the Southern District of Texas, who shall appoint a third arbitrator. While the third arbitrator shall be neutral, the two party-appointed arbitrators are not required to be neutral and it shall not be grounds for removal of either of the two party-appointed arbitrators or for vacating the arbitrators' award that either of such arbitrators has past or present minimal relationships with the party that appointed such arbitrator. Evident partiality on the part of an arbitrator exists only where the circumstances are such that a reasonable person would have to conclude there in fact existed actual bias and a mere appearance or impression of bias will not constitute evident partiality or otherwise disqualify an arbitrator. (e) The three arbitrators shall by majority vote resolve all disputes between the parties. There shall be no transcript of the hearing before the arbitrators. The arbitrators' decision shall be in writing, but shall be as brief as possible. The arbitrators shall not assign the reasons for their decision. The arbitrators shall certify in their award that they have faithfully applied the terms and conditions of this Agreement and that no part of their award includes any amount for exemplary or punitive damages. All proceedings conducted hereunder and the decision of the arbitrators shall be kept confidential by the parties, e.g., the arbitrators' award shall not 26 27 be released to the press or published in any of the various arbitration reporters. Judgment upon any award rendered in any such arbitration proceeding may be entered by any federal or state court having jurisdiction. (f) Notwithstanding any provision of this Agreement to the contrary, (i) in the event of a breach or threatened breach by the Executive of any of the covenants set forth in Section 13 hereof, the Company shall be entitled to seek equitable relief, including an injunction, in any court of proper jurisdiction to maintain the status quo pending the resolution of the dispute by binding arbitration as provided above, and (ii) the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. With respect to any such action, the Executive and the Company hereby irrevocably submit to the non-exclusive jurisdiction of any Federal or State court sitting in the City of Houston, Texas, and agree that process in any such action shall be valid and effective for all purposes if served upon the respective party in accordance with the notice provisions of Section 17 hereof. 22. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (a) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (b) "Auditor" shall have the meaning set forth in Section 9(b) hereof. (c) "Average Annual Bonus" shall mean the average annual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in which the Executive participated in respect of any of the three calendar years ending immediately prior to the calendar year in which occurs the Date of Termination or, if higher, immediately prior to the calendar year in which occurs the first event or circumstance constituting Good Reason; provided, however, that if there are fewer than three bonuses earned by the Executive in the applicable 27 28 three-year period, the average annual bonus will be calculated by dividing the total amount of the bonuses paid by the number of bonuses paid. (d) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (e) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (f) "Board" shall mean the Board of Directors of the Company. (g) "Cause" for termination by the Company of the Executive's employment shall mean (i) conviction of the Executive for the commission of a felony, (ii) the willful gross neglect by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7(e) hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (iii) the engaging by the Executive in willful gross misconduct resulting in demonstrable and material economic harm to the Company or its subsidiaries. For purposes of clauses (ii) and (iii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision after the occurrence of a Change in Control or within the six-month period immediately preceding a Change in Control, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (h) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: 28 29 (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation (or a share exchange between shareholders of the Company or any direct or indirect subsidiary of the Company and another corporation or entity pursuant to Article 5.02 (or any successor provision thereto) of the Texas Business Corporation Act), other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the 29 30 surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least fifty-one percent (51%) of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; or (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least fifty-one percent (51%) of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. 30 31 (j) "Committee" shall mean the Personnel Committee of the Board until six months prior to the occurrence of a Change in Control and thereafter shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Personnel Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)); provided, however, that the maximum number of individuals constituting the Committee shall not exceed five. (k) "Company" shall mean American General Corporation, a Texas corporation and, except in determining under Section 22(h) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (l) "Date of Termination" shall have the meaning set forth in Section 7(f) hereof. (m) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, (i) as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, (ii) a physician agreed upon by the Executive (or the Executive's legal representative) and the Company (or, if the parties hereto are unable to agree upon a single physician, a third physician agreed upon by two physicians, each of whom has been selected by either the Executive (or the Executive's legal representative) or the Company) shall have determined that the Executive will be incapable, due to physical or mental illness, of substantially performing the Executive's duties and responsibilities under this Agreement for the remainder of the Term, (iii) the Company shall have given the Executive a Notice of Termination for Disability, and (iv) within thirty (30) days after such Notice of Termination is given, the Executive shall not have 31 32 returned to the full-time performance of the Executive's duties. (n) "Employment Period" shall mean the period (which in no event shall extend beyond the expiration of the Term and may end earlier pursuant to Section 3(b) hereof) during which Executive has an obligation to render services hereunder, as described in Section 4 hereof. (o) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (p) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (q) "Executive" shall mean the individual named in the first paragraph of this Agreement. (r) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI), (VII) or (VIII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive on or after any Change in Control (or prior to a Change in Control under the circumstances described in clause (ii) or (iii) of the first sentence of Section 8(d) hereof) of any duties inconsistent with the Executive's status as an executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities during such period from those in effect immediately prior to the Change in Control (or, where applicable, immediately prior to the occurrence of an event or circumstance constituting Good Reason pursuant to clauses (ii) and (iii) of the first sentence of Section 8(d) hereof); 32 33 (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment after a Change in Control (or prior to a Change in Control under the circumstances described in clause (ii) or (iii) of the first sentence of Section 8(d) hereof) to a location more than fifty (50) miles from the Executive's principal place of employment immediately prior to the Change in Control (or, where applicable, immediately prior to the occurrence of an event or circumstance constituting Good Reason pursuant to clauses (ii) and (iii) of the first sentence of Section 8(d) hereof) or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) during such period except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) except for any changes required by applicable law, the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the date hereof which is material to the Executive's total compensation, including but not limited to the Company's Performance-Based Plan for Executive Officers, Supplemental Thrift Plan, Restoration of Retirement Income Plan, 1984 Stock and Incentive Plan, "1994 Stock and Incentive Plan", and 1997 Stock and Incentive Plan, unless an equitable arrangement (embodied in 33 34 an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the date hereof; (VI) except for any changes required by applicable law, the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the date hereof, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive as of the date hereof, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect on the date hereof; prior to a Change in Control, notwithstanding the foregoing provisions of this Section 22(r)(VI), it shall not constitute Good Reason that the Executive's benefits under the Company's general medical, health and accident plans are no longer substantially similar to the benefits enjoyed by the Executive immediately prior to the date hereof, unless the changes in such benefits constitute a material adverse alteration thereof; (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7(e) hereof; for purposes of this Agreement, no 34 35 such purported termination shall be effective, except as provided in Section 3(b) hereof; or (VIII) the Company's breach of a material term or condition of the Agreement. It shall also constitute Good Reason for termination by the Executive of the Executive's employment if: (X) if, at any time during the Term hereof (whether or not a Change in Control shall have occurred), Robert M. Devlin is not serving as Chief Executive Officer of the Company (or, if a merger, consolidation or share exchange by the Company (or a Company subsidiary) with another corporation shall have occurred, as Chief Executive Officer or second-in-command of the Company), and (Y) (i) there is a material diminution in the duties, responsibilities or title of the Executive, (ii) a substantial adverse alteration is made in the nature or status of the Executive's responsibilities from those in effect immediately prior to Robert M. Devlin's ceasing to so serve, (iii) the Company relocates the Executive's principal place of employment to a location more than fifty (50) miles from the Executive's principal place of employment immediately prior to Robert M. Devlin's ceasing to so serve, or (iv) the Company requires the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights 35 36 with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason which is made after the occurrence of a Change in Control or during the six-month period immediately preceding the occurrence of a Change in Control, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist. (s) "Gross-Up Payment" shall have the meaning set forth in Section 9 hereof. (t) "Normal Retirement Age" shall mean age 62. (u) "Notice of Termination" shall have the meaning set forth in Section 7(e) hereof. (v) "Pension Plans" shall mean all tax-qualified and non-qualified supplemental or excess benefit pension plans maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits. (w) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. (x) "Tax Counsel" shall have the meaning set forth in Section 9 hereof. (y) "Term" shall mean the period of time described in Section 3 hereof (including any extension, 36 37 continuation or termination described therein). (z) "Total Payments" shall mean those payments so described in Section 9 hereof. American General Corporation By: /s/ ROBERT M. DEVLIN --------------------------------- Name: Robert M. Devlin Title: Chief Executive Officer /s/ JAMES S. D'AGOSTINO ------------------------------------ James S. D'Agostino Address: --------------------------- --------------------------- --------------------------- (Please print carefully) 37 EX-10.15 5 RETIREMENT AGREEMENT, BETWEEN ROBERT M. DELVIN 1 EXHIBIT 10.15 SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT THIS AGREEMENT is made as of the 1st day of February, 1998, by and between AMERICAN GENERAL CORPORATION, a Texas corporation (the "Company"), and Robert M. Delvin (the "Executive"). WHEREAS, the Executive has been employed by the Company in valuable executive service to the Company; and WHEREAS, the Company desires to reward such past service and to encourage and reward the continued employment of Executive with the Company until his retirement and to promote his devotion to his duties on behalf of the Company without uncertainty or concern as to his retirement income security or that of his spouse; NOW, THEREFORE, the Company and the Executive hereby enter into this Supplemental Executive Retirement Agreement as hereinafter provided: ARTICLE I. GENERAL Effective Date. This Agreement shall be effective as of February 1, 1998 (the "Effective Date"). Defined Terms. The definitions of capitalized terms used in this Agreement (if not provided where a capitalized term initially appears) are provided in the last Article hereof. ARTICLE II. RETIREMENT BENEFITS Normal Retirement Benefit. If the Executive retires on or after his Normal Retirement Date, the Retirement Benefit shall be an annual retirement benefit payable to the Executive for his lifetime, with a ten-year term certain (the "Normal Retirement Benefit"), in an annual amount equal to (X) minus (Y), calculated as follows: (A) The amount of (X) equals (a) multiplied by (b): 2 (a) sixty-seven-and-2/10ths percent (67.2%) of such Executive's Final Average Compensation; (b) the fraction equal to his Years of Service (not in excess of twenty-eight (28) years) divided by twenty-eight (28); and (B) The amount of (Y) equals (e) plus (f) plus (g): (e) the Social Security Benefit; (f) the Qualified Plan Benefit; and (g) the Restoration Plan Benefit. Early Retirement Benefit. If the Executive retires on or after his Early Retirement Date (but before his Normal Retirement Date), the Retirement Benefit shall be the annual Retirement Benefit computed under Section 2.1, reduced as follows: (A) If payment of the Retirement Benefit commences after the Executive has attained age sixty (60), the Retirement Benefit shall be reduced by two-and-one-half percent (2.5%) per year for each complete year between such commencement and the Executive's Normal Retirement Date; the reduction per year shall be pro-rated for in complete years; (B) If payment of the Retirement Benefit commences before the Executive attains age sixty (60), the Retirement Benefit shall be further reduced (beyond the reduction imposed by Section 2.2(A) hereof) by five percent (5%) per year for each complete year between such commencement and the Executive's attaining age sixty (60); the reduction per year shall be pro-rated for incomplete years. Termination of Employment Prior to Early Retirement Date and Normal Retirement Date. If the Executive incurs a termination of employment with the Company after satisfying the vesting requirement under Section 2.7, but before attaining either an Early Retirement Date or a Normal Retirement Date, he shall receive a Retirement Benefit determined under Section 2.1, but, unless such 2 3 termination is described in Section 2.6 hereof, such benefit shall be calculated by using his actual Years of Service (including all periods credited as Years of Service pursuant to this Agreement) and actual compensation at the time of his termination and the actual Social Security Benefit that he is entitled to receive at his Normal Retirement Date. Unless such termination is described in Section 2.6 hereof, payment of such benefit shall commence after, but not more than sixty (60) days after, his Normal Retirement Date. Disability. If the Executive is receiving either short-term or long-term disability benefits under any Company plan, then, during the period of payment of such disability benefits, the Executive shall be treated as employed for all purposes of the Agreement, including, without limitation, attainment of the age, service and vesting requirements under the Agreement. The parties hereto agree that such disability benefits will cease and the Executive will no longer be considered employed by the Company on the date on which the Executive attains his Normal Retirement Age. Payment of the Executive's Retirement Benefit shall commence after, but not more than sixty (60) days after, his Normal Retirement Date. Termination by Reason of Death. If the Executive dies (i) while in the employment of the Company, (ii) after the attainment of age fifty-five (55), (iii) having been credited with ten (10) Years of Service, and (iv) prior to the commencement of the payment of the Retirement Benefit hereunder, the Executive's surviving spouse, if any, shall receive for her lifetime an annual benefit equal to the two-thirds (2/3) survivor annuity she would have received had the Executive retired on the day before his death, deeming the Executive, for purposes of this Section 2.5 only, to have elected a joint and survivor annuity payable immediately at a reduced amount with a two-thirds (2/3) survivor annuity. The payment of spouse's benefit shall commence not later than sixty (60) days after the Executive's death. Termination on or after Change in Control; Certain Other Terminations. Notwithstanding any other provision of this Agreement, upon any termination of the Executive's employment, whether or not a Change in Control (as defined in the Executive's employment agreement with the Company dated as of February 1, 1998, 3 4 as it may be amended from time to time (the "Employment Agreement")) has occurred, which termination is (i) by the Company without Cause, (ii) by the Executive with Good Reason, or (iii) by the Executive in a Special Termination (as such terms are defined in the Employment Agreement), the Company shall pay the Executive within the five (5) business days immediately following such termination a lump sum amount, in cash, equal to the actuarial equivalent of the Normal Retirement Benefit which the Executive would have accrued, if the Executive had accumulated (after his termination of employment) thirty-six (36) additional months of service and age credit (but in no event shall the Executive be deemed to have accumulated additional service and age credit after the Executive's sixty-fifth birthday). For purposes of this Section 2.6, an "actuarial equivalent" shall be determined using the same assumptions utilized under the American General Retirement Plan (or any successor plan thereto) immediately prior to the Executive's termination of employment, or, if more favorable to the Executive, immediately prior to the Change in Control. The Retirement Benefit so calculated shall be based on a projected Social Security Benefit that is determined under the provisions of the Social Security Act as in effect on the date of such Change in Control, using the estimated "primary insurance amount" the Executive would be entitled to under such Act at his Normal Retirement Date, assuming (i) the amount of income he is receiving on the date such Change in Control becomes effective which would be treated as wages for purposes of such Act would remain constant through his Normal Retirement Date, and (ii) an annual cost-of-living adjustment equal to four percent (4%). Vesting of Retirement Benefit. The Executive shall have a vested right to his Retirement Benefit upon the occurrence of any of the following while the Executive is employed by the Company: (i) his completion of ten (10) Years of Service; (ii) the attainment of his Normal Retirement Age; (iii) the termination of the Executive's employment pursuant to Section 8(c) of the Employment Agreement; or 4 5 (iv) the occurrence of a Change in Control at any time. Time and Form of Payment. (A) Time of Payment. Except where specifically otherwise provided herein, the payment of any Retirement Benefit to which the Executive has become entitled shall commence after, but no more than sixty (60) days after, the Executive's date of retirement. The Executive shall give the Company reasonable advance notice in writing of his intention to retire (which shall be given at least one month before his intended retirement date). (B) Normal Form of Payment. A life annuity with a ten-year term certain is the normal form of payment of the Retirement Benefit for the Executive and any actuarial equivalents to be calculated pursuant to this Agreement will be based on the normal form of payment. If the Executive dies after payment of the Retirement Benefit in the normal form has commenced, payments shall continue for the remainder of the ten-year term certain to the beneficiary or beneficiaries designated by the Executive by written instruction delivered to the Administrator during the Executive's lifetime. The Executive may designate one or more primary and contingent beneficiaries to receive the remaining payments of the Retirement Benefit, and may designate the proportions in which such beneficiaries are to receive such payments. The Executive may change such designations from time to time, and the last written designation filed with the Administrator prior to the Executive's death shall control. If the Executive fails to specifically designate a beneficiary, or if no designated beneficiary survives the Executive, payment shall be made by the Administrator in the following order of priority: (i) to the Executive's surviving spouse, or, if none, (ii) to the Executive's children, or, if none, 5 6 (iii) to the Executive's estate. (C) Election of Alternative Forms of Payment. Subject to Section 2.6 hereof, the Executive can elect that his Retirement Benefit be paid in any of the following forms by an irrevocable election in writing which is delivered to the Company within sixty (60) days after the Effective Date, or, with the permission of the Committee, by an irrevocable election in writing which is delivered to the Company at any time before his retirement becomes effective: (i) a joint and survivor annuity payable at a reduced amount for the life of the Executive with a survivor annuity for the life of the Executive's surviving spouse which shall be one hundred percent (100%) of the annuity payable during the joint lives of the Executive and the surviving spouse; (ii) a joint and survivor annuity payable at a reduced amount for the life of the Executive with a survivor annuity for the life of the Executive's surviving spouse which shall be seventy-five percent (75%) of the annuity payable during the joint lives of the Executive and the surviving spouse; (iii) a joint and survivor annuity payable at a reduced amount for the life of the Executive with a survivor annuity for the life of the Executive's surviving spouse which shall be fifty percent (50%) of the annuity payable during the joint lives of the Executive and the surviving spouse; or (iv) a lump-sum payment of the actuarial present value of the normal form of payment of the Retirement Benefit. 6 7 In calculating an alternative form of payment for the Retirement Benefit, the Administrator shall use the same assumptions utilized under the American General Retirement Plan (or any successor plan thereto) immediately prior to the Executive's termination of employment, or, if a Change in Control shall have occurred prior to the Executive's termination of employment, the assumptions so utilized immediately prior to the Change in Control, if more favorable to the Executive. ARTICLE III. ADMINISTRATION General. Except as otherwise specifically provided in the Agreement, the Administrator shall be responsible for administration of the Agreement. Administrative Rules. The Administrator may adopt such rules of procedure as it deems desirable for the conduct of its affairs, except to the extent that such rules conflict with the provisions of the Agreement. Duties. The Administrator shall have the following rights, powers and duties: (A) The decision of the Administrator in matters within its jurisdiction shall be final, binding and conclusive upon the Company and upon any person affected by such decision, subject to the claims procedure hereinafter set forth. (B) The Administrator shall have the duty and authority to interpret and construe the provisions of the Agreement, to determine eligibility for a Retirement Benefit and the appropriate amount of any Retirement Benefit, to decide any question which may arise regarding the rights of the Executive hereunder and to exercise such powers as the Administrator may deem necessary for the administration of the Agreement. (C) The Administrator shall maintain full and complete records of its decisions. Its records shall contain all relevant data pertaining to the Executive and his rights and duties under 7 8 the Agreement. The Administrator shall maintain a bookkeeping account with respect to payment of any Retirement Benefit. (D) Notwithstanding any other provision of this Agreement, upon and after the occurrence of a Change in Control and within the six-month period immediately preceding a Change in Control, the Administrator's authority and powers shall not be used to interpret or construe the provisions hereof in any way (or to take any other action) which would adversely affect any right given the Executive by this Agreement. Fees. No fee or compensation shall be paid to any person for services as the Administrator. ARTICLE IV. CLAIMS PROCEDURE General. Any claim for a Retirement Benefit under the Agreement shall be filed by the Executive or beneficiary (either of which is referred to in this Article as the "claimant") in the manner prescribed by the Administrator. Denials. If a claim for a Retirement Benefit under the Agreement is wholly or partially denied, notice of the decision shall be furnished to the claimant by the Administrator within a reasonable period of time after receipt of the claim by the Administrator. Notice. Any claimant who is denied a claim for Retirement Benefits shall be furnished written notice setting forth: (i) the specific reason or reasons for the denial; (ii) specific reference to the pertinent provision of the Agreement upon which the denial is based; (iii) a description of any additional material or information necessary of the claimant to perfect the claim; and 8 9 (iv) an explanation of the claims review procedure under the Agreement. Appeals Procedure. In order that a claimant may appeal a denial of a claim, the claimant or the claimant's duly authorized representative may: (i) request a review by written application to the Committee, no later than sixty (60) days after receipt by the claimant of written notification of denial of a claim; (ii) review pertinent documents; and (iii) submit issues and comments in writing. Review. A decision on review of a denied claim shall be made by the Committee not later than sixty (60) days after receipt of a request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered within a reasonable period of time, but not later than one-hundred-and-twenty (120) days after receipt of a request for a review. The decision on review shall be in writing and shall include the specific reason(s) for the decision and the specific reference(s) to the pertinent provisions of the Agreement on which the decision is based. Section 4.6 Arbitration. Any further dispute or controversy arising under or in connection with this Agreement which is not resolved by agreement pursuant to Sections 4.1 through 4.5 hereof shall be resolved by binding arbitration pursuant to the Federal Arbitration Act in accordance with the Employment Dispute Resolution Rules then in effect with the American Arbitration Association. The arbitration proceeding shall be conducted in Houston, Texas. This agreement to arbitrate shall be enforceable in either federal or state court. The enforcement of this agreement to arbitrate and all procedural aspects of this agreement to arbitrate, including but not limited to, the construction and interpretation of this agreement to arbitrate, the issues subject to arbitration (i.e., arbitrability), the scope of the arbitrable issues, allegations of waiver, delay or 9 10 defenses to arbitrability, and the rules governing the conduct of the arbitration, shall be governed by and construed pursuant to the Federal Arbitration Act and shall be decided by the arbitrators. In deciding the substance of any such claims, the arbitrators shall apply the substantive laws of the State of Texas (excluding Texas choice-of-law principles that might call for the application of some other state's law); provided, however, it is expressly agreed that the arbitrators shall have no authority to award treble, exemplary, or punitive damages under any circumstances regardless of whether such damages may be available under Texas law, the parties hereby waiving their right, if any, to recover treble, exemplary, or punitive damages in connection with any such claims. The arbitration may be initiated by any party by providing to the other parties a written notice of arbitration specifying the claims. Within thirty (30) days of the notice of initiation of the arbitration procedure, (1) the Executive shall denominate one arbitrator and (2) the Company shall denominate one arbitrator. The two arbitrators shall select a third arbitrator failing agreement on which within sixty (60) days of the original notice, either the Executive or the Company shall apply to the Senior Active United States District Judge for the Southern District of Texas, who shall appoint a third arbitrator. While the third arbitrator shall be neutral, the two party-appointed arbitrators are not required to be neutral and it shall not be grounds for removal of either of the two party-appointed arbitrators or for vacating the arbitrators' award that either of such arbitrators has past or present minimal relationships with the party that appointed such arbitrator. Evident partiality on the part of an arbitrator exists only where the circumstances are such that a reasonable person would have to conclude there in fact existed actual bias and a mere appearance or impression of bias will not constitute evident partiality or otherwise disqualify an arbitrator. The three arbitrators shall by majority vote resolve all disputes between the parties. There shall be no transcript of the hearing before the arbitrators. The arbitrators' decision shall be in writing, but shall be as brief as possible. The arbitrators shall not assign the reasons for their decision. The arbitrators shall 10 11 certify in their award that they have faithfully applied the terms and conditions of this Agreement and that no part of their award includes any amount for exemplary or punitive damages. All proceedings conducted hereunder and the decision of the arbitrators shall be kept confidential by the parties, e.g., the arbitrators' award shall not be released to the press or published in any of the various arbitration reporters. Judgment upon any award rendered in any such arbitration proceeding may be entered by any federal or state court having jurisdiction. ARTICLE V. MISCELLANEOUS PROVISIONS Amendment and Termination. This Agreement may be amended or modified only with the written consent of the parties hereto. No Assignment. The Executive shall not have the power to pledge, transfer, assign, anticipate, mortgage or otherwise encumber or dispose of in advance any interest in amounts payable hereunder of any of the payments provided for herein, nor shall any interest in amounts payable hereunder or in any payments be subject to seizure for payments of any debts, judgments, alimony or separate maintenance, or be reached or transferred by operation of law in the event of bankruptcy, insolvency or otherwise. Successors and Assigns. The provisions of the Agreement are binding upon and inure to the benefit of each Company, its successors and assigns, and the Executive, his beneficiaries, heirs and legal representatives. Governing Law. The Agreement shall be subject to and construed in accordance with the laws of the State of Texas to the extent not preempted by the provisions of ERISA. No Guarantee of Employment. Nothing contained in the Agreement shall be construed as a contract of employment or deemed to give the Executive the right to be retained in the employ of an Company or any equity or other interest in the assets, business or affairs of an Company. 11 12 Severability. If any provision of the Agreement shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of the Agreement, but the Agreement shall be construed and enforced as if such illegal or invalid provision had never been included herein. Notification of Addresses. The Executive and each beneficiary shall file with the Administrator, from time to time, in writing, the post office address of the Executive, the post office address of each beneficiary, and each change of post office address. Any communication, statement or notice addressed to the last post office address filed with the Administrator (or if no such address was filed with the Administrator, then to the last post office address of the Executive or beneficiary as shown on the Company's records) shall be binding on the Executive and each beneficiary for all purposes of the Agreement and neither the Administrator nor the Company shall be obliged to search for or ascertain the whereabouts of the Executive or beneficiary. Bonding. The Administrator and all agents and advisors employed by it shall not be required to be bonded, except as may otherwise be required by ERISA. Taxes. The Company shall have the right to withhold from any cash or other amounts due or to become due from the Company to a Executive (including by reducing the amount of any Retirement Benefit payable in the future) the amount of any federal, state and local taxes required to be withheld or otherwise deducted and paid by the Company with respect to the vesting or payment of any Retirement Benefit hereunder. Section 5.10 No Funding. There shall be no funding of the benefit amounts to be paid pursuant to this Agreement. The Agreement shall not confer upon the Executive (or beneficiary or any other person) any security interest or any other right, title or interest of any kind in or to any property of the Company. The Agreement shall constitute merely the unsecured promise of the Company to make the benefit payments provided for herein. Notwithstanding the foregoing provisions of this Section 5.10, the Company, in its discretion, may 12 13 establish a trust to pay the benefit amounts hereunder, which trust shall be subject to the claims of the Company's general creditors in the event of the Company's bankruptcy or insolvency. If such a trust is established, the Company shall remain responsible for the payment of any benefit amounts provided hereunder which are not paid in accordance with the provisions hereof by such trust. ARTICLE VI. DEFINITIONS AND USAGE Definitions. Wherever used in the Agreement, the following words and phrases shall have the meaning set forth below, unless the context plainly requires a different meaning: "Administrator" means the Company, acting through the Personnel Committee of the Board, or other person or persons designated by the Personnel Committee. "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. "Agreement" means this Supplemental Executive Retirement Agreement, as set forth herein and as amended from time to time. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. "Board" means the Board of Directors of the Company. "Change in Control" means a change in the control of the Company, which shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes 13 14 such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation (or a share exchange between shareholders of the Company or any direct or indirect subsidiary of the Company and another corporation or entity pursuant to Article 5.02 (or any successor provision thereto) of the Texas Business Corporation Act), other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least fifty-one percent (51%) of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after 14 15 such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; or (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least fifty-one percent (51%) of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. "Code" means the Internal Revenue Code of 1986, as amended from time to time. Any reference to a particular Code section shall include any provision which modifies, replaces or supersedes it. "Committee" shall mean the Personnel Committee of the Board until six months prior to the occurrence of a Change in Control and thereafter shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Personnel Committee of the Board, plus (ii) in the 15 16 event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)); provided, however, that the maximum number of individuals constituting the Committee shall not exceed five. "Company" means American General Corporation, a Texas corporation, and, except in determining under the definition of Change in Control herein whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. "Early Retirement Date" means the first date on which the Executive (i) has completed ten (10) Years of Service and (ii) has attained the age of fifty-five (55). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. Any reference to a particular ERISA section shall include any provision which modifies, replaces, or supersedes it. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Executive" means Robert M. Devlin "Final Average Compensation" means the following sum divided by three (3): the sum of the base salary received by the Executive during, and the incentive payments received by the Executive pursuant to any annual bonus, incentive compensation or similar plan maintained by the Company with respect to, the three (3) calendar years (whether or not consecutive) ending within the last sixty (60) months of the Executive's employment with the Company which produce the highest total of such base salary and incentive payments (for purposes of this sentence, any amount of such base salary or incentive payment which is deferred by the Executive shall be included in the calculation of amounts received). Notwithstanding the immediately preceding sentence, if the Executive's termination of employment is described in Section 2.6 hereof and the Executive receives 16 17 (pursuant to Section 8(c)(iii) of his Employment Agreement, or any successor provision thereto, and in lieu of any further salary or bonus payments) a lump sum amount (the "Severance Amount"), Final Average Compensation shall mean the Severance Amount divided by three (3). "Normal Retirement Age" means age sixty-two (62). "Normal Retirement Date" means the date on which the Executive attains his Normal Retirement Age. "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. "Qualified Plan" means the American General Retirement Plan, together with any other defined benefit retirement plan intended to be qualified under Section 401(a) of the Code which is adopted and maintained by the Company and under which the Executive is entitled to a retirement benefit at the date of his retirement or other termination of employment. "Qualified Plan Benefit" means the aggregate annual retirement benefit to which the Executive (at the date of his retirement or other termination of employment) is entitled under the plan or plans which comprise the Qualified Plan (expressed in the form of a single life annuity with a ten-year term certain commencing payment on the date payment of the Retirement Benefit hereunder commences). "Restoration Plan Benefit" means the annual retirement benefit to which the Executive (at the date of his retirement or other termination of employment) is entitled under the American General Corporation Restoration of Retirement Income Plan (expressed in the 17 18 form of a single life annuity with a ten-year term certain commencing payment on the date payment of the Retirement Benefit hereunder commences). "Retirement Benefit" means the benefit payable under this Agreement, as determined under Article II. "Social Security Benefit" means one-half of the annual benefit payable under the Social Security Act, relating to Old-Age and Disability benefits, as of the Executive's Normal Retirement Date, or upon actual retirement, if later. "Years of Service" means the total number of years (measured in full and partial years, in increments of one-twelfth years) of active employment with the Company during which substantial services were rendered as an employee, commencing on the date the Executive was first employed by the Company and ending on the date he ceases to perform services for the Company (including employment before the Effective Date), but in no event shall more than twenty-eight (28) years be credited to the Executive regardless of his actual period of service with the Company. Notwithstanding the foregoing, if the Executive 18 19 retires on or after the attainment of age 60, he shall be credited with no fewer than twenty-five (25) Years of Service. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. AMERICAN GENERAL CORPORATION By /s/ LARRY D. HORNER ------------------------------------ Chairman of the Personnel Committee /s/ ROBERT M. DEVLIN -------------------------------------- Robert M. Devlin 19 EX-10.16 6 RETIREMENT AGREEMENT, BETWEEN JON P. NEWTON 1 EXHIBIT 10.16 SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT THIS AGREEMENT is made as of the 1st day of February, 1998, by and between AMERICAN GENERAL CORPORATION, a Texas corporation (the "Company"), and Jon P. Newton (the "Executive"). WHEREAS, the Executive has been employed by the Company in valuable executive service to the Company; and WHEREAS, the Company desires to reward such past service and to encourage and reward the continued employment of Executive with the Company until his retirement and to promote his devotion to his duties on behalf of the Company without uncertainty or concern as to his retirement income security or that of his spouse; NOW, THEREFORE, the Company and the Executive hereby enter into this Supplemental Executive Retirement Agreement as hereinafter provided: ARTICLE I. GENERAL Effective Date. This Agreement shall be effective as of February 1, 1998 (the "Effective Date"). Defined Terms. The definitions of capitalized terms used in this Agreement (if not provided where a capitalized term initially appears) are provided in the last Article hereof. ARTICLE II. RETIREMENT BENEFITS Normal Retirement Benefit. If the Executive retires on or after his Normal Retirement Date, the Retirement Benefit shall be an annual retirement benefit payable to the Executive for his lifetime, with a ten-year term certain (the "Normal Retirement Benefit"), in an annual amount equal to (X) minus (Y), calculated as follows: (A) The amount of (X) equals (a) multiplied by (b): 2 (a) sixty-seven-and-2/10ths percent (67.2%) of such Executive's Final Average Compensation; (b) the fraction equal to his Years of Service (not in excess of twenty-eight (28) years) divided by twenty-eight (28); and (B) The amount of (Y) equals (e) plus (f) plus (g): (e) the Social Security Benefit; (f) the Qualified Plan Benefit; and (g) the Restoration Plan Benefit. Early Retirement Benefit. If the Executive retires on or after his Early Retirement Date (but before his Normal Retirement Date), the Retirement Benefit shall be the annual Retirement Benefit computed under Section 2.1, reduced as follows: (A) If payment of the Retirement Benefit commences after the Executive has attained age sixty (60), the Retirement Benefit shall be reduced by two-and-one-half percent (2.5%) per year for each complete year between such commencement and the Executive's Normal Retirement Date; the reduction per year shall be pro-rated for incomplete years; (B) If payment of the Retirement Benefit commences before the Executive attains age sixty (60), the Retirement Benefit shall be further reduced (beyond the reduction imposed by Section 2.2(A) hereof) by five percent (5%) per year for each complete year between such commencement and the Executive's attaining age sixty (60); the reduction per year shall be pro-rated for incomplete years. Termination of Employment Prior to Early Retirement Date and Normal Retirement Date. If the Executive incurs a termination of employment with the Company after satisfying the vesting requirement under Section 2.7, but before attaining either an Early Retirement Date or a Normal Retirement Date, he shall receive a Retirement Benefit determined under Section 2.1, but, unless such 2 3 termination is described in Section 2.6 hereof, such benefit shall be calculated by using his actual Years of Service (including all periods credited as Years of Service pursuant to this Agreement) and actual compensation at the time of his termination and the actual Social Security Benefit that he is entitled to receive at his Normal Retirement Date. Unless such termination is described in Section 2.6 hereof, payment of such benefit shall commence after, but not more than sixty (60) days after, his Normal Retirement Date. Disability. If the Executive is receiving either short-term or long-term disability benefits under any Company plan, then, during the period of payment of such disability benefits, the Executive shall be treated as employed for all purposes of the Agreement, including, without limitation, attainment of the age, service and vesting requirements under the Agreement. The parties hereto agree that such disability benefits will cease and the Executive will no longer be considered employed by the Company on the date on which the Executive attains his Normal Retirement Age. Payment of the Executive's Retirement Benefit shall commence after, but not more than sixty (60) days after, his Normal Retirement Date. Termination by Reason of Death. If the Executive dies (i) while in the employment of the Company, (ii) after the attainment of age fifty-five (55), (iii) having been credited with ten (10) Years of Service, and (iv) prior to the commencement of the payment of the Retirement Benefit hereunder, the Executive's surviving spouse, if any, shall receive for her lifetime an annual benefit equal to the two-thirds (2/3) survivor annuity she would have received had the Executive retired on the day before his death, deeming the Executive, for purposes of this Section 2.5 only, to have elected a joint and survivor annuity payable immediately at a reduced amount with a two-thirds (2/3) survivor annuity. The payment of spouse's benefit shall commence not later than sixty (60) days after the Executive's death. Termination on or after Change in Control; Certain Other Terminations. Notwithstanding any other provision of this Agreement, upon any termination of the Executive's employment, whether or not a Change in Control (as defined in the Executive's employment agreement with the Company dated as of February 1, 1998, 3 4 as it may be amended from time to time (the "Employment Agreement")) has occurred, which termination is (i) by the Company without Cause, (ii) by the Executive with Good Reason, or (iii) by the Executive in a Special Termination (as such terms are defined in the Employment Agreement), the Company shall pay the Executive within the five (5) business days immediately following such termination a lump sum amount, in cash, equal to the actuarial equivalent of the Normal Retirement Benefit which the Executive would have accrued, if the Executive had accumulated (after his termination of employment) thirty-six (36) additional months of service and age credit (but in no event shall the Executive be deemed to have accumulated additional service and age credit after the Executive's sixty-fifth birthday). For purposes of this Section 2.6, an "actuarial equivalent" shall be determined using the same assumptions utilized under the American General Retirement Plan (or any successor plan thereto) immediately prior to the Executive's termination of employment, or, if more favorable to the Executive, immediately prior to the Change in Control. The Retirement Benefit so calculated shall be based on a projected Social Security Benefit that is determined under the provisions of the Social Security Act as in effect on the date of such Change in Control, using the estimated "primary insurance amount" the Executive would be entitled to under such Act at his Normal Retirement Date, assuming (i) the amount of income he is receiving on the date such Change in Control becomes effective which would be treated as wages for purposes of such Act would remain constant through his Normal Retirement Date, and (ii) an annual cost-of-living adjustment equal to four percent (4%). Vesting of Retirement Benefit. The Executive shall have a vested right to his Retirement Benefit upon the occurrence of any of the following while the Executive is employed by the Company: (i) his completion of ten (10) Years of Service; (ii) the attainment of his Normal Retirement Age; (iii) the termination of the Executive's employment pursuant to Section 8(c) of the Employment Agreement; or 4 5 (iv) the occurrence of a Change in Control at any time. Time and Form of Payment. (A) Time of Payment. Except where specifically otherwise provided herein, the payment of any Retirement Benefit to which the Executive has become entitled shall commence after, but no more than sixty (60) days after, the Executive's date of retirement. The Executive shall give the Company reasonable advance notice in writing of his intention to retire (which shall be given at least one month before his intended retirement date). (B) Normal Form of Payment. A life annuity with a ten-year term certain is the normal form of payment of the Retirement Benefit for the Executive and any actuarial equivalents to be calculated pursuant to this Agreement will be based on the normal form of payment. If the Executive dies after payment of the Retirement Benefit in the normal form has commenced, payments shall continue for the remainder of the ten-year term certain to the beneficiary or beneficiaries designated by the Executive by written instruction delivered to the Administrator during the Executive's lifetime. The Executive may designate one or more primary and contingent beneficiaries to receive the remaining payments of the Retirement Benefit, and may designate the proportions in which such beneficiaries are to receive such payments. The Executive may change such designations from time to time, and the last written designation filed with the Administrator prior to the Executive's death shall control. If the Executive fails to specifically designate a beneficiary, or if no designated beneficiary survives the Executive, payment shall be made by the Administrator in the following order of priority: (i) to the Executive's surviving spouse, or, if none, (ii) to the Executive's children, or, if none, 5 6 (iii) to the Executive's estate. (C) Election of Alternative Forms of Payment. Subject to Section 2.6 hereof, the Executive can elect that his Retirement Benefit be paid in any of the following forms by an irrevocable election in writing which is delivered to the Company within sixty (60) days after the Effective Date, or, with the permission of the Committee, by an irrevocable election in writing which is delivered to the Company at any time before his retirement becomes effective: (i) a joint and survivor annuity payable at a reduced amount for the life of the Executive with a survivor annuity for the life of the Executive's surviving spouse which shall be one hundred percent (100%) of the annuity payable during the joint lives of the Executive and the surviving spouse; (ii) a joint and survivor annuity payable at a reduced amount for the life of the Executive with a survivor annuity for the life of the Executive's surviving spouse which shall be seventy-five percent (75%) of the annuity payable during the joint lives of the Executive and the surviving spouse; (iii) a joint and survivor annuity payable at a reduced amount for the life of the Executive with a survivor annuity for the life of the Executive's surviving spouse which shall be fifty percent (50%) of the annuity payable during the joint lives of the Executive and the surviving spouse; or (iv) a lump-sum payment of the actuarial present value of the normal form of payment of the Retirement Benefit. 6 7 In calculating an alternative form of payment for the Retirement Benefit, the Administrator shall use the same assumptions utilized under the American General Retirement Plan (or any successor plan thereto) immediately prior to the Executive's termination of employment, or, if a Change in Control shall have occurred prior to the Executive's termination of employment, the assumptions so utilized immediately prior to the Change in Control, if more favorable to the Executive. ARTICLE III. ADMINISTRATION General. Except as otherwise specifically provided in the Agreement, the Administrator shall be responsible for administration of the Agreement. Administrative Rules. The Administrator may adopt such rules of procedure as it deems desirable for the conduct of its affairs, except to the extent that such rules conflict with the provisions of the Agreement. Duties. The Administrator shall have the following rights, powers and duties: (A) The decision of the Administrator in matters within its jurisdiction shall be final, binding and conclusive upon the Company and upon any person affected by such decision, subject to the claims procedure hereinafter set forth. (B) The Administrator shall have the duty and authority to interpret and construe the provisions of the Agreement, to determine eligibility for a Retirement Benefit and the appropriate amount of any Retirement Benefit, to decide any question which may arise regarding the rights of the Executive hereunder and to exercise such powers as the Administrator may deem necessary for the administration of the Agreement. (C) The Administrator shall maintain full and complete records of its decisions. Its records shall contain all relevant data pertaining to the Executive and his rights and duties under 7 8 the Agreement. The Administrator shall maintain a bookkeeping account with respect to payment of any Retirement Benefit. (D) Notwithstanding any other provision of this Agreement, upon and after the occurrence of a Change in Control and within the six-month period immediately preceding a Change in Control, the Administrator's authority and powers shall not be used to interpret or construe the provisions hereof in any way (or to take any other action) which would adversely affect any right given the Executive by this Agreement. Fees. No fee or compensation shall be paid to any person for services as the Administrator. ARTICLE IV. CLAIMS PROCEDURE General. Any claim for a Retirement Benefit under the Agreement shall be filed by the Executive or beneficiary (either of which is referred to in this Article as the "claimant") in the manner prescribed by the Administrator. Denials. If a claim for a Retirement Benefit under the Agreement is wholly or partially denied, notice of the decision shall be furnished to the claimant by the Administrator within a reasonable period of time after receipt of the claim by the Administrator. Notice. Any claimant who is denied a claim for Retirement Benefits shall be furnished written notice setting forth: (i) the specific reason or reasons for the denial; (ii) specific reference to the pertinent provision of the Agreement upon which the denial is based; (iii) a description of any additional material or information necessary of the claimant to perfect the claim; and 8 9 (iv) an explanation of the claims review procedure under the Agreement. Appeals Procedure. In order that a claimant may appeal a denial of a claim, the claimant or the claimant's duly authorized representative may: (i) request a review by written application to the Committee, no later than sixty (60) days after receipt by the claimant of written notification of denial of a claim; (ii) review pertinent documents; and (iii) submit issues and comments in writing. Review. A decision on review of a denied claim shall be made by the Committee not later than sixty (60) days after receipt of a request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered within a reasonable period of time, but not later than one-hundred-and-twenty (120) days after receipt of a request for a review. The decision on review shall be in writing and shall include the specific reason(s) for the decision and the specific reference(s) to the pertinent provisions of the Agreement on which the decision is based. Section 4.6 Arbitration. Any further dispute or controversy arising under or in connection with this Agreement which is not resolved by agreement pursuant to Sections 4.1 through 4.5 hereof shall be resolved by binding arbitration pursuant to the Federal Arbitration Act in accordance with the Employment Dispute Resolution Rules then in effect with the American Arbitration Association. The arbitration proceeding shall be conducted in Houston, Texas. This agreement to arbitrate shall be enforceable in either federal or state court. The enforcement of this agreement to arbitrate and all procedural aspects of this agreement to arbitrate, including but not limited to, the construction and interpretation of this agreement to arbitrate, the issues subject to arbitration (i.e., arbitrability), the scope of the arbitrable issues, allegations of waiver, delay or 9 10 defenses to arbitrability, and the rules governing the conduct of the arbitration, shall be governed by and construed pursuant to the Federal Arbitration Act and shall be decided by the arbitrators. In deciding the substance of any such claims, the arbitrators shall apply the substantive laws of the State of Texas (excluding Texas choice-of-law principles that might call for the application of some other state's law); provided, however, it is expressly agreed that the arbitrators shall have no authority to award treble, exemplary, or punitive damages under any circumstances regardless of whether such damages may be available under Texas law, the parties hereby waiving their right, if any, to recover treble, exemplary, or punitive damages in connection with any such claims. The arbitration may be initiated by any party by providing to the other parties a written notice of arbitration specifying the claims. Within thirty (30) days of the notice of initiation of the arbitration procedure, (1) the Executive shall denominate one arbitrator and (2) the Company shall denominate one arbitrator. The two arbitrators shall select a third arbitrator failing agreement on which within sixty (60) days of the original notice, either the Executive or the Company shall apply to the Senior Active United States District Judge for the Southern District of Texas, who shall appoint a third arbitrator. While the third arbitrator shall be neutral, the two party-appointed arbitrators are not required to be neutral and it shall not be grounds for removal of either of the two party-appointed arbitrators or for vacating the arbitrators' award that either of such arbitrators has past or present minimal relationships with the party that appointed such arbitrator. Evident partiality on the part of an arbitrator exists only where the circumstances are such that a reasonable person would have to conclude there in fact existed actual bias and a mere appearance or impression of bias will not constitute evident partiality or otherwise disqualify an arbitrator. The three arbitrators shall by majority vote resolve all disputes between the parties. There shall be no transcript of the hearing before the arbitrators. The arbitrators' decision shall be in writing, but shall be as brief as possible. The arbitrators shall not assign the reasons for their decision. The arbitrators shall 10 11 certify in their award that they have faithfully applied the terms and conditions of this Agreement and that no part of their award includes any amount for exemplary or punitive damages. All proceedings conducted hereunder and the decision of the arbitrators shall be kept confidential by the parties, e.g., the arbitrators' award shall not be released to the press or published in any of the various arbitration reporters. Judgment upon any award rendered in any such arbitration proceeding may be entered by any federal or state court having jurisdiction. ARTICLE V. MISCELLANEOUS PROVISIONS Amendment and Termination. This Agreement may be amended or modified only with the written consent of the parties hereto. This Agreement supersedes the supplemental retirement benefit provision in the Company's Memorandum of Understanding addressed to the Executive and dated February 10, 1993, as amended February 16, 1993. No Assignment. The Executive shall not have the power to pledge, transfer, assign, anticipate, mortgage or otherwise encumber or dispose of in advance any interest in amounts payable hereunder of any of the payments provided for herein, nor shall any interest in amounts payable hereunder or in any payments be subject to seizure for payments of any debts, judgments, alimony or separate maintenance, or be reached or transferred by operation of law in the event of bankruptcy, insolvency or otherwise. Successors and Assigns. The provisions of the Agreement are binding upon and inure to the benefit of each Company, its successors and assigns, and the Executive, his beneficiaries, heirs and legal representatives. Governing Law. The Agreement shall be subject to and construed in accordance with the laws of the State of Texas to the extent not preempted by the provisions of ERISA. No Guarantee of Employment. Nothing contained in the Agreement shall be construed as a contract of employment 11 12 or deemed to give the Executive the right to be retained in the employ of an Company or any equity or other interest in the assets, business or affairs of an Company. Severability. If any provision of the Agreement shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of the Agreement, but the Agreement shall be construed and enforced as if such illegal or invalid provision had never been included herein. Notification of Addresses. The Executive and each beneficiary shall file with the Administrator, from time to time, in writing, the post office address of the Executive, the post office address of each beneficiary, and each change of post office address. Any communication, statement or notice addressed to the last post office address filed with the Administrator (or if no such address was filed with the Administrator, then to the last post office address of the Executive or beneficiary as shown on the Company's records) shall be binding on the Executive and each beneficiary for all purposes of the Agreement and neither the Administrator nor the Company shall be obliged to search for or ascertain the whereabouts of the Executive or beneficiary. Bonding. The Administrator and all agents and advisors employed by it shall not be required to be bonded, except as may otherwise be required by ERISA. Taxes. The Company shall have the right to withhold from any cash or other amounts due or to become due from the Company to a Executive (including by reducing the amount of any Retirement Benefit payable in the future) the amount of any federal, state and local taxes required to be withheld or otherwise deducted and paid by the Company with respect to the vesting or payment of any Retirement Benefit hereunder. Section 5.10 No Funding. There shall be no funding of the benefit amounts to be paid pursuant to this Agreement. The Agreement shall not confer upon the Executive (or beneficiary or any other person) any security interest or any other right, title or interest of any kind in or to any property of the Company. The 12 13 Agreement shall constitute merely the unsecured promise of the Company to make the benefit payments provided for herein. Notwithstanding the foregoing provisions of this Section 5.10, the Company, in its discretion, may establish a trust to pay the benefit amounts hereunder, which trust shall be subject to the claims of the Company's general creditors in the event of the Company's bankruptcy or insolvency. If such a trust is established, the Company shall remain responsible for the payment of any benefit amounts provided hereunder which are not paid in accordance with the provisions hereof by such trust. ARTICLE VI. DEFINITIONS AND USAGE Definitions. Wherever used in the Agreement, the following words and phrases shall have the meaning set forth below, unless the context plainly requires a different meaning: "Administrator" means the Company, acting through the Personnel Committee of the Board, or other person or persons designated by the Personnel Committee. "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. "Agreement" means this Supplemental Executive Retirement Agreement, as set forth herein and as amended from time to time. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. "Board" means the Board of Directors of the Company. "Change in Control" means a change in the control of the Company, which shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the 13 14 Company or its Affiliates) representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation (or a share exchange between shareholders of the Company or any direct or indirect subsidiary of the Company and another corporation or entity pursuant to Article 5.02 (or any successor provision thereto) of the Texas Business Corporation Act), other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the 14 15 Company, at least fifty-one percent (51%) of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; or (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least fifty-one percent (51%) of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their owner ship of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. "Code" means the Internal Revenue Code of 1986, as amended from time to time. Any reference to a particular Code section shall include any provision which modifies, replaces or supersedes it. "Committee" shall mean the Personnel Committee of the Board until six months prior to the occurrence of a 15 16 Change in Control and thereafter shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Personnel Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)); provided, however, that the maximum number of individuals constituting the Committee shall not exceed five. "Company" means American General Corporation, a Texas corporation, and, except in determining under the definition of Change in Control herein whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. "Early Retirement Date" means the first date on which the Executive (i) has completed ten (10) Years of Service and (ii) has attained the age of fifty-five (55). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. Any reference to a particular ERISA section shall include any provision which modifies, replaces, or supersedes it. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Executive" means Jon P. Newton "Final Average Compensation" means the following sum divided by three (3): the sum of the base salary received by the Executive during, and the incentive payments received by the Executive pursuant to any annual bonus, incentive compensation or similar plan maintained by the Company with respect to, the three (3) calendar years (whether or not consecutive) ending within the last sixty (60) months of the Executive's employment with the Company which produce the highest total of such base salary and incentive payments (for purposes of this sentence, any amount of such base salary or incentive payment which is deferred by the Executive shall be 16 17 included in the calculation of amounts received). Notwithstanding the immediately preceding sentence, if the Executive's termination of employment is described in Section 2.6 hereof and the Executive receives (pursuant to Section 8(c)(iii) of his Employment Agreement, or any successor provision thereto, and in lieu of any further salary or bonus payments) a lump sum amount (the "Severance Amount"), Final Average Compensation shall mean the Severance Amount divided by three (3). "Normal Retirement Age" means age sixty-two (62). "Normal Retirement Date" means the date on which the Executive attains his Normal Retirement Age. "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. "Qualified Plan" means the American General Retirement Plan, together with any other defined benefit retirement plan intended to be qualified under Section 401(a) of the Code which is adopted and maintained by the Company and under which the Executive is entitled to a retirement benefit at the date of his retirement or other termination of employment. "Qualified Plan Benefit" means the aggregate annual retirement benefit to which the Executive (at the date of his retirement or other termination of employment) is entitled under the plan or plans which comprise the Qualified Plan (expressed in the form of a single life annuity with a ten-year term certain commencing payment on the date payment of the Retirement Benefit hereunder commences). 17 18 "Restoration Plan Benefit" means the annual retirement benefit to which the Executive (at the date of his retirement or other termination of employment) is entitled under the American General Corporation Restoration of Retirement Income Plan (expressed in the form of a single life annuity with a ten-year term certain commencing payment on the date payment of the Retirement Benefit hereunder commences). "Retirement Benefit" means the benefit payable under this Agreement, as determined under Article II. "Social Security Benefit" means one-half of the annual benefit payable under the Social Security Act, relating to Old-Age and Disability benefits, as of the Executive's Normal Retirement Date, or upon actual retirement, if later. "Years of Service" means the total number of years (measured in full and partial years, in increments of one-twelfth years) of active employment with the Company during which substantial services were rendered as an employee, commencing on the date the Executive was first employed by the Company and ending on the date he ceases to perform services for the Company (including employment before the Effective Date), but in no event shall more than twenty-eight (28) years be credited to the Executive regardless of his actual period of service with the Company. Subject to such twenty-eight (28) year maximum, the Executive shall also be credit with 2.0834 Years of Service for each Year of Service (measured in full and partial years, in increments of one-twelfth years) rendered by the Executive between March 1, 1993, and his attaining age sixty-two (62); thus if the Executive 18 19 continues to be employed by the Company until February 28, 1998, he will, upon date, have a vested right to his Retirement Benefit under Section 2.7(i) hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. AMERICAN GENERAL CORPORATION By /s/ LARRY D. HORNER ------------------------------------ Chairman of the Personnel Committee /s/ JON P. NEWTON -------------------------------------- Jon P. Newton 19 EX-10.17 7 RETIREMENT AGREEMENT, BETWEEN JAMES S. D'AGOSTINO 1 EXHIBIT 10.17 SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT THIS AGREEMENT is made as of the 1st day of February, 1998, by and between AMERICAN GENERAL CORPORATION, a Texas corporation (the "Company"), and James S. D'Agostino Jr. (the "Executive"). WHEREAS, the Executive has been employed by the Company in valuable executive service to the Company; and WHEREAS, the Company desires to reward such past service and to encourage and reward the continued employment of Executive with the Company until his retirement and to promote his devotion to his duties on behalf of the Company without uncertainty or concern as to his retirement income security or that of his spouse; NOW, THEREFORE, the Company and the Executive hereby enter into this Supplemental Executive Retirement Agreement as hereinafter provided: ARTICLE I. GENERAL Effective Date. This Agreement shall be effective as of February 1, 1998 (the "Effective Date"). Defined Terms. The definitions of capitalized terms used in this Agreement (if not provided where a capitalized term initially appears) are provided in the last Article hereof. ARTICLE II. RETIREMENT BENEFITS Normal Retirement Benefit. If the Executive retires on or after his Normal Retirement Date, the Retirement Benefit shall be an annual retirement benefit payable to the Executive for his lifetime, with a ten-year term certain (the "Normal Retirement Benefit"), in an annual amount equal to (X) minus (Y), calculated as follows: (A) The amount of (X) equals (a) multiplied by (b): 2 (a) sixty-seven-and-2/10ths percent (67.2%) of such Executive's Final Average Compensation; (b) the fraction equal to his Years of Service (not in excess of twenty-eight (28) years) divided by twenty-eight (28); and (B) The amount of (Y) equals (e) plus (f) plus (g): (e) the Social Security Benefit; (f) the Qualified Plan Benefit; and (g) the Restoration Plan Benefit. Early Retirement Benefit. If the Executive retires on or after his Early Retirement Date (but before his Normal Retirement Date), the Retirement Benefit shall be the annual Retirement Benefit computed under Section 2.1, reduced as follows: (A) If payment of the Retirement Benefit commences after the Executive has attained age sixty (60), the Retirement Benefit shall be reduced by two-and-one-half percent (2.5%) per year for each complete year between such commencement and the Executive's Normal Retirement Date; the reduction per year shall be pro-rated for incomplete years; (B) If payment of the Retirement Benefit commences before the Executive attains age sixty (60), the Retirement Benefit shall be further reduced (beyond the reduction imposed by Section 2.2(A) hereof) by five percent (5%) per year for each complete year between such commencement and the Executive's attaining age sixty (60); the reduction per year shall be pro-rated for incomplete years. Termination of Employment Prior to Early Retirement Date and Normal Retirement Date. If the Executive incurs a termination of employment with the Company after satisfying the vesting requirement under Section 2.7, but before attaining either an Early Retirement Date or a Normal Retirement Date, he shall receive a Retirement Benefit determined under Section 2.1, but, unless such 2 3 termination is described in Section 2.6 hereof, such benefit shall be calculated by using his actual Years of Service (including all periods credited as Years of Service pursuant to this Agreement) and actual compensation at the time of his termination and the actual Social Security Benefit that he is entitled to receive at his Normal Retirement Date. Unless such termination is described in Section 2.6 hereof, payment of such benefit shall commence after, but not more than sixty (60) days after, his Normal Retirement Date. Disability. If the Executive is receiving either short-term or long-term disability benefits under any Company plan, then, during the period of payment of such disability benefits, the Executive shall be treated as employed for all purposes of the Agreement, including, without limitation, attainment of the age, service and vesting requirements under the Agreement. The parties hereto agree that such disability benefits will cease and the Executive will no longer be considered employed by the Company on the date on which the Executive attains his Normal Retirement Age. Payment of the Executive's Retirement Benefit shall commence after, but not more than sixty (60) days after, his Normal Retirement Date. Termination by Reason of Death. If the Executive dies (i) while in the employment of the Company, (ii) after the attainment of age fifty-five (55), (iii) having been credited with ten (10) Years of Service, and (iv) prior to the commencement of the payment of the Retirement Benefit hereunder, the Executive's surviving spouse, if any, shall receive for her lifetime an annual benefit equal to the two-thirds (2/3) survivor annuity she would have received had the Executive retired on the day before his death, deeming the Executive, for purposes of this Section 2.5 only, to have elected a joint and survivor annuity payable immediately at a reduced amount with a two-thirds (2/3) survivor annuity. The payment of spouse's benefit shall commence not later than sixty (60) days after the Executive's death. Termination on or after Change in Control; Certain Other Terminations. Notwithstanding any other provision of this Agreement, upon any termination of the Executive's employment, whether or not a Change in Control (as defined in the Executive's employment agreement with the Company dated as of February 1, 1998, 3 4 as it may be amended from time to time (the "Employment Agreement")) has occurred, which termination is (i) by the Company without Cause, (ii) by the Executive with Good Reason, or (iii) by the Executive in a Special Termination (as such terms are defined in the Employment Agreement), the Company shall pay the Executive within the five (5) business days immediately following such termination a lump sum amount, in cash, equal to the actuarial equivalent of the Normal Retirement Benefit which the Executive would have accrued, if the Executive had accumulated (after his termination of employment) thirty-six (36) additional months of service and age credit (but in no event shall the Executive be deemed to have accumulated additional service and age credit after the Executive's sixty-fifth birthday). For purposes of this Section 2.6, an "actuarial equivalent" shall be deter mined using the same assumptions utilized under the American General Retirement Plan (or any successor plan thereto) immediately prior to the Executive's termination of employment, or, if earlier and more favorable to the Executive, immediately prior to the Change in Control. The Retirement Benefit so calculated shall be based on a projected Social Security Benefit that is determined under the provisions of the Social Security Act as in effect on the date of such termination, using the estimated "primary insurance amount" the Executive would be entitled to under such Act at his Normal Retirement Date, assuming (i) the amount of income he is receiving on the date such termination becomes effective which would be treated as wages for purposes of such Act would remain constant through his Normal Retirement Date, and (ii) an annual cost-of-living adjustment equal to four percent (4%). Vesting of Retirement Benefit. The Executive shall have a vested right to his Retirement Benefit upon the occurrence of any of the following while the Executive is employed by the Company: (i) his completion of ten (10) Years of Service; (ii) the attainment of his Normal Retirement Age; (iii) the termination of the Executive's employment pursuant to Section 8(c) of the Employment Agreement; or 4 5 (iv) the occurrence of a Change in Control at any time. Time and Form of Payment. (A) Time of Payment. Except where specifically otherwise provided herein, the payment of any Retirement Benefit to which the Executive has become entitled shall commence after, but no more than sixty (60) days after, the Executive's date of retirement. The Executive shall give the Company reasonable advance notice in writing of his intention to retire (which shall be given at least one month before his intended retirement date). (B) Normal Form of Payment. A life annuity with a ten-year term certain is the normal form of payment of the Retirement Benefit for the Executive and any actuarial equivalents to be calculated pursuant to this Agreement will be based on the normal form of payment. If the Executive dies after payment of the Retirement Benefit in the normal form has commenced, payments shall continue for the remainder of the ten-year term certain to the beneficiary or beneficiaries designated by the Executive by written instruction delivered to the Administrator during the Executive's lifetime. The Executive may designate one or more primary and contingent beneficiaries to receive the remaining payments of the Retirement Benefit, and may designate the proportions in which such beneficiaries are to receive such payments. The Executive may change such designations from time to time, and the last written designation filed with the Administrator prior to the Executive's death shall control. If the Executive fails to specifically designate a beneficiary, or if no designated beneficiary survives the Executive, payment shall be made by the Administrator in the following order of priority: (i) to the Executive's surviving spouse, or, if none, (ii) to the Executive's children, or, if none, 5 6 (iii) to the Executive's estate. (C) Election of Alternative Forms of Payment. Subject to Section 2.6 hereof, the Executive can elect that his Retirement Benefit be paid in any of the following forms by an irrevocable election in writing which is delivered to the Company within sixty (60) days after the Effective Date, or, with the permission of the Committee, by an irrevocable election in writing which is delivered to the Company at any time before his retirement becomes effective: (i) a joint and survivor annuity payable at a reduced amount for the life of the Executive with a survivor annuity for the life of the Executive's surviving spouse which shall be one hundred percent (100%) of the annuity payable during the joint lives of the Executive and the surviving spouse; (ii) a joint and survivor annuity payable at a reduced amount for the life of the Executive with a survivor annuity for the life of the Executive's surviving spouse which shall be seventy-five percent (75%) of the annuity payable during the joint lives of the Executive and the surviving spouse; (iii) a joint and survivor annuity payable at a reduced amount for the life of the Executive with a survivor annuity for the life of the Executive's surviving spouse which shall be fifty percent (50%) of the annuity payable during the joint lives of the Executive and the surviving spouse; or (iv) a lump-sum payment of the actuarial present value of the normal form of payment of the Retirement Benefit. 6 7 In calculating an alternative form of payment for the Retirement Benefit, the Administrator shall use the same assumptions utilized under the American General Retirement Plan (or any successor plan thereto) immediately prior to the Executive's termination of employment, or, if a Change in Control shall have occurred prior to the Executive's termination of employment, the assumptions so utilized immediately prior to the Change in Control, if more favorable to the Executive. ARTICLE III. ADMINISTRATION General. Except as otherwise specifically provided in the Agreement, the Administrator shall be responsible for administration of the Agreement. Administrative Rules. The Administrator may adopt such rules of procedure as it deems desirable for the conduct of its affairs, except to the extent that such rules conflict with the provisions of the Agreement. Duties. The Administrator shall have the following rights, powers and duties: (A) The decision of the Administrator in matters within its jurisdiction shall be final, binding and conclusive upon the Company and upon any person affected by such decision, subject to the claims procedure hereinafter set forth. (B) The Administrator shall have the duty and authority to interpret and construe the provisions of the Agreement, to determine eligibility for a Retirement Benefit and the appropriate amount of any Retirement Benefit, to decide any question which may arise regarding the rights of the Executive hereunder and to exercise such powers as the Administrator may deem necessary for the administration of the Agreement. (C) The Administrator shall maintain full and complete records of its decisions. Its records shall contain all relevant data pertaining to the Executive and his rights and duties under 7 8 the Agreement. The Administrator shall maintain a bookkeeping account with respect to payment of any Retirement Benefit. (D) Notwithstanding any other provision of this Agreement, upon and after the occurrence of a Change in Control and within the six-month period immediately preceding a Change in Control, the Administrator's authority and powers shall not be used to interpret or construe the provisions hereof in any way (or to take any other action) which would adversely affect any right given the Executive by this Agreement. Fees. No fee or compensation shall be paid to any person for services as the Administrator. ARTICLE IV. CLAIMS PROCEDURE General. Any claim for a Retirement Benefit under the Agreement shall be filed by the Executive or beneficiary (either of which is referred to in this Article as the "claimant") in the manner prescribed by the Administrator. Denials. If a claim for a Retirement Benefit under the Agreement is wholly or partially denied, notice of the decision shall be furnished to the claimant by the Administrator within a reasonable period of time after receipt of the claim by the Administrator. Notice. Any claimant who is denied a claim for Retirement Benefits shall be furnished written notice setting forth: (i) the specific reason or reasons for the denial; (ii) specific reference to the pertinent provision of the Agreement upon which the denial is based; (iii) a description of any additional material or information necessary of the claimant to perfect the claim; and 8 9 (iv) an explanation of the claims review procedure under the Agreement. Appeals Procedure. In order that a claimant may appeal a denial of a claim, the claimant or the claimant's duly authorized representative may: (i) request a review by written application to the Committee, no later than sixty (60) days after receipt by the claimant of written notification of denial of a claim; (ii) review pertinent documents; and (iii) submit issues and comments in writing. Review. A decision on review of a denied claim shall be made by the Committee not later than sixty (60) days after receipt of a request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered within a reasonable period of time, but not later than one-hundred-and-twenty (120) days after receipt of a request for a review. The decision on review shall be in writing and shall include the specific reason(s) for the decision and the specific references(s) to the pertinent provisions of the Agreement on which the decision is based. Section 4.6 Arbitration. Any further dispute or controversy arising under or in connection with this Agreement which is not resolved by agreement pursuant to Sections 4.1 through 4.5 hereof shall be resolved by binding arbitration pursuant to the Federal Arbitration Act in accordance with the Employment Dispute Resolution Rules then in effect with the American Arbitration Association. The arbitration proceeding shall be conducted in Houston, Texas. This agreement to arbitrate shall be enforceable in either federal or state court. The enforcement of this agreement to arbitrate and all procedural aspects of this agreement to arbitrate, including but not limited to, the construction and interpretation of this agreement to arbitrate, the issues subject to arbitration (i.e., arbitrability), the scope of the arbitrable issues, allegations of waiver, delay or 9 10 defenses to arbitrability, and the rules governing the conduct of the arbitration, shall be governed by and construed pursuant to the Federal Arbitration Act and shall be decided by the arbitrators. In deciding the substance of any such claims, the arbitrators shall apply the substantive laws of the State of Texas (excluding Texas choice-of-law principles that might call for the application of some other state's law); provided, however, it is expressly agreed that the arbitrators shall have no authority to award treble, exemplary, or punitive damages under any circumstances regardless of whether such damages may be available under Texas law, the parties hereby waiving their right, if any, to recover treble, exemplary, or punitive damages in connection with any such claims. The arbitration may be initiated by any party by providing to the other parties a written notice of arbitration specifying the claims. Within thirty (30) days of the notice of initiation of the arbitration procedure, (1) the Executive shall denominate one arbitrator and (2) the Company shall denominate one arbitrator. The two arbitrators shall select a third arbitrator failing agreement on which within sixty (60) days of the original notice, either the Executive or the Company shall apply to the Senior Active United States District Judge for the Southern District of Texas, who shall appoint a third arbitrator. While the third arbitrator shall be neutral, the two party-appointed arbitrators are not required to be neutral and it shall not be grounds for removal of either of the two party-appointed arbitrators or for vacating the arbitrators' award that either of such arbitrators has past or present minimal relationships with the party that appointed such arbitrator. Evident partiality on the part of an arbitrator exists only where the circumstances are such that a reasonable person would have to conclude there in fact existed actual bias and a mere appearance or impression of bias will not constitute evident partiality or otherwise disqualify an arbitrator. The three arbitrators shall by majority vote resolve all disputes between the parties. There shall be no transcript of the hearing before the arbitrators. The arbitrators' decision shall be in writing, but shall be as brief as possible. The arbitrators shall not assign the reasons for their decision. The arbitrators shall 10 11 certify in their award that they have faithfully applied the terms and conditions of this Agreement and that no part of their award includes any amount for exemplary or punitive damages. All proceedings conducted hereunder and the decision of the arbitrators shall be kept confidential by the parties, e.g., the arbitrators' award shall not be released to the press or published in any of the various arbitration reporters. Judgment upon any award rendered in any such arbitration proceeding may be entered by any federal or state court having jurisdiction. ARTICLE V. MISCELLANEOUS PROVISIONS Amendment and Termination. This Agreement may be amended or modified only with the written consent of the parties hereto. No Assignment. The Executive shall not have the power to pledge, transfer, assign, anticipate, mortgage or otherwise encumber or dispose of in advance any interest in amounts payable hereunder of any of the payments provided for herein, nor shall any interest in amounts payable hereunder or in any payments be subject to seizure for payments of any debts, judgments, alimony or separate maintenance, or be reached or transferred by operation of law in the event of bankruptcy, insolvency or otherwise. Successors and Assigns. The provisions of the Agreement are binding upon and inure to the benefit of each Company, its successors and assigns, and the Executive, his beneficiaries, heirs and legal representatives. Governing Law. The Agreement shall be subject to and construed in accordance with the laws of the State of Texas to the extent not preempted by the provisions of ERISA. No Guarantee of Employment. Nothing contained in the Agreement shall be construed as a contract of employment or deemed to give the Executive the right to be retained in the employ of an Company or any equity or other interest in the assets, business or affairs of an Company. 11 12 Severability. If any provision of the Agreement shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of the Agreement, but the Agreement shall be construed and enforced as if such illegal or invalid provision had never been included herein. Notification of Addresses. The Executive and each beneficiary shall file with the Administrator, from time to time, in writing, the post office address of the Executive, the post office address of each beneficiary, and each change of post office address. Any communication, statement or notice addressed to the last post office address filed with the Administrator (or if no such address was filed with the Administrator, then to the last post office address of the Executive or beneficiary as shown on the Company's records) shall be binding on the Executive and each beneficiary for all purposes of the Agreement and neither the Administrator nor the Company shall be obliged to search for or ascertain the whereabouts of the Executive or beneficiary. Bonding. The Administrator and all agents and advisors employed by it shall not be required to be bonded, except as may otherwise be required by ERISA. Taxes. The Company shall have the right to withhold from any cash or other amounts due or to become due from the Company to a Executive (including by reducing the amount of any Retirement Benefit payable in the future) the amount of any federal, state and local taxes required to be withheld or otherwise deducted and paid by the Company with respect to the vesting or payment of any Retirement Benefit hereunder. Section 5.10 No Funding. There shall be no funding of the benefit amounts to be paid pursuant to this Agreement. The Agreement shall not confer upon the Executive (or beneficiary or any other person) any security interest or any other right, title or interest of any kind in or to any property of the Company. The Agreement shall constitute merely the unsecured promise of the Company to make the benefit payments provided for herein. Notwithstanding the foregoing provisions of this Section 5.10, the Company, in its discretion, may 12 13 establish a trust to pay the benefit amounts hereunder, which trust shall be subject to the claims of the Company's general creditors in the event of the Company's bankruptcy or insolvency. If such a trust is established, the Company shall remain responsible for the payment of any benefit amounts provided hereunder which are not paid in accordance with the provisions hereof by such trust. ARTICLE VI. DEFINITIONS AND USAGE Definitions. Wherever used in the Agreement, the following words and phrases shall have the meaning set forth below, unless the context plainly requires a different meaning: "Administrator" means the Company, acting through the Personnel Committee of the Board, or other person or persons designated by the Personnel Committee. "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. "Agreement" means this Supplemental Executive Retirement Agreement, as set forth herein and as amended from time to time. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. "Board" means the Board of Directors of the Company. "Change in Control" means a change in the control of the Company, which shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes 13 14 such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation (or a share exchange between shareholders of the Company or any direct or indirect subsidiary of the Company and another corporation or entity pursuant to Article 5.02 (or any successor provision thereto) of the Texas Business Corporation Act), other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least fifty-one percent (51%) of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after 14 15 such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; or (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least fifty-one percent (51%) of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. "Code" means the Internal Revenue Code of 1986, as amended from time to time. Any reference to a particular Code section shall include any provision which modifies, replaces or supersedes it. "Committee" shall mean the Personnel Committee of the Board until six months prior to the occurrence of a Change in Control and thereafter shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Personnel Committee of the Board, plus (ii) in the 15 16 event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)); provided, however, that the maximum number of individuals constituting the Committee shall not exceed five. "Company" means American General Corporation, a Texas corporation, and, except in determining under the definition of Change in Control herein whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. "Early Retirement Date" means the first date on which the Executive (i) has completed ten (10) Years of Service and (ii) has attained the age of fifty-five (55). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. Any reference to a particular ERISA section shall include any provision which modifies, replaces, or supersedes it. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Executive" means James S. D'Agostino Jr. "Final Average Compensation" means the following sum divided by three (3): the sum of the base salary received by the Executive during, and the incentive payments received by the Executive pursuant to any annual bonus, incentive compensation or similar plan maintained by the Company with respect to, the three (3) calendar years (whether or not consecutive) ending within the last sixty (60) months of the Executive's employment with the Company which produce the highest total of such base salary and incentive payments (for purposes of this sentence, any amount of such base salary or incentive payment which is deferred by the Executive shall be included in the calculation of amounts received). Notwithstanding the immediately preceding sentence, if the Executive's termination of employment is described in Section 2.6 hereof and the Executive receives 16 17 (pursuant to Section 8(c)(iii) of his Employment Agreement, or any successor provision thereto, and in lieu of any further salary or bonus payments) a lump sum amount (the "Severance Amount"), Final Average Compensation shall mean the Severance Amount divided by three (3). "Normal Retirement Age" means age sixty-two (62). "Normal Retirement Date" means the date on which the Executive attains his Normal Retirement Age. "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. "Qualified Plan" means the American General Retirement Plan, together with any other defined benefit retirement plan intended to be qualified under Section 401(a) of the Code which is adopted and maintained by the Company and under which the Executive is entitled to a retirement benefit at the date of his retirement or other termination of employment. "Qualified Plan Benefit" means the aggregate annual retirement benefit to which the Executive (at the date of his retirement or other termination of employment) is entitled under the plan or plans which comprise the Qualified Plan (expressed in the form of a single life annuity with a ten-year term certain commencing payment on the date payment of the Retirement Benefit hereunder commences). "Restoration Plan Benefit" means the annual retirement benefit to which the Executive (at the date of his retirement or other termination of employment) is entitled under the American General Corporation Restoration of Retirement Income Plan (expressed in the 17 18 form of a single life annuity with a ten-year term certain commencing payment on the date payment of the Retirement Benefit hereunder commences). "Retirement Benefit" means the benefit payable under this Agreement, as determined under Article II. "Social Security Benefit" means one-half of the annual benefit payable under the Social Security Act, relating to Old-Age and Disability benefits, as of the Executive's Normal Retirement Date, or upon actual retirement, if later. "Years of Service" means the total number of years (measured in full and partial years, in increments of one-twelfth years) of active employment with the Company during which substantial services were rendered as an employee, commencing on the date the Executive was first employed by the Company and ending on the date he ceases to perform services for the Company (including employment before the Effective Date), but in no event shall more 18 19 than twenty-eight (28) years be credited to the Executive regardless of his actual period of service with the Company. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. AMERICAN GENERAL CORPORATION By /s/ ROBERT M. DEVLIN ------------------------------------ Chief Executive Officer /s/ JAMES S. D'AGOSTINO JR. -------------------------------------- James S. D'Agostino Jr. 19 EX-10.21 8 PERFORMANCE-BASED PLAN FOR EXECUTIVE OFFICERS 1 EXHIBIT 10.18 AMERICAN GENERAL CORPORATION RETIREMENT PLAN FOR DIRECTORS (AS AMENDED AND RESTATED EFFECTIVE AS OF MARCH 1, 1997) 1. PURPOSE. This plan shall be known as the American General Corporation Retirement Plan for Directors (the "Plan"). The Plan shall be maintained by American General Corporation, a Texas corporation (the "Company") solely for the purpose of providing retirement benefits to persons who have served as directors of the Company and who, since July 1, 1965, have not been officers or employees of the Company or of any subsidiary of which the Company owns directly or indirectly more than 50% of the outstanding capital stock ("Directors"). 2. PAYMENT OF BENEFITS. The benefits payable under the Plan will be paid from the Company's general revenues as payments become due under the Plan, will not be funded in advance through an arrangement constituting a qualified trust under the Internal Revenue Code or through insurance annuity contracts, and will not be subject to the jurisdiction of nor be guaranteed by the Pension Benefit Guaranty Corporation. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of benefits under the Plan. 3. YEARS OF SERVICE. For all purposes of the Plan, a Director's Years of Service shall be equal to the number of Years of Service credited under the terms of the Plan as in effect on February 28, 1997. From and after March 1, 1997, no further Years of Service shall be credited to Directors for purposes of benefits under the Plan. 4. RETIREMENT BENEFITS. (a) A Director who retired or otherwise terminated service as a Director prior to March 1, 1997 shall be entitled to benefits and payments under the Plan based upon the terms and provisions of the Plan as in effect on the date such Director retired or terminated service as a Director and none of the provisions of this March 1, 1997 restatement of the Plan shall be applicable to such Director. (b) A Director who retires or otherwise terminates service as a Director on or after March 1, 1997 shall receive a deferred account benefit determined pursuant to Section 5 and Appendix A. 5. DEFERRED ACCOUNT. The March 1, 1997 accrued benefit under the Plan of each Director who is serving as a Director on March 1, 1997 shall be converted to a present dollar amount, based upon actuarial assumptions satisfactory to the Administrator (hereinafter defined), and such dollar amount shall be converted into a number of full and fractional "Units" equal in the aggregate to the value of such present value dollar amount. For purposes of this Section 5, a Director's March 1, 1997 Plan accrued benefit shall be equal to annual payments payable commencing as of the date such Director attains the age of 70 for a period of years equal to the Years of Service completed by the Director as of February 28, 1997 but ending upon the Director's death if occurring prior to the expiration of such period of years, with each such annual payment being equal to the dollar amount of the annual retainer in effect for Directors on February 28, 1997. For all purposes of the Plan, a Unit shall be equal to the mean between the high and low selling prices of the date as of which such value is being determined of a share of Common Stock of the Company; provided, however, that for purposes of effecting the conversion into Units of Directors' March 1, 1997 Plan accrued benefits as described under this Section 5, the value of a Unit shall be equal to the average of the means between the high and low selling prices during the period commencing April 28, 1997 and ending May 2, 1997, inclusive, of a share of Common Stock of the Company. 6. BENEFIT NOT ASSIGNABLE. A Director's rights under the Plan shall not be subject to assignment encumbrance, garnishment, attachment, or charge, whether voluntary or involuntary. Page 1 of 3 2 7. AMENDMENT, AND TERMINATION OF PLAN. The Company reserves the right to amend or terminate the Plan at any time by action of its Board of Directors, provided that any such action shall not, without a Director's consent, adversely affect any Director's right to a benefit which accrued pursuant to the provisions of the Plan prior to such action. 9. ADMINISTRATION OF PLAN. The Plan shall be administered by an Administrator who shall be a person or committee appointed by the Chairman of the Board. All decisions that are made by the Administrator with respect to interpretation of the terms of the Plan, with respect to the amount of benefits payable under the Plan, and with respect to any questions or disputes arising under the Plan shall be final and binding on the Company and the directors and their heirs or beneficiaries. 10. WITHHOLDING. The Company shall have the right to deduct from any and all amounts paid to any Director under this Plan any taxes required by law to be withheld therefrom. 11. CONSTRUCTION. The Plan shall be governed by, and interpreted and enforced in accordance with, the laws of the State of Texas and of the United States of America. IN WITNESS WHEREOF, the Company has adopted this amended and restated Plan as evidenced by the signatures affixed hereto of its duly authorized officers, as of the 1st day of March, 1997. AMERICAN GENERAL CORPORATION ATTEST: By: /S/ JON P. NEWTON ---------------------------------- Jon P. Newton /S/ SUSAN A. JACOBS Vice Chairman and General Counsel - ------------------------- Susan A. Jacobs Associate General Counsel Page 2 of 3 3 Appendix A SECTION A1. DIRECTORS' ACCOUNT BALANCES. The Company shall maintain an individual book account under the Plan for each Director having a deferred account. Each Director shall initially have credited to his or her account the number of Units calculated in respect of such Director pursuant to Section 5 hereof. Any dividends paid on Common Stock shall be credited to a Director's account in respect of each Unit and deemed to be reinvested in additional Units. In addition, the number of Units allocated to a Director's account shall be adjusted to reflect stock dividends, splits and reclassifications, and similar transactions affecting the value of Common Stock. At the time that the Director's services as a Director cease, subject to Section 5 hereof, the account balance will, until such time as it is paid to the Director in cash in accordance with the Director's payment elections, be allocated among the hypothetical investments permitted under A2(b)(ii) below, as may be elected by the Director. SECTION A2. PAYMENT ELECTIONS. (a) General Provisions. In connection with the commencement of participation in this Plan, each Director shall make an election (the "Payment Election") concerning the timing and form of distribution of the amounts credited to his or her Plan account. Any payment from the Plan shall commence following termination of the Director's services to the Company as a Director, but in no event prior to one year after receipt by the Company of the Director's initial Payment Election. The forms of benefit available under the Plan shall be a lump sum payment or quarterly, semi-annual or annual installments over a period not to exceed 15 years from the earliest date the director may commence receiving payments hereunder. (b) Special Rule. (i) Subsequent Payment Elections may be made by a Director, which shall supersede the initial Payment Election, but any such subsequent Payment Election shall not be valid unless it is made prior to May of the calendar year preceding the calendar year in which payments to the Director hereunder are otherwise due to commence. (ii) If a Director has elected to receive installment payments of the amount in his or her account, the Director may, at the Director's option, elect to allocate the account, on or after the date on which he or she ceases to perform services as a Director, among hypothetical investments in the AGC Stock Fund, International Fund, Small-Cap Fund, Mid-Cap Fund, Equity Index Fund, Bond Fund or Cash Fund under the American General Employees' Thrift and Incentive Plan and shall be credited with a rate of return which said account would have earned had it been invested in the fund elected. The Director may allocate and reallocate his or her account among the funds in accordance with rules established by the Administrator. SECTION A3. PAYMENTS TO A DECEASED DIRECTOR'S ESTATE. (a) In the event of a Director's death before the balance of his or her account is fully paid, payment of the balance of the Director's account shall then be made to his or her estate in accordance with the manner selected by the Director prior to death, which manner shall provide that (i) payment shall be made to the Director's estate in the same manner as provided with respect to the payments to the Director or (ii) the balance of the Director's account shall be determined as soon as practicable following his or her death and this amount shall be paid in a single payment to the Director's estate as soon as reasonably practicable thereafter. In the event no election has been made, payment shall be made in accordance with clause (ii) of the preceding sentence. (b) In the event of a Director's death before the balance of his or her account is fully paid to the estate in installments, the Administrator may, upon consideration of the application of the duly appointed administrator or executor of the Director's estate, direct that the balance of the Director's account be paid to the estate in a single payment. The payment shall be made at the time specified by the Administrator. Page 3 of 3 EX-10.23 9 RETIREMENT AGREEMENT BETWEEN MICHAEL J. POULOS 1 EXHIBIT 10.20 September 11, 1997 Mr. Michael J. Poulos 2121 Kirby, #73 Houston, Texas 77019 Dear Mr. Poulos: As you know, American General Corporation ("AGC"), Western National Corporation ("Western"), and a subsidiary of AGC have, as of the date hereof, entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which AGC will indirectly acquire all or substantially all of the stock of Western through a merger (the "Merger"). AGC understands that you intend to resign as Chairman of the Board, President and Chief Executive Officer of Western upon the consummation of the Merger. It is an important element of AGC's decision to acquire Western through such Merger that an understanding and agreement exist with respect to the benefits that you will receive upon such resignation pursuant to (a) the Employment Agreement dated September 9, 1993, between you and Conseco, Inc. and assumed by Western, as the same has been amended from time to time (the "Employment Agreement") and (b) any and all agreements between you and Western evidencing awards you have received from time to time under Western's 1993 Stock and Incentive Plan (collectively, the "Award Agreements"). Upon the consummation of the Merger, it is our understanding that you will resign as Chairman of the Board, President and Chief Executive Officer of Western, effective as of the Effective Time (as such term is defined in the Merger Agreement). AGC agrees that it will cause Western to treat such resignation as a "Control Termination" for purposes of the Employment Agreement and the Award Agreements in exchange for your consent and agreement to the following modifications and amendments to the Employment Agreement and the Award Agreements: o No severance payments or other compensation or benefits will be provided to you pursuant to Sections 10, 11, 12, and 13 of the Employment Agreement following your resignation, and, in lieu thereof, within 10 days following your resignation, you will receive a lump sum cash payment in an amount equal to the sum of the amounts determined in accordance with the following clauses (a) and (b): (a) an amount equivalent to salary payments for 36 calendar months at the rate of Base Salary (as such term is defined in the Employment Agreement) in effect immediately prior to your resignation; and (b) an amount equivalent to 36 calendar months of bonus at the greater of (1) the monthly rate of the bonus payment for the bonus period that ended immediately prior to your resignation date or (2) the monthly rate of the estimated amount of the bonus you would have received for the bonus period which includes your resignation date. 2 Mr. Michael J. Poulos Page 2 September 11, 1997 The amount of such lump sum payment will be adjusted as provided in the following paragraph. o Although you will continue to be entitled to receive the parachute payment protections and benefits set forth in that certain Amendment to Employment Agreement dated May 14, 1997, between you and Western, you agree that the lump sum payment described in the preceding paragraph will be reduced by approximately $150,000 so that none of the payments and benefits provided to you in connection with the Merger will be nondeductible or subject you to an excise tax pursuant to the golden parachute payment provisions of Section 280G or Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Parachute Sanctions"). The $150,000 figure set forth in the preceding sentence is an initial estimate of the amount of the reduction necessary to prevent the application of the Parachute Sanctions. However, it is our understanding that the lump sum payment described in the preceding paragraph may be reduced by a greater amount if both you and AGC agree that a greater reduction is necessary to prevent the application of the Parachute Sanctions. The amount of any such greater reduction in your lump sum payment will be agreed to by you and AGC prior to the Merger. After the Merger, neither Western nor AGC will have the right to (a) reduce your lump sum payment by any amount in excess of the reduction amount agreed to prior to the Merger or (b) receive a refund or reimbursement of any portion of your lump sum payment based upon a claim that such refund or reimbursement is necessary to prevent the application of the Parachute Sanctions. o Your options to purchase shares of Western common stock under Western's 1993 Stock and Incentive Plan will be converted into options to purchase shares of AGC common stock pursuant to Section 6.10(a) of the Merger Agreement. Upon your resignation from Western as of the Effective Time, such stock options will continue to be exercisable for the remainder of their original 10-year term. o You will not be permitted to surrender to Western pursuant to the provisions of Section 14 of the Employment Agreement (or any similar provision in an Award Agreement) any of your options to acquire Western common stock or shares of Western common stock that you own. However, in lieu of such right, you may elect, within 60 days after your resignation date, to receive a lump sum cash payment in return for your surrender of (a) all or any portion of the AGC stock options then outstanding and received by you in accordance with the terms of the Merger Agreement in exchange for your Western stock options (the "Unexercised Exchange Options") and (b) all or any portion of the AGC common stock then owned by you and received in accordance with the terms of the Merger Agreement in exchange for your shares of Western common stock (the "Owned Exchange Stock"). For each Unexercised Exchange Option to purchase one share of AGC common stock that you elect to surrender as provided above, you will receive an amount equal to the difference, if any, between (1) the New York Stock Exchange closing sales price of one share of AGC common stock on the date of your election (or on the next preceding trading day if your election is made on a non-trading day) and (2) the exercise price for such share of AGC common stock pursuant to the terms of the 3 Mr. Michael J. Poulos Page 3 September 11, 1997 Unexercised Exchange Option. For each share of Owned Exchange Stock that you elect to surrender as provided above, you will receive an amount equal to the New York Stock Exchange closing sales price of one share of AGC common stock on the date of your election (or on the next preceding trading day if your election is made on a non-trading day). Any payment required pursuant to this paragraph will be paid within 10 days after the date of your election hereunder, against execution and delivery by you to AGC of an appropriate agreement confirming your surrender of the Unexercised Exchange Options and the certificates duly endorsed by you for the Owned Exchange Stock. Notwithstanding any provision in this letter agreement to the contrary, if the Merger Agreement is terminated without consummation of the Merger, then this letter agreement will be of no further force and effect and will be void ab initio. Western shall be a third party beneficiary of our understandings and agreements set forth in this letter agreement, and will join in the execution of this letter agreement to evidence its agreement to be bound by such understandings and agreements. If this letter agreement accurately sets forth our understandings and agreements with respect to the subject matter hereof, please execute this letter agreement in the space provided below. Very truly yours, AMERICAN GENERAL CORPORATION By: /s/ JON P. NEWTON ------------------------------------ Name: Jon P. Newton ------------------------------- Title: Vice Chairman ------------------------------ AGREED AND ACCEPTED this 23rd day of September, 1997 /s/ MICHAEL J. POULOS - ------------------------------ Michael J. Poulos Western National Corporation joins in the execution of this letter agreement to evidence its agreement to be bound by the understandings and agreements set forth herein. WESTERN NATIONAL CORPORATION By: /s/ RICHARD W. SCOTT ------------------------------------ Name: Richard W. Scott ------------------------------- Title: Vice Chairman & Chief Investment Officer ------------------------------ Date: September 23 , 1997 ---- EX-12 10 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 AMERICAN GENERAL CORPORATION EXHIBIT 12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
For the Years Ended December 31, In millions, except ratios 1997 1996 1995 - -------------------------------------------------------------------------------------------- Consolidated operations: Income before income tax expense and net dividends on preferred securities of subsidiaries $ 1,073 $ 1,080 $ 1,010 Undistributed income of equity investee (49) (35) (39) Fixed charges deducted from income Interest expense 643 661 711 Implicit interest in rents 20 21 21 - -------------------------------------------------------------------------------------------- Total fixed charges deducted from income 663 682 732 - -------------------------------------------------------------------------------------------- Earnings available for fixed charges $ 1,687 $ 1,727 $ 1,703 - -------------------------------------------------------------------------------------------- Fixed charges per above $ 663 $ 682 $ 732 Capitalized interest 5 12 17 - -------------------------------------------------------------------------------------------- Total fixed charges 668 694 749 Dividends on preferred stock and securities 138 68 30 - -------------------------------------------------------------------------------------------- Combined fixed charges and preferred stock dividends $ 806 $ 762 $ 779 - -------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges 2.52 2.49 2.27 - -------------------------------------------------------------------------------------------- Ratio of earnings to combined fixed charges and preferred stock dividends 2.09 2.26 2.19 - -------------------------------------------------------------------------------------------- Consolidated operations, corporate fixed charges and preferred stock dividends only: Income before income tax expense and net dividends on preferred securities of subsidiaries $ 1,073 $ 1,080 $ 1,010 Undistributed income of equity investee (49) (35) (39) Corporate fixed charges deducted from income - corporate interest expense 183 179 205 - -------------------------------------------------------------------------------------------- Earnings available for fixed charges $ 1,207 $ 1,224 $ 1,176 - -------------------------------------------------------------------------------------------- Total corporate fixed charges per above $ 183 $ 179 $ 205 Capitalized interest related to real estate operations 5 11 16 - -------------------------------------------------------------------------------------------- Total corporate fixed charges 188 190 221 Dividends on preferred stock and securities 138 68 30 - -------------------------------------------------------------------------------------------- Combined corporate fixed charges and preferred stock dividends $ 326 $ 258 $ 251 - -------------------------------------------------------------------------------------------- Ratio of earnings to corporate fixed charges 6.41 6.45 5.32 - -------------------------------------------------------------------------------------------- Ratio of earnings to combined corporate fixed charges and preferred stock dividends 3.70 4.74 4.69 - -------------------------------------------------------------------------------------------- American General Finance, Inc.: Income before income tax expense $ 204 $ 54 $ 116 Fixed charges deducted from income Interest expense 484 493 518 Implicit interest in rents 11 12 13 - -------------------------------------------------------------------------------------------- Total fixed charges deducted from income 495 505 531 - -------------------------------------------------------------------------------------------- Earnings available for fixed charges $ 699 $ 559 $ 647 - -------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges 1.41 1.11 1.22 - --------------------------------------------------------------------------------------------
1997 FORM 10-K 21 EX-13 11 PORTIONS OF AMERICAN GENERAL'S 1997 ANNUAL REPORT 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS ================================================================================ AMERICAN GENERAL CORPORATION For the three years ended December 31, 1997 Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and related Notes beginning on page 32. OVERVIEW American General Corporation (American General), a diversified financial services organization with market capitalization of $13.5 billion and over 12 million customers, is a market leader in retirement services, life insurance, and consumer finance. American General has pursued an aggressive strategy of growth through acquisitions. Since December 1994, American General has completed or announced six acquisitions with total consideration (excluding assumed debt) of $5.7 billion, including $3.7 billion in 1997. American General and its subsidiaries (collectively, the company) reported financial highlights for the three years ended December 31, 1997 as follows:
In millions 1997 1996 1995 ================================================================================ Net income $ 542 $ 653 $ 650 Net income per share (diluted) 2.19 2.63 2.66 Revenues and deposits 13,973 13,129 12,542 Assets 80,620 74,134 69,083 Shareholders' equity 7,583 6,844 7,109 - --------------------------------------------------------------------------------
The following significant items affected the company's financial results: o On June 17, 1997, American General completed the merger of USLIFE Corporation (USLIFE) in an all-stock transaction valued at $1.8 billion. The merger was accounted for using the pooling of interests method and, therefore, all periods include the results of USLIFE's operations. o Results include the operations of other acquired companies beginning on the respective acquisition dates. American General acquired Home Beneficial Corporation (Home Beneficial Life) on April 16, 1997, The Independent Life and Accident Insurance Company (Independent Life) on February 29, 1996, and The Franklin Life Insurance Company (Franklin Life) on January 31, 1995. o Net income for 1997 includes aftertax charges of $353 million, which are discussed in Note 3 to the consolidated financial statements. These charges consist of merger-related costs ($247 million or $.99 per share), loss on sale of non-strategic assets ($73 million or $.29 per share), and a litigation settlement ($33 million or $.13 per share). o Net income for 1996 includes aftertax charges of $143 million, consisting of loss on sale of non-strategic assets ($111 million or $.44 per share) and a write-down of USLIFE group business ($32 million or $.13 per share). o Net income for 1995 includes a fourth quarter aftertax charge for an increase in the allowance for finance receivable losses ($140 million or $.57 per share). BUSINESS DIVISIONS To facilitate meaningful period-to-period comparisons, earnings of each business division include earnings from its business operations and earnings on that amount of equity considered necessary to support its business, and exclude non-recurring items and net realized investment gains. Division earnings were as follows:
In millions 1997 1996 1995 ================================================================================ Retirement Services $ 246 $ 225 $ 204 Life Insurance 576 536 476 Consumer Finance 156 128 85 - -------------------------------------------------------------------------------- Division earnings $ 978 $ 889 $ 765 - --------------------------------------------------------------------------------
Division earnings, presented above on an aftertax basis, differ from those disclosed in Note 20.2 to the consolidated financial statements by the amount of non-recurring items and income tax expense for each division. RETIREMENT SERVICES The Retirement Services division offers tax-deferred retirement annuities and employer-sponsored retirement programs for employees of educational, health care, public sector, and other not-for-profit organizations. Asset growth through sales and deposits, management of the investment spread, separate account fees, and operating expenses contribute to the division's profitability. Division results were as follows:
In millions 1997 1996 1995 ================================================================================ Retirement Services earnings $ 246 $ 225 $ 204 Assets Investments 23,545 22,146 21,933 Separate Accounts 10,564 7,134 4,541 Sales 1,645 1,324 1,112 Deposits Fixed 1,592 1,587 1,720 Variable 1,795 1,310 835 Operating expenses 160 145 149 - --------------------------------------------------------------------------------
21 1997 ANNUAL REPORT 2 EARNINGS. Division earnings increased 9% in 1997 and 10% in 1996, reflecting continued growth in assets and management of fixed investment spread, partially offset by the effect of customers' growing preference for variable accounts. Asset growth, excluding the fair value adjustment on securities, was 15% in 1997 and 13% in 1996 as a result of strong sales and deposits in each of the division's primary markets, as well as stock market appreciation. SALES AND DEPOSITS. In recent years the company introduced new variable investment products, which provide numerous investment options, in response to customers' preference for equity-based investments. As a result, sales increased 24% in 1997 and 19% in 1996. Total deposits increased 17% in 1997 and 13% in 1996, while variable account deposits increased 37% and 57%, respectively. The division's Separate Account assets, which relate to variable account options, increased $3.4 billion in 1997 and $2.6 billion in 1996, reflecting the strong sales and stock market appreciation. FIXED INVESTMENT SPREAD. Fixed investment spread represents the difference between the yield on invested assets and the average interest rate the company credits to policyholders' fixed accounts. Investment results and crediting rates on fixed accounts were as follows:
In millions 1997 1996 1995 ================================================================================ Net investment income $1,706 $1,652 $1,597 Investment yield 7.91% 8.03% 8.24% Average crediting rate 6.16 6.23 6.41 Fixed investment spread 1.75 1.80 1.83 - --------------------------------------------------------------------------------
Net investment income increased in 1997 and 1996 as a result of growth in invested assets. Investment yields declined 12 basis points in 1997 and 21 basis points in 1996 due to lower market rates on new investments. In response to these declining yields, the company adjusted the rates credited to policyholders. As a result, the investment spread on fixed accounts declined only 5 basis points in 1997 and 3 basis points in 1996. SEPARATE ACCOUNT FEES. Separate Account fees, which represent the fastest-growing component of division revenues, include mortality and surrender fees and investment advisory fees. These fees increased $40 million, or 53%, in 1997 and $29 million, or 67%, in 1996, due to strong sales and deposit growth and market appreciation in Separate Account assets. SURRENDERS. Policyholder surrenders are influenced by both competition and market interest rates. The company's rate of policyholder surrenders was 4.7% of average reserves in 1997, compared to 4.4% in 1996 and 3.7% in 1995. These rates were among the lowest in the industry. OPERATING EXPENSES. Operating expenses increased in 1997 due to the growth in sales and deposits. As a result of the management of operating expenses relative to the growth rate for assets, the ratio of operating expenses to average assets improved to .49% in 1997, compared to .52% in 1996 and .61% in 1995. Operating expenses for 1995 included $19 million (.08% of average assets) for state guaranty fund assessments resulting from past industry insolvencies. OUTLOOK. In 1998, the division will introduce a new product line that will offer additional investment options for tax-qualified annuities. With the acquisition of Western National Corporation (Western National) in February 1998, the division will also offer non-qualified annuities sold through financial institutions. Management believes these actions position the division for continued growth. LIFE INSURANCE The Life Insurance division provides traditional and interest-sensitive life insurance and annuities to a broad spectrum of customers through independent and career agents. Recent acquisitions have expanded distribution systems and product portfolios. In 1997, the company realigned the division to strengthen its distribution systems, achieve operating efficiencies, improve product development, and enhance customer service. Division profitability is a function of premiums, investment spread, mortality, persistency, and operating expenses. Division results, reflecting the pooling of USLIFE insurance operations, were as follows:
In millions 1997 1996 1995 ================================================================================ Life Insurance earnings $ 576 $ 536 $ 476 Assets 34,802 32,738 31,317 Insurance and annuity liabilities 25,283 24,550 23,139 Premiums and other considerations 3,066 2,964 2,701 Net investment income 2,099 2,016 1,872 Insurance and annuity benefits 2,949 2,867 2,761 Operating expenses 730 688 592 - --------------------------------------------------------------------------------
EARNINGS. Division earnings increased in 1997 and 1996 primarily due to the acquisitions of Home Beneficial Life in April 1997 and Independent Life in February 1996. Home Beneficial Life's operations increased division earnings by $24 million in 1997, and Independent Life's operations increased division earnings by $30 million in 1996. These companies are currently being consolidated into the division's Nashville-based operations. AMERICAN GENERAL CORPORATION 22 3 PREMIUMS AND DEPOSITS. The division's primary focus is the sale of life and annuity products to individuals. Sales and deposits of individual life insurance and annuities were as follows:
In millions 1997 1996 1995 ================================================================================ Individual life insurance Sales $ 521 $ 473 $ 530 Deposits 1,154 1,057 1,004 Annuities Sales 429 388 686 Deposits 505 461 746 - --------------------------------------------------------------------------------
Premiums and other considerations increased 3% in 1997 and 10% in 1996. These increases were primarily due to new sales and the acquisitions of Home Beneficial Life and Independent Life. Individual life insurance sales increased in 1997 due to the introduction of new products, expansion of producer relationships, and the addition of Home Beneficial Life. These increases were partially offset by lower sales in some companies as product portfolios were updated and the division realignment was implemented. The decline in 1996 sales reflected disruptions due to the implementation of new field administration systems and the rationalization of relationships with certain producer groups. These decreases were partially offset by the acquisition of Independent Life. Deposits for interest-sensitive life insurance increased due to new sales and persistency of the business in force. Annuity sales and deposits increased in 1997 due to higher structured settlement and variable annuity sales, partially offset by the continued decrease in fixed annuity sales resulting from the shift in consumers' preference to equity-based products. Annuity sales and deposits declined in 1996 due to less favorable market conditions. INVESTMENT SPREAD. Investment results and interest crediting rates were as follows:
1997 1996 1995 ================================================================================ Investment yield 8.14% 8.16% 8.33% Average crediting rate 5.99 6.07 6.22 Investment spread 2.15 2.09 2.11 - --------------------------------------------------------------------------------
Net investment income increased in 1997 and 1996 as a result of growth in invested assets. Investment yields decreased due to lower interest rates on new investment purchases. The spread between investment yield and the average rate credited to policyholders has remained steady and is within product pricing assumptions. At December 31, 1997, one-half of the division's insurance and annuity liabilities were subject to interest crediting rate adjustments. MORTALITY AND PERSISTENCY. Death claims and premium termination rates were as follows:
In millions 1997 1996 1995 ================================================================================ Death claims $ 912 $ 849 $ 774 Death claims per $1,000 in force 3.36 3.23 3.19 Premium termination rate 13.55% 14.05% 12.34% - --------------------------------------------------------------------------------
Death claims, included in insurance and annuity benefits, increased 7% in 1997 and 10% in 1996 due to the acquisitions of Home Beneficial Life and Independent Life. The 1997 and 1996 premium termination rates also reflect higher terminations, which were in line with management's expectations, following these acquisitions. Overall, mortality and persistency experience was within pricing assumptions. OPERATING EXPENSES. The ratio of operating expenses to direct premiums and deposits was 17.0%, 16.8%, and 14.5% in 1997, 1996, and 1995, respectively. The higher ratios in 1997 and 1996 reflected lower annuity deposits and Home Beneficial Life's and Independent Life's higher overall expense ratios, which did not completely reflect anticipated savings from consolidation of operations. Total cost savings related to the Independent Life, Home Beneficial Life, and USLIFE acquisitions are exceeding management's original expectations. OUTLOOK. Management expects that the realignment within the division, improvements in product portfolios and producer relationships, and completion of the consolidations will strengthen sales and lower the expense ratio. CONSUMER FINANCE The Consumer Finance division provides consumer and home equity loans and credit-related insurance products. Division results are influenced by the amount and mix of finance receivables, credit quality, borrowing cost, and operating expenses. Division results were as follows:
In millions 1997 1996 1995 ================================================================================ Consumer Finance earnings $ 156 $ 128 $ 85 Average finance receivables 7,523 8,124 8,283 Yield on finance receivables 16.81% 17.85% 18.02% Borrowing cost 6.80 6.88 7.01 Interest spread 10.01 10.97 11.01 Operating expenses $ 466 $ 504 $ 458 - --------------------------------------------------------------------------------
EARNINGS. Division earnings increased 21% in 1997 primarily due to improved credit quality, which more than offset the effect of a decrease in average finance receivables. Earnings for 1996 and 1995 were adversely affected by credit quality deterioration. 23 1997 ANNUAL REPORT 4 FINANCE RECEIVABLES. Average finance receivables decreased $601 million during 1997, primarily due to the reclassification of non-strategic assets to assets held for sale at December 31, 1996. These receivables were subsequently sold in 1997. Finance receivables at December 31, 1997 were $387 million higher than at December 31, 1996, primarily due to growth of real estate secured loans. The division increased the proportion of real estate secured receivables to 52% at December 31, 1997 from 49% in 1996 and 35% in 1995. CREDIT QUALITY. The division experienced a significant decline in credit quality in fourth quarter 1995 and recorded a pretax adjustment of $216 million ($140 million aftertax) to increase the allowance for losses on finance receivables. Since 1995, the division has focused on an action plan to improve credit quality. The components of this action plan included selling under-performing receivable portfolios, raising underwriting standards, and rebalancing the portfolio to increase the proportion of real estate secured receivables. The allowance for finance receivable losses, delinquencies, and charge offs were as follows:
In millions 1997 1996 1995 ================================================================================ Allowance for finance receivable losses $ 373 $ 395 $ 492 % of finance receivables 4.65% 5.18% 5.85% Delinquencies $ 310 $ 317 $ 386 % of finance receivables 3.60% 3.83% 4.13% Charge offs $ 270 $ 444 $ 308 % of average finance receivables 3.60% 5.47% 3.77% - --------------------------------------------------------------------------------
The 1997 decreases in the allowance, delinquencies, and charge offs reflected the positive impact of the credit quality improvement program. The 1996 decreases in the allowance and the delinquency ratios were primarily due to the reclassification of certain receivables to assets held for sale at December 31, 1996. The 1996 charge offs included activity related to the reclassified portfolios. Excluding these portfolios, the 1996 charge-off ratio was 4.70%. INTEREST SPREAD. The interest spread between yield and borrowing cost decreased 96 basis points during 1997 due to declining yields, partially offset by lower borrowing cost. Yield on finance receivables declined 104 basis points in 1997, compared to a decrease of 17 basis points during 1996. The 1997 decline reflected the increased proportion of real estate secured loans, which generally have a higher level of credit quality and lower yields. OPERATING EXPENSES. Operating expenses decreased 8% in 1997, compared to a 10% increase in 1996. The 1997 decrease was primarily due to exclusion of the operating expenses associated with servicing the portfolios held for sale and decreased collection expenses. The increase in 1996 operating expenses reflected lower deferred loan origination costs, increased costs related to collection efforts, and branch office growth that occurred in 1994 and 1995. As a percentage of average finance receivables, operating expenses were 6.1%, 6.1%, and 5.4% in 1997, 1996, and 1995, respectively. Operating expenses as a percentage of average finance receivables for 1997 remained level due to the lower average receivables. OUTLOOK. Management anticipates that increases in receivables due to improvements in loan production and portfolio acquisitions, combined with continuing improvements in credit quality and the expense ratio, will favorably impact earnings growth in 1998. INVESTMENTS At year-end 1997, the company's $81 billion of assets included $54 billion of investments, principally supporting insurance and annuity liabilities. Fixed maturity securities and mortgage loans accounted for 94% of total investments. FAIR VALUE OF SECURITIES A decrease in interest rates and resulting increases in bond values in 1997 caused a $1.3 billion increase in the fair value adjustment to fixed maturity securities and a related $544 million positive adjustment to shareholders' equity. The components of the adjustment to report fixed maturity and equity securities at fair value at December 31, and the 1997 change, were as follows:
In millions 1997 1996 Change ================================================================================ Fair value adjustment to fixed maturity securities $2,844 $1,547 $1,297 Decrease in deferred policy acquisition costs and cost of insurance purchased (1,062) (598) (464) Increase in deferred income taxes (628) (339) (289) - -------------------------------------------------------------------------------- Net unrealized gains Fixed maturity securities 1,154 610 544 Equity securities 15 17 (2) - -------------------------------------------------------------------------------- Net unrealized gains on securities $1,169 $ 627 $ 542 - --------------------------------------------------------------------------------
In contrast, increases in interest rates in 1996 resulted in a $1.6 billion decrease in the fair value AMERICAN GENERAL CORPORATION 24 5 adjustment to fixed maturity securities and a $655 million negative adjustment to shareholders' equity from year-end 1995. Accounting rules do not permit adjustment to fair value of the insurance liabilities supported by these securities, thereby creating volatility in shareholders' equity as interest rates change. Care should be exercised in drawing conclusions based on balance sheets that are only partially adjusted to fair value. FIXED MATURITY SECURITIES At year-end 1997, fixed maturity securities included $35.9 billion of corporate bonds, $9.4 billion of mortgage-backed securities (MBSs), and $2.3 billion of bonds issued by governmental agencies. The average credit rating of the fixed maturity securities was A+ at year-end 1997, 1996, and 1995. Average ratings by category at December 31, 1997 were as follows:
Average In millions 1997 Rating ================================================================================ Investment grade $ 36,328 76% A Mortgage-backed 9,428 20 AAA Below investment grade 1,991 4 BB- - -------------------------------------------------------------------------------- Total fixed maturity securities $ 47,747 100% A+ - --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES. MBSs at December 31 were as follows:
In millions 1997 1996 1995 ================================================================================ CMOs $ 8,354 $ 9,330 $ 10,466 Pass-through securities 673 1,053 1,061 Commercial MBSs 401 259 136 - -------------------------------------------------------------------------------- Total MBSs $ 9,428 $10,642 $ 11,663 - --------------------------------------------------------------------------------
Collateralized mortgage obligations (CMOs) are purchased to diversify the portfolio risk characteristics from primarily corporate credit risk to a mix of credit and cash flow risk. The majority of the CMOs in the company's investment portfolio have relatively low cash flow variability. In addition, virtually all CMOs in the portfolio have minimal credit risk because the underlying collateral is guaranteed by Federal agencies. These CMOs are highly liquid and offer higher yields than corporate debt securities of similar credit quality and expected average lives. The principal risks inherent in holding MBSs are prepayment and extension risks arising from changes in market interest rates. In declining interest rate environments, the mortgages underlying CMOs are prepaid more rapidly than anticipated, causing early repayment of CMOs. In rising interest rate environments, underlying mortgages are prepaid at a slower rate than anticipated, causing CMO principal payments to be extended. Although early CMO repayments may result in acceleration of income from recognition of any unamortized discount, the proceeds typically are reinvested at lower current yields, resulting in a net reduction of future investment income. Proceeds from repayments of the company's MBSs decreased to $496 million in 1997 from $885 million in 1996 and $686 million in 1995. At current interest rate levels, repayments are expected to increase slightly in 1998. The company manages this prepayment and extension risk by investing in CMO tranches that provide for greater stability of cash flows. The mix of CMO tranches at December 31 was as follows:
In millions 1997 1996 1995 ================================================================================ Planned Amortization Class $ 4,520 $ 5,172 $ 5,579 Sequential 2,685 2,967 3,268 Other 1,149 1,191 1,619 - -------------------------------------------------------------------------------- Total CMOs $ 8,354 $ 9,330 $ 10,466 - --------------------------------------------------------------------------------
The Planned Amortization Class (PAC) tranche is structured to provide more certain cash flows to the investor and therefore is subject to less prepayment and extension risk than other CMO tranches. PACs derive their stability from two factors: (1) early repayments are applied first to other tranches to preserve the PACs' originally scheduled cash flows as much as possible, and (2) cash flows applicable to other tranches are applied first to the PACs if the PACs' actual cash flows are received later than originally anticipated. PACs accounted for approximately 48% of total MBSs at year-end 1997, 1996, and 1995. Sequentials allocate all principal payments to tranches based on maturity, retiring the shortest maturity tranches first. The prepayment and extension risk associated with a Sequential tranche can vary as interest rates fluctuate, since Sequentials are not supported by other tranches. Sequentials include PACs that effectively function as Sequentials due to excessive early repayment of the underlying mortgages. The majority of the company's CMO portfolio trades in the open market. As such, the company obtains market prices from outside vendors. Any security price not received from a vendor is obtained from the originating broker or, in rare circumstances, is internally calculated. BELOW INVESTMENT GRADE. Below investment grade securities have credit ratings below BBB-. Below investment grade securities were 4% of invested assets at year-end 1997 and 3% for 1996 and 1995. The company invests in below investment grade securities to 25 1997 ANNUAL REPORT 6 enhance the overall yield of the portfolio. Investment income from below investment grade securities was $178 million (9.6% yield) in 1997, $161 million (9.5% yield) in 1996, and $163 million (9.7% yield) in 1995. Realized investment gains (losses) were immaterial. NON-PERFORMING. Bonds are deemed to be non-performing when the payment of interest is sufficiently uncertain as to preclude the accrual of interest. Non-performing bonds were less than 0.1% of total fixed maturity securities at year-end 1997, 1996, and 1995. PROJECTED CASH FLOWS. Projected principal cash flows and average interest rates by expected maturity date for fixed maturity securities at December 31, 1997 were as follows:
Fixed Rate Variable Rate ------------------------ --------------------- Cash Average Cash Average In millions Flows(a) Rate Flows Rate(b) ================================================================================ 1998 $ 933 7.33% $ -- -- % 1999 1,762 7.73 -- -- 2000 2,168 7.59 -- -- 2001 2,940 7.67 10 6.81 2002 4,140 7.62 40 7.96 Thereafter 33,996 7.28 534 6.12 - -------------------------------------------------------------------------------- Total $ 45,939 7.37% $ 584 6.26% - -------------------------------------------------------------------------------- Fair value $ 47,153 $ 589 - --------------------------------------------------------------------------------
(a) MBS prepayment assumptions are based on rates in effect at December 31, 1997. (b) Based on rates in effect at December 31, 1997. The company uses interest rate swap agreements to convert specific investment securities from a floating to a fixed-rate basis, or vice versa. Notional amounts of interest rate swap agreements, under which the company receives fixed rates and pays variable rates, and the related average rates by contractual maturity date at December 31, 1997 were as follows:
Average Average Notional Receive Pay In millions Amount Rate Rate* ================================================================================ 1999 $ 9 6.92% 8.86% 2002 15 7.10 5.98 Thereafter 145 6.94 6.28 - -------------------------------------------------------------------------------- Total $ 169 6.95% 6.39% - --------------------------------------------------------------------------------
*Based on rates in effect at December 31, 1997. The fair value of these agreements was $5 million at December 31, 1997. MORTGAGE LOANS Mortgage loans on real estate, consisting primarily of loans on office and retail properties, represented 6% of invested assets at year-end 1997. Mortgage loan statistics at December 31 were as follows:
In millions 1997 1996 1995 ================================================================================ Mortgage loans $3,326 $ 3,312 $ 3,433 Allowance for losses (54) (84) (96) - -------------------------------------------------------------------------------- Mortgage loans, net $3,272 $ 3,228 $ 3,337 - -------------------------------------------------------------------------------- Non-performing Delinquent (60+ days) .6% .7% 2.6% Restructured 3.5 4.4 2.9 - -------------------------------------------------------------------------------- Total non-performing 4.1% 5.1% 5.5% - -------------------------------------------------------------------------------- Allowance for losses 1.6% 2.5% 2.8% Yield on restructured loans 8.6 8.3 8.3 Foreclosures during the year $ 12 $ 36 $ 78 - --------------------------------------------------------------------------------
NON-PERFORMING. Non-performing mortgage loans include loans delinquent 60 days or more and loans that have been restructured and are currently performing under the modified terms. Non-performing mortgage loans totaled $135 million at year-end 1997, compared to $169 million and $189 million at year-end 1996 and 1995, respectively. The company's portfolio continues to outperform the life insurance industry averages for non-performing mortgage loans. The industry average was 6.9% at September 30, 1997, the latest date for which information is available. WATCH LIST. Mortgage loans are placed on the company's watch list if (1) the loan is delinquent 30-59 days, (2) the borrower is in bankruptcy, or (3) the loan is potentially undercollateralized. At year-end 1997, $128 million of mortgage loans were on the company's watch list, compared to $286 million at year-end 1996 and $274 million at year-end 1995. The 1997 decrease was due to loans that were no longer undercollateralized or were reinstated, refinanced, or repaid. While the watch list loans may be predictive of higher non-performing loans in the future, the company does not anticipate a significant effect on operations, liquidity, or capital from these loans. PROJECTED CASH FLOWS. Projected principal cash flows and average interest rates by contractual maturity date for mortgage loans on real estate at December 31, 1997 were as follows:
Average In millions Cash Flows Fixed Rate ================================================================================ 1998 $ 200 9.47% 1999 155 9.58 2000 272 9.58 2001 208 9.43 2002 173 9.11 Thereafter 2,338 8.55 - -------------------------------------------------------------------------------- Total $3,346 8.82% - -------------------------------------------------------------------------------- Fair value $3,399 - --------------------------------------------------------------------------------
AMERICAN GENERAL CORPORATION 26 7 CAPITAL RESOURCES The company's overall financial strength is based on total equity of $9.3 billion and is confirmed by strong ratings for both debt-paying and claims-paying ability. To facilitate analysis of capital resources, corporate capital and capital of the business divisions are discussed separately below. CORPORATE CAPITAL Total capital of the parent company is referred to as "corporate capital." Since American General is a holding company, the level of corporate capital is determined primarily by the required equity of its business divisions, while the mix of corporate capital between debt and equity is influenced by overall corporate strategy and structure. American General's target capital structure consists of 25% corporate debt, 15% redeemable equity, and 60% shareholders' equity. At year-end 1997, corporate capital totaling $10.0 billion, excluding the fair value adjustment on securities, consisted of $1.9 billion corporate debt (19%), $1.7 billion redeemable equity (17%), and $6.4 billion shareholders' equity (64%). On February 25, 1998, American General issued 10.2 million shares of common stock and paid $580 million cash to complete the $1.2 billion acquisition of Western National. The cash portion of the purchase price was financed through short-term borrowings. Following the acquisition, the company's pro forma capital structure was 25% corporate debt, 15% redeemable equity, and 60% shareholders' equity. DEBT. American General's corporate debt ratings at December 31, 1997 were as follows:
Standard Duff & & Poor's Phelps Moody's ================================================================================ Commercial paper A-1+ D-1+ P-1 (Highest) (Highest) (Highest) Long-term debt AA- AA- A2 (Strong) (Strong) (Strong) - --------------------------------------------------------------------------------
Projected principal cash flows and average interest rates by contractual maturity date for corporate long-term debt at December 31, 1997 were as follows:
Average In millions Cash Flows Fixed Rate ================================================================================ 1998 $ 355 8.37% 1999 100 7.70 2000 350 8.23 Thereafter 550 7.16 - -------------------------------------------------------------------------------- Total $1,355 7.79% - -------------------------------------------------------------------------------- Fair value $1,407 - --------------------------------------------------------------------------------
The weighted-average interest rate on the $575 million of corporate short-term debt at December 31, 1997 was 6.12%. The company limits its exposure to market interest rate increases through the issuance of fixed-rate debt and, to a lesser extent, the use of derivative financial instruments to synthetically create fixed-rate debt by altering the nature of short-term debt. At December 31, 1997, the company had interest rate swap agreements with a total notional amount of $400 million under which it receives variable rates averaging 5.72% (based on rates in effect at December 31, 1997) and pays fixed rates averaging 6.15%. These agreements, which expire after 2002, had an immaterial fair value at December 31, 1997. REDEEMABLE EQUITY. During the last three years, the company issued redeemable equity totaling $1.7 billion through two wholly owned subsidiaries and two subsidiary trusts. These securities are recorded on the consolidated balance sheet as preferred securities within redeemable equity. Proceeds from these issuances were used primarily to reduce short-term debt issued in connection with corporate development activities. RETIREMENT SERVICES AND LIFE INSURANCE RISK-BASED CAPITAL. 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. The RBC formula specifies weighting factors that are applied to financial balances or levels of activity of each company, based on the perceived degree of risk, to calculate RBC. The RBC ratio is determined by dividing a life insurance company's total adjusted capital by its Authorized Control Level RBC. The RBC requirements provide for four different levels of regulatory attention depending on an insurance company's RBC ratio, the least severe of which is the Company Action Level. At the Company Action Level, the company must submit a comprehensive financial plan to the state insurance commissioner that discusses proposed corrective actions to improve its capital position. 27 1997 ANNUAL REPORT 8 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 December 31, 1997, all of American General's principal retirement services and life insurance companies had statutory equity in excess of the target. RATINGS. Rating agencies use the NAIC approach as a factor in assigning an insurance company its claims-paying ability rating. This rating serves as an indicator of the insurance company's financial strength and ability to meet its future obligations to policyholders. The claims-paying ability ratings of the company's principal retirement services and life insurance companies at December 31, 1997 were as follows:
A.M. Standard Duff & Best & Poor's Phelps Moody's ====================================================================================================== Retirement Services VALIC A++ AA+ AAA Aa2 (Highest) (Excellent) (Highest) (Excellent) Life Insurance All American Life A+ AA+ Aa3 (Superior) (Excellent) (Excellent) American General A++ AA+ AAA Aa3 Life (Highest) (Excellent) (Highest) (Excellent) American General A++ AA+ AAA Life and Accident (Highest) (Excellent) (Highest) Franklin Life A++ AA+ AAA Aa3 (Highest) (Excellent) (Highest) (Excellent) Old Line Life A+ AA+ Aa3 (Superior) (Excellent) (Excellent) United States Life A+ AA+ Aa3 (Superior) (Excellent) (Excellent) - ------------------------------------------------------------------------------------------------------
CONSUMER FINANCE The Consumer Finance division's capital varies directly with the amount of total finance receivables. The capital mix of consumer finance debt and equity is based primarily upon maintaining leverage at a level that supports cost-effective funding. Consumer finance capital of $8.5 billion at year-end 1997 included $7.3 billion of consumer finance debt, which was not guaranteed by the parent company, and $1.2 billion of equity. The Consumer Finance division's target ratio of debt to tangible net worth, a standard measure of financial risk in the consumer finance industry, is 7.5 to 1. The ratio equaled the target at year-end 1997 and 1995, and was 8.4 to 1 at year-end 1996. The 1996 ratio exceeded the target of 7.5 to 1 due to the $93 million aftertax loss associated with assets held for sale as of December 31, 1996. RATINGS. Consumer finance debt ratings at December 31, 1997 were as follows:
Standard Duff & & Poor's Phelps Moody's ================================================================================ Commercial paper A-1 D-1+ P-1 (Strong) (Highest) (Highest) Long-term debt A+ A+ A2 (Strong) (Strong) (Strong) - --------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT The company's asset/liability management program is designed to maintain a reasonable balance in the duration of assets and liabilities, while achieving liquidity and profitability objectives by minimizing the company's exposure to fluctuations in interest rates. Asset/liability management is performed on an ongoing basis for each operating company as well as on an aggregate basis. RETIREMENT SERVICES AND LIFE INSURANCE STRATEGY. The company responds to fluctuations in interest rates through periodic repricing of new products and adjustment of interest crediting rates on existing products where possible. As a result, the company has maintained overall margins on interest-sensitive products, despite declining market interest rates. The company's ability to manage interest crediting rates and durations is largely due to the nature of its insurance and annuity products. At December 31, 1997, the company had the ability, subject to certain minimum rate guarantees, to adjust interest crediting rates on approximately 72% of its insurance and annuity liabilities. Insurance and annuity liabilities at December 31 were as follows:
In millions 1997 1996 1995 ================================================================================ Retirement annuities $ 21,995 $ 21,067 $ 20,147 Traditional life 6,655 6,339 5,563 Interest-sensitive life 6,250 5,646 5,096 Participating life 3,541 3,485 3,396 Other annuities 7,061 7,391 7,550 Other 2,157 2,094 1,966 - -------------------------------------------------------------------------------- Total insurance and annuity liabilities $ 47,659 $ 46,022 $ 43,718 - --------------------------------------------------------------------------------
PROJECTED CASH FLOWS. Insurance investment contracts, included within insurance and annuity liabilities, do not subject the company to significant risks arising from policyholder mortality or morbidity. The majority of the company's annuity contracts are considered to be insurance investment contracts. Projected cash flows and average crediting rates by anticipated payment date related to the company's AMERICAN GENERAL CORPORATION 28 9 insurance investment contracts at December 31, 1997 were as follows:
Adjustable Non-Adjustable Crediting Rate Crediting Rate ---------------------- -------------------- Cash Average Cash Average In millions Flows(a) Rate(b) Flows(a) Rate ================================================================================ 1998 $ 1,975 5.74% $125 5.53% 1999 1,752 5.78 41 6.43 2000 1,563 5.78 33 6.55 2001 1,431 5.80 30 6.55 2002 1,307 5.82 26 6.54 Thereafter 19,413 5.95 443 6.54 - -------------------------------------------------------------------------------- Total $27,441 5.90% $698 6.35% - -------------------------------------------------------------------------------- Fair value $26,883 $740 - --------------------------------------------------------------------------------
(a) Surrender assumptions are based on rates in effect at December 31, 1997. (b) Based on rates in effect at December 31, 1997. 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 decline significantly over prolonged periods. These agreements, with a notional amount of $3.0 billion and an immaterial fair value at December 31, 1997, expire in 1998. Projected cash flows of interest rate sensitive investments are detailed in the "Investments" section beginning on page 24. Cash flow testing of assets and liabilities is performed at least annually under multiple interest rate scenarios to evaluate the appropriateness of the company's investment portfolios relative to its insurance reserves. Cash flow testing performed as of December 31, 1997 indicated that the company's insurance subsidiaries would have sufficient cash flows to meet their insurance obligations. DURATION. The company manages the duration of its investment portfolio by aligning characteristics of investment purchases with specific duration objectives and, to a lesser extent, through portfolio restructuring actions. The most recent estimated duration of the company's insurance and annuity liabilities was in the range of 4.8 to 5.8 years, while the estimated duration of the assets supporting these liabilities was 5.7 years. CONSUMER FINANCE STRATEGY. The company funds its finance receivables with equity and a combination of fixed-rate debt, principally long-term, and floating-rate or short-term debt, principally commercial paper. The company's mix of fixed-rate and floating-rate debt is a management decision based in part on the nature of the receivables being supported. The company limits its exposure to market interest rate increases by fixing interest rates it pays for term periods. PROJECTED CASH FLOWS. Projected principal cash flows and average interest rates by contractual maturity date for finance receivables at December 31, 1997 were as follows:
Fixed Rate Variable Rate --------------------- ------------------ Cash Average Cash Average In millions Flows Rate Flows Rate* ================================================================================ 1998 $2,137 21.40% $ 44 12.46% 1999 1,370 20.95 35 12.51 2000 855 18.55 28 12.48 2001 468 15.55 23 12.45 2002 288 13.05 19 12.41 Thereafter 2,013 13.05 250 12.09 - -------------------------------------------------------------------------------- Total $7,131 17.89% $ 399 12.23% - -------------------------------------------------------------------------------- Fair value $7,234 $ 405 - --------------------------------------------------------------------------------
*Based on rates in effect at December 31, 1997. Projected principal cash flows and average interest rates by expected maturity date for consumer finance long-term debt at December 31, 1997 were as follows:
Fixed Rate Variable Rate ------------------- ----------------- Cash Average Cash Average In millions Flows Rate Flows Rate* ================================================================================ 1998 $ 825 7.54% $ -- -- % 1999 570 7.33 40 6.10 2000 1,279 6.79 -- -- 2001 42 6.24 -- -- 2002 550 6.77 -- -- Thereafter 713 7.48 -- -- - -------------------------------------------------------------------------------- Total $3,979 7.14% $ 40 6.10% - -------------------------------------------------------------------------------- Fair value $4,077 $ 40 - --------------------------------------------------------------------------------
*Based on rates in effect at December 31, 1997. The weighted-average interest rate on the $3.3 billion of consumer finance short-term debt at December 31, 1997 was 5.9%. The company uses derivative financial instruments to synthetically create fixed-rate debt by altering the nature of floating-rate or short-term debt. Notional amounts of interest rate swap agreements, under which the company receives variable rates and pays fixed rates, and related average rates by contractual maturity dates at December 31, 1997 were as follows:
Average Average Notional Receive Pay In millions Amount Rate* Rate ================================================================================ 1998 $ 265 5.62% 7.08% 1999 50 5.72 9.39 2000 225 5.70 8.80 2002 200 5.72 6.93 Thereafter 200 5.72 6.16 - -------------------------------------------------------------------------------- Total $ 940 5.69% 7.39% - --------------------------------------------------------------------------------
*Based on rates in effect at December 31, 1997. Had the company terminated these agreements at December 31, 1997, it would have paid $30 million. 29 1997 ANNUAL REPORT 10 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 December 31, 1997, the company had committed and unused credit facilities of $4.0 billion. The company believes that its overall sources of liquidity will continue to be sufficient to satisfy its foreseeable financial obligations. PARENT COMPANY The primary sources of cash for the parent company include net dividends from subsidiaries and the proceeds from issuance of debt and redeemable equity. During 1997, the parent company received $666 million of net dividends from subsidiaries. While the subsidiaries are restricted in the amount of dividends they may pay to the parent company, these restrictions are not expected to affect American General's ability to meet its cash obligations in 1998. The parent primarily uses cash for acquisitions, to pay dividends to shareholders, to pay interest on corporate debt, and to repurchase common stock. American General repurchased 9.9 million shares of its common stock at a cost of $466 million during 1997, 5.3 million shares at a cost of $187 million during 1996, and 1.4 million shares at a cost of $45 million in 1995. Most of the 1997 repurchase activity was undertaken to acquire an amount of shares essentially equivalent to the amount issued in the acquisition of Home Beneficial Life. Since 1987, American General has repurchased 113.7 million common shares for an aggregate cost of $2.6 billion. To meet pooling of interests accounting requirements in connection with the USLIFE merger, American General rescinded its share buyback program prior to consummating the merger. Future repurchase activity will be based on the company's corporate development activities, capital management strategy, and fluctuations in its common stock price. RETIREMENT SERVICES AND LIFE INSURANCE Principal sources of cash for the Retirement Services and Life Insurance divisions were as follows:
In millions 1997 1996 1995 ================================================================================ Operating activities $1,890 $1,984 $1,984 Fixed policyholder account deposits, net of withdrawals 95 120 1,231 Variable account deposits, net of withdrawals 2,094 1,767 1,194 - --------------------------------------------------------------------------------
Operating cash flows for the Retirement Services and Life Insurance divisions remained stable over the last three years. In both 1997 and 1996, the decrease in net fixed policyholder account deposits and the increase in net variable account deposits were the result of policyholders seeking higher returns in equity-based investments, including the company's Separate Accounts. Because the investment risk on variable accounts lies solely with the policyholder, deposits and withdrawals related to Separate Accounts are not included in the company's consolidated statement of cash flows. The major uses of cash were the net purchase of investments necessary to support increases in insurance and annuity liabilities, and net dividends paid to the parent. The subsidiaries in these divisions paid net dividends of $586 million in 1997, compared to $315 million in 1996 and $359 million in 1995. CONSUMER FINANCE Principal sources of cash for the Consumer Finance division were as follows:
In millions 1997 1996 1995 ================================================================================ Operating activities $ 516 $ 590 $ 658 Increase (decrease) in borrowings (366) 155 376 Disposition of non-strategic assets 733 -- -- - --------------------------------------------------------------------------------
Cash provided by operating activities decreased in 1997 and 1996 primarily as a result of lower finance charge revenues attributable to lower average finance receivables and yields. Cash provided by the sale of non-strategic assets resulted in a decrease in borrowings in 1997. Cash provided by borrowings decreased in 1996 due to lower growth in receivables. The major uses of cash were to fund finance receivables and net dividends paid to the parent company. Net cash used to fund finance receivables was $793 million in 1997, up from $453 million in 1996 and down from $759 million in 1995. Net dividends paid to the parent company totaled $80 million in 1997, compared to $139 million in 1996 and $33 million in 1995. REGULATION AND OTHER REGULATION Insurance regulators monitor market conduct, such as sales and advertising practices, agent licensing and compensation, policyholder service, complaint handling, underwriting, and claims practices. The company is not aware of any existing or pending regulatory actions concerning market conduct that would materially affect its operations. However, as a result of increased regulatory scrutiny, market conduct compliance costs will increase for American General's insurance subsidiaries. See Note 19.2 to the consolidated financial statements for discussion of purported class action lawsuits related to market conduct. AMERICAN GENERAL CORPORATION 30 11 TAXATION Tax laws affect not only the way the company is taxed but also the design of many of its products. Changes in tax laws or regulations could adversely affect operating results. YEAR 2000 The company is in the process of modifying its computer systems to be Year 2000 compliant. During 1997, the company incurred and expensed $15 million (pretax) related to this project. The company estimates that it will incur future costs in excess of $45 million (pretax) for additional internal staff, third-party vendors, and other expenses to render its systems Year 2000 compliant. The company expects to substantially complete this project during 1998. However, risks and uncertainties exist in most significant systems development projects. If conversion of the company's systems is not completed on a timely basis, due to non-performance by third-party vendors or other unforeseen circumstances, the Year 2000 issue could have a material adverse impact on the operations of the company. LITIGATION See Note 19.2 to the consolidated financial statements for specific legal proceedings involving the company. FORWARD-LOOKING STATEMENTS The statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. 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) adverse litigation results; (5) resolution of market conduct issues; (6) the company's ability to render its computer systems Year 2000 compliant; and (7) the company's failure to achieve anticipated levels of earnings or operational efficiencies related to recently acquired companies, as well as other cost-saving initiatives. Investors are also directed to other risks and uncertainties discussed in documents filed by the company with the Securities and Exchange Commission. 31 1997 ANNUAL REPORT 12 CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------------------------------------------------- AMERICAN GENERAL CORPORATION For the years ended December 31 In millions, except per share data 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- REVENUES Premiums and other considerations $ 3,362 $ 3,244 $ 2,969 Net investment income 4,020 3,773 3,584 Finance charges 1,265 1,450 1,492 Realized investment gains 40 62 18 Equity in earnings of Western National Corporation 54 40 43 Other 186 145 130 ----------------------------------------------------------------------------------------------------- Total revenues 8,927 8,714 8,236 - --------------------------------------------------------------------------------------------------------------------------- BENEFITS AND Insurance and annuity benefits 4,332 4,218 4,085 EXPENSES Operating costs and expenses 1,447 1,405 1,275 Commissions 873 848 812 Change in deferred policy acquisition costs and cost of insurance purchased (100) (124) (235) Provision for finance receivable losses 248 417 574 Interest expense Corporate 158 162 197 Consumer Finance 461 493 518 Other charges Merger-related costs 272 - - Loss on sale of non-strategic assets 113 165 - Litigation settlement 50 - - Write-down of group business - 50 - ----------------------------------------------------------------------------------------------------- Total benefits and expenses 7,854 7,634 7,226 - --------------------------------------------------------------------------------------------------------------------------- EARNINGS Income before income tax expense 1,073 1,080 1,010 Income tax expense 447 387 341 ----------------------------------------------------------------------------------------------------- Income before net dividends on preferred securities of subsidiaries 626 693 669 Net dividends on preferred securities of subsidiaries 84 40 19 ----------------------------------------------------------------------------------------------------- Net income $ 542 $ 653 $ 650 - --------------------------------------------------------------------------------------------------------------------------- SHARE DATA Net income per share Basic $ 2.21 $ 2.67 $ 2.68 Diluted 2.19 2.63 2.66 - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. AMERICAN GENERAL CORPORATION 32 13 CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------------------------------------------------- AMERICAN GENERAL CORPORATION At December 31 In millions, except share data 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Investments Fixed maturity securities (amortized cost: $44,961; $42,867; $40,149) $ 47,747 $ 44,355 $ 43,220 Mortgage loans on real estate 3,272 3,228 3,337 Equity securities (cost: $93; $111; $144) 116 137 191 Policy loans 2,156 2,011 1,887 Investment real estate 233 626 607 Other long-term investments 176 210 183 Short-term investments 306 265 173 ----------------------------------------------------------------------------------------------------- Total investments 54,006 50,832 49,598 ----------------------------------------------------------------------------------------------------- Cash 263 176 227 Finance receivables, net 7,639 7,230 7,918 Investment in Western National Corporation 583 535 407 Deferred policy acquisition costs 2,718 2,954 2,343 Cost of insurance purchased 680 755 504 Acquisition-related goodwill 677 605 627 Assets held for sale - 667 - Other assets 2,572 2,517 2,289 Assets held in Separate Accounts 11,482 7,863 5,170 ----------------------------------------------------------------------------------------------------- Total assets $ 80,620 $ 74,134 $ 69,083 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES Insurance and annuity liabilities $ 47,659 $ 46,022 $ 43,718 Debt (short-term) Corporate ($575; $631; $776) 1,916 2,102 2,295 Consumer Finance ($3,255; $3,131; $2,490) 7,266 7,630 7,470 Income tax liabilities 1,380 1,078 1,387 Other liabilities 1,608 1,368 1,205 Liabilities related to Separate Accounts 11,482 7,863 5,170 ----------------------------------------------------------------------------------------------------- Total liabilities 71,311 66,063 61,245 - --------------------------------------------------------------------------------------------------------------------------- REDEEMABLE Company-obligated mandatorily redeemable EQUITY preferred securities of subsidiaries holding solely company subordinated notes Non-convertible 1,479 982 485 Convertible 247 245 244 ----------------------------------------------------------------------------------------------------- Total redeemable equity 1,726 1,227 729 - --------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' Convertible preferred stock (shares issued and EQUITY outstanding: 2,317,701; 2,323,722) 85 85 - Common stock (shares issued: 259,135,053; 283,738,546; 283,734,425; outstanding: 243,206,215; 241,170,903; 242,104,405) 326 572 532 Net unrealized gains on securities 1,169 627 1,296 Retained earnings 6,624 6,420 6,071 Cost of treasury stock (621) (860) (790) ----------------------------------------------------------------------------------------------------- Total shareholders' equity 7,583 6,844 7,109 ----------------------------------------------------------------------------------------------------- Total liabilities and equity $ 80,620 $ 74,134 $ 69,083 - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 33 1997 ANNUAL REPORT 14 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- AMERICAN GENERAL CORPORATION
For the years ended December 31 In millions, except per share data 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE Balance at beginning of year $ 85 $ -- $ -- PREFERRED Issuance for acquisition -- 85 -- STOCK ----------------------------------------------------------------------------------------------------- Balance at end of year 85 85 -- - --------------------------------------------------------------------------------------------------------------------------- COMMON Balance at beginning of year 572 532 528 STOCK Retirement of USLIFE treasury shares (346) -- -- Treasury shares issued for acquisitions and other 100 40 4 ----------------------------------------------------------------------------------------------------- Balance at end of year 326 572 532 - --------------------------------------------------------------------------------------------------------------------------- NET UNREALIZED Balance at beginning of year 627 1,296 (1,092) GAINS ON Change during year 542 (669) 2,388 ----------------------------------------------------------------------------------------------------- Securities Balance at end of year 1,169 627 1,296 - --------------------------------------------------------------------------------------------------------------------------- RETAINED Balance at beginning of year 6,420 6,071 5,705 EARNINGS Net income 542 653 650 Cash dividends (per share) Preferred ($2.57; $1.94) (6) (5) -- Common ($1.40; $1.30; $1.24) (329) (299) (285) Other (3) -- 1 ----------------------------------------------------------------------------------------------------- Balance at end of year 6,624 6,420 6,071 - --------------------------------------------------------------------------------------------------------------------------- COST OF Balance at beginning of year (860) (790) (807) TREASURY Retirement of USLIFE treasury shares 346 -- -- STOCK Share repurchases (466) (187) (45) Issuance for acquisitions 304 104 -- Issuance under employee benefit plans and other 55 13 62 ----------------------------------------------------------------------------------------------------- Balance at end of year (621) (860) (790) - --------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Balance at end of year $ 7,583 $ 6,844 $ 7,109 - ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF COMMON STOCK ACTIVITY
In thousands of shares 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- SHARES ISSUED Balance at beginning of year 283,739 283,734 283,731 Retirement of USLIFE treasury shares (24,650) -- -- Conversion of convertible preferred stock 46 5 3 ----------------------------------------------------------------------------------------------------- Balance at end of year 259,135 283,739 283,734 - --------------------------------------------------------------------------------------------------------------------------- TREASURY Balance at beginning of year (42,568) (41,630) (42,795) SHARES Retirement of USLIFE treasury shares 24,650 -- -- Share repurchases (9,946) (5,273) (1,417) Issuance for acquisitions 9,462 3,740 -- Issuance under employee benefit plans and other 2,473 595 2,582 ----------------------------------------------------------------------------------------------------- Balance at end of year (15,929) (42,568) (41,630) - --------------------------------------------------------------------------------------------------------------------------- OUTSTANDING SHARES Balance at end of year 243,206 241,171 242,104 - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. AMERICAN GENERAL CORPORATION 34 15 CONSOLIDATED STATEMENT OF CASH FLOWS - -------------------------------------------------------------------------------- American General Corporation
For the years ended December 31 In millions 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- OPERATING Net income $ 542 $ 653 $ 650 ACTIVITIES Reconciling adjustments Insurance and annuity liabilities 1,082 1,351 1,535 Deferred policy acquisition costs and cost of insurance purchased (100) (124) (235) Provision for finance receivable losses 248 417 574 Loss on sale of non-strategic assets 113 165 -- Realized investment gains (40) (62) (18) Other, net (200) (121) (116) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,645 2,279 2,390 - --------------------------------------------------------------------------------------------------------------------------- INVESTING Investment purchases (11,010) (10,678) (8,558) ACTIVITIES Investment dispositions and repayments 10,290 9,280 6,102 Finance receivable originations and purchases (5,136) (5,339) (5,686) Finance receivable principal payments received 4,343 4,886 4,927 Disposition of non-strategic assets 1,047 -- -- Acquisitions (283) (106) (920) Investment in Western National Corporation -- (126) -- Other, net (92) (295) (25) - --------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (841) (2,378) (4,160) - --------------------------------------------------------------------------------------------------------------------------- FINANCING Retirement Services and Life Insurance ACTIVITIES Policyholder account deposits 3,068 2,996 3,365 Policyholder account withdrawals (2,973) (2,876) (2,134) - --------------------------------------------------------------------------------------------------------------------------- Total Retirement Services and Life Insurance 95 120 1,231 - --------------------------------------------------------------------------------------------------------------------------- Consumer Finance Net increase (decrease) in short-term debt 124 641 (287) Long-term debt issuances 731 124 1,577 Long-term debt redemptions (1,221) (610) (914) - --------------------------------------------------------------------------------------------------------------------------- Total Consumer Finance (366) 155 376 - --------------------------------------------------------------------------------------------------------------------------- Corporate Net decrease in short-term debt (56) (145) (421) Long-term debt issuances -- -- 433 Long-term debt redemptions (133) (50) (100) Issuances of preferred securities of subsidiaries 498 495 729 Common stock repurchases (467) (191) (40) Dividends on common and preferred stock (335) (304) (285) Other, net 47 (32) (24) - --------------------------------------------------------------------------------------------------------------------------- Total Corporate (446) (227) 292 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (717) 48 1,899 - --------------------------------------------------------------------------------------------------------------------------- NET CHANGE Net increase (decrease) in cash 87 (51) 129 IN CASH Cash at beginning of year 176 227 98 - --------------------------------------------------------------------------------------------------------------------------- Cash at end of year $ 263 $ 176 $ 227 - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 35 1997 ANNUAL REPORT 16 NOTES TO FINANCIAL STATEMENTS Significant Accounting Policies 1.1 Preparation of Financial Statements The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) and include the accounts of American General Corporation (American General) and its subsidiaries (collectively, the company). All material intercompany transactions have been eliminated in consolidation. The accompanying consolidated financial statements include the results of operations, financial position, and cash flows of USLIFE Corporation (USLIFE) under the pooling of interests method of accounting in conjunction with the acquisition of USLIFE (see Note 2.2). The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and disclosures of contingent assets and liabilities. Ultimate results could differ from these estimates. 1.2 Investments FIXED MATURITY AND EQUITY SECURITIES. All fixed maturity and equity securities are classified as available-for-sale and recorded at fair value. After adjusting related balance sheet accounts as if unrealized gains (losses) had been realized, the net adjustment is recorded in net unrealized gains on securities within shareholders' equity. If the fair value of a security classified as available-for-sale declines below its cost and this decline is considered to be other than temporary, the security is reduced to its fair value, and the reduction is recorded as a realized loss. MORTGAGE LOANS. Mortgage loans are reported at amortized cost, net of an allowance for losses. The allowance for losses covers all non-performing loans and loans for which management has a concern based on its assessment of risk factors, such as potential non-payment or non-monetary default. The allowance is based on a loan-specific review and a formula that reflects past results and current trends. Loans for which the company determines that collection of all amounts due under the contractual terms is not probable are considered to be impaired. The company generally looks to the underlying collateral for repayment of impaired loans. Therefore, impaired loans are considered to be collateral dependent and are reported at the lower of amortized cost or fair value of the underlying collateral, less estimated cost to sell. POLICY LOANS. Policy loans are reported at unpaid principal balance. INVESTMENT REAL ESTATE. Investment real estate is classified as held for investment or available for sale, based on management's intent. Real estate held for investment is carried at cost, less accumulated depreciation and impairment write-downs. Real estate available for sale is carried at the lower of cost (less accumulated depreciation, if applicable) or fair value less cost to sell. INVESTMENT INCOME. Interest on fixed maturity securities and performing and restructured mortgage loans is recorded as income when earned and is adjusted for any amortization of premium or discount. Interest on delinquent mortgage loans is recorded as income when received. Dividends are recorded as income on ex-dividend dates. REALIZED INVESTMENT GAINS. Realized investment gains (losses) are recognized using the specific identification method. 1.3 Finance Receivables FINANCE CHARGES. Finance charges on discounted receivables and interest on interest-bearing receivables are recognized as revenue using the interest method. The accrual of revenue is suspended when contractual payments are not received for four consecutive months for loans and retail sales contracts, and for six months for private label receivables. Extension fees and late charges are recognized as revenue when received. Direct costs incurred to originate loans, net of non-refundable points and fees, are deferred and included in the carrying amount of the related loans. The amount deferred is recognized as an adjustment to finance charge revenues, using the interest method over the lesser of the contractual term or the expected life based on prepayment experience. If loans are prepaid, any remaining deferral is expensed. LOSSES ON FINANCE RECEIVABLES. The company's policy is to charge off finance receivables, except those secured by real estate, for which minimal or no collections have been made for six months. For loans secured by real estate, foreclosure proceedings are initiated when four monthly installments are past due. At foreclosure, the carrying amount of a loan in excess of the fair value of the underlying real estate is charged off. The allowance for finance receivable losses is maintained at a level that is considered adequate to absorb anticipated losses in the existing portfolio. Management considers numerous factors including economic conditions, portfolio composition, and loss and delinquency experience in its periodic evaluations of the portfolio. AMERICAN GENERAL CORPORATION 36 17 1.4 Deferred Policy Acquisition Costs (DPAC) Certain costs of writing an insurance policy, including commissions, underwriting, and marketing expenses, are deferred and reported as DPAC. DPAC associated with interest-sensitive life contracts, insurance investment contracts, and participating life insurance contracts is charged to expense in relation to the estimated gross profits of those contracts. DPAC associated with all other insurance contracts is charged to expense over the premium-paying period or as the premiums are earned over the life of the contract. DPAC is adjusted for the impact on estimated future gross profits as if net unrealized gains (losses) on securities had been realized at the balance sheet date. The impact of this adjustment is included in net unrealized gains on securities within shareholders' equity. The company reviews the carrying amount of DPAC on at least an annual basis. Management considers estimated future gross profits or future premiums, expected mortality, interest earned and credited rates, persistency, and expenses in determining whether the carrying amount is recoverable. 1.5 Cost of Insurance Purchased (CIP) The cost assigned to certain acquired subsidiaries' insurance contracts in force at the acquisition date is reported as CIP. Interest is accreted on the unamortized balance of CIP at rates of 6.0% to 8.2%. CIP is charged to expense and adjusted for the impact of net unrealized gains (losses) on securities in the same manner as DPAC. The company reviews the carrying amount of CIP on at least an annual basis using the same methods used to evaluate DPAC. 1.6 Acquisition-Related Goodwill Acquisition-related goodwill is charged to expense in equal amounts, generally over 20 to 40 years. The carrying amount of goodwill is regularly reviewed for indicators of impairment in value, which in the view of management are other than temporary, including unexpected or adverse changes in the following: (1) the economic or competitive environments in which the company operates, (2) profitability analyses, (3) cash flow analyses, and (4) the fair value of the relevant subsidiary. The company determines the subsidiary's fair value based on an independent appraisal. If facts and circumstances suggest that a subsidiary's goodwill is impaired, the company assesses the fair value of the underlying business and reduces goodwill to an amount that results in the book value of the subsidiary approximating fair value. 1.7 Separate Accounts Separate Accounts are assets and liabilities associated with certain contracts, principally annuities, for which the investment risk lies solely with the contract holder. Therefore, the company's liability for these accounts equals the value of the account assets. Investment income, realized investment gains (losses), and policyholder account deposits and withdrawals related to Separate Accounts are excluded from the consolidated statements of income and cash flows. Assets held in Separate Accounts are primarily shares in mutual funds, which are carried at fair value, based on the quoted net asset value per share. 1.8 Insurance and Annuity Liabilities Substantially all of the company's insurance and annuity liabilities relate to long-duration contracts. The contracts normally cannot be changed or canceled by the company during the contract period. For interest-sensitive life and insurance investment contracts, reserves equal the sum of the policy account balance and deferred revenue charges. Reserves for other contracts are based on estimates of the cost of future policy benefits. Reserves are determined using the net level premium method. Interest assumptions used to compute reserves ranged from 2.0% to 13.5% at December 31, 1997. 1.9 Premium Recognition Most receipts for annuities and interest-sensitive life insurance policies are classified as deposits instead of revenues. Revenues for these contracts consist of mortality, expense, and surrender charges. Policy charges that compensate the company for future services are deferred and recognized over the period earned, using the same assumptions used to amortize DPAC. For limited-payment contracts, net premiums are recorded as revenue, and the difference between the gross premium received and the net premium is deferred and recognized in a constant relationship to insurance in force. For all other contracts, premiums are recognized when due. 1.10 Participating Life Insurance Participating life insurance accounted for approximately 10% of life insurance in force and 11% of premiums and other considerations in 1997, 1996, and 1995. The portion of earnings allocated to participating policyholders that cannot be expected to inure to shareholders is excluded from net income and shareholders' equity. Dividends to be paid on participating life insurance contracts are determined annually based on estimates of the contracts' earnings. Policyholder dividends were $95 million, $94 million, and $92 million in 1997, 1996, and 1995, respectively. 1.11 Reinsurance The company limits its exposure to loss on any single insured to $1.5 million by ceding additional risks 37 1997 ANNUAL REPORT 18 through reinsurance contracts with other insurers. The company diversifies its risk of reinsurance loss by using a number of reinsurers that have strong claims-paying ability ratings. If the reinsurer could not meet its obligations, the company would reassume the liability. The likelihood of a material reinsurance liability being reassumed by the company is considered to be remote. A receivable is recorded for the portion of benefits paid and insurance liabilities that have been reinsured. Reinsurance recoveries on ceded reinsurance contracts were $131 million, $166 million, and $176 million during 1997, 1996, and 1995, respectively. The cost of reinsurance is recognized over the life of the reinsured policies using assumptions consistent with those used to account for the underlying policies. Reinsurance premiums included in premiums and other considerations were as follows:
In millions 1997 1996 1995 =========================================================== Direct premiums and other considerations $3,542 $ 3,427 $ 3,107 Reinsurance assumed 119 125 155 Reinsurance ceded (299) (308) (293) - ----------------------------------------------------------- Premiums and other considerations $3,362 $ 3,244 $ 2,969 - -----------------------------------------------------------
1.12 Stock-Based Compensation The company's stock and incentive plans provide for the award of stock options, restricted stock awards, performance awards, and incentive awards to key employees and directors. Stock options constitute the majority of such awards. Expense related to stock options is measured as the excess of the market price of the stock at the measurement date over the exercise price. The measurement date is the first date on which both the number of shares that the employee is entitled to receive and the exercise price are known. Generally, no expense is recognized since the market price equals the exercise price at the measurement date. 1.13 Income Taxes Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities, at the enacted tax rates expected to be in effect when the temporary differences reverse. The effect of a tax rate change is recognized in income in the period of enactment. State income taxes are included in income tax expense. A valuation allowance for deferred tax assets is provided if it is more likely than not that some portion of the deferred tax asset will not be realized. An increase or decrease in a valuation allowance that results from a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset is included in income. A change related to fluctuations in fair value of available-for-sale securities is included in net unrealized gains on securities in shareholders' equity. 1.14 Earnings Per Share During 1997, the company adopted Statement of Financial Accounting Standards (SFAS) 128, "Earnings per Share," which changed certain requirements for computing and disclosing earnings per share, retroactive for all periods presented. Diluted earnings per share computed under the new standard is the same as fully diluted earnings per share computed under the previous rules for 1997 and 1996, and $.01 higher for 1995. Basic earnings per share is computed by dividing earnings available to common shareholders by average common shares outstanding. Diluted earnings per share is computed assuming the conversion or exercise of dilutive convertible preferred securities and stock options outstanding during the period. 1.15 New Accounting Standards Not Yet Adopted In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. Beginning first quarter 1998, the company must adopt this statement for all periods presented. Application of this statement will not change recognition or measurement of net income and, therefore, will not impact the company's consolidated results of operations or financial position. In June 1997, the FASB also issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," which changes the way companies report segment information. This statement is effective for 1998, but application to interim periods is not required until 1999. Restatement of comparative information for all periods presented is required upon adoption. Application of this statement will result in more detailed segment disclosures but will not have an impact on the company's consolidated results of operations or financial position. 2 Acquisitions 2.1 Accounting for Acquisitions With the exception of USLIFE, the company's acquisitions have been accounted for using the purchase method. Under this method, the results of operations for each acquisition are included in the company's consolidated statement of income from the date of acquisition. The purchase price of each acquisition is allocated to specific assets and liabilities based on management's best estimate of their fair values at the date AMERICAN GENERAL CORPORATION 38 19 of acquisition. The difference between the aggregate purchase price and the net assets acquired is attributed to goodwill. The merger of USLIFE was accounted for using the pooling of interests method. Accordingly, the company's consolidated financial statements include the results of operations, financial position, and cash flows of USLIFE for all periods presented. 2.2 USLIFE On June 17, 1997, the company completed the merger of USLIFE in an all-stock transaction. American General issued 39.0 million shares of common stock (with a market value of approximately $1.8 billion) in exchange for all USLIFE common shares. Assets, net unrealized gains on securities, and share- holders' equity for the separate companies were as follows:
June 30, December 31, In millions 1997* 1996 1995 ============================================================== Assets American General $69,707 $66,254 $ 61,152 USLIFE 7,680 7,880 7,931 - -------------------------------------------------------------- Total $77,387 $74,134 $ 69,083 - --------------------------------------------------------------- Net unrealized gains on securities American General $ 489 $ 559 $ 1,100 USLIFE 44 68 196 - -------------------------------------------------------------- Total $ 533 $ 627 $ 1,296 - --------------------------------------------------------------- Shareholders' equity American General $ 5,041 $ 5,621 $ 5,801 USLIFE 1,705 1,223 1,308 - -------------------------------------------------------------- Total $ 6,746 $ 6,844 $ 7,109 - --------------------------------------------------------------
*Unaudited. Revenues and net income for the separate companies were as follows:
Six Months Twelve Months Ended Ended June 30, December 31, In millions 1997(a) 1996 1995 =============================================================== Revenues American General $ 3,471 $ 6,908 $ 6,496 USLIFE 897 1,806 1,740 - --------------------------------------------------------------- Total $ 4,368 $ 8,714 $ 8,236 - --------------------------------------------------------------- Net income(b) American General $ 286 $ 577 $ 545 USLIFE 47 76 105 Merger-related costs (247) -- -- - --------------------------------------------------------------- Total $ 86 $ 653 $ 650 - ---------------------------------------------------------------
(a) Unaudited. (b) Includes charges discussed in Note 3. 2.3 Home Beneficial Life On April 16, 1997, the company acquired Home Beneficial Corporation, the holding company of Home Beneficial Life Insurance Company (Home Beneficial Life), for $665 million. The purchase price consisted of $283 million cash and 9.5 million shares of American General common stock. During the period between the announcement of the agreement to acquire Home Beneficial Life and the date of acquisition, American General repurchased an amount of shares essentially equivalent to the amount issued in the acquisition. Non-cash activities related to the acquisition that are not reflected in the consolidated statement of cash flows for the year ended December 31, 1997 were as follows: In millions - -------------------------------------------------------------- Fair value of assets acquired $ 1,446 Liabilities assumed (781) Issuance of treasury shares (382) - -------------------------------------------------------------- Net cash paid $ 283 - --------------------------------------------------------------
2.4 Independent Life On February 29, 1996, the company acquired Independent Insurance Group, Inc., the holding company of The Independent Life and Accident Insurance Company, for $362 million. The purchase price consisted of $139 million cash, 3.7 million shares of American General common stock, and 2.3 million shares of American General 7% Convertible Preferred Stock. Non-cash activities related to the acquisition that are not reflected in the consolidated statement of cash flows for the year ended December 31, 1996 were as follows: In millions - -------------------------------------------------------------- Fair value of assets acquired, excluding $33 million cash $ 1,358 Liabilities assumed (1,029) Issuance of treasury shares (138) Issuance of preferred stock (85) - -------------------------------------------------------------- Net cash paid $ 106 - --------------------------------------------------------------
2.5 Franklin Life On January 31, 1995, the company acquired The Franklin Life Insurance Company (Franklin Life) for $1.17 billion. The purchase price consisted of $920 million cash and a $250 million cash dividend paid by Franklin Life to its former parent prior to closing. 2.6 Western National On December 23, 1994, the company acquired a 40% investment in Western National Corporation (Western National), the holding company of Western National Life Insurance Company, through the acquisition of 24.9 million shares of common stock for $274 million cash. On September 17, 1996, the company increased its equity ownership to 46% through the purchase of 7.3 million shares of participating convertible preferred stock for $126 million cash. These acquisitions were recorded on an equity basis. 39 1997 ANNUAL REPORT 20 On February 25, 1998, the company acquired the remaining 54% equity interest of Western National for $1.2 billion. The purchase price consisted of $580 million cash and 10.2 million shares of American General common stock. Western National's assets, liabilities, and results of operations will be consolidated in the company's financial statements effective January 1, 1998. Earnings attributable to minority interests through February 25, 1998 will be reflected as a charge against consolidated income. Western National will be reported as part of the Retirement Services division. 3 Other Charges 3.1 Merger-Related Costs The company recorded the following costs in second quarter 1997 related to the merger with USLIFE: In millions Pretax Aftertax - ------------------------------------------------------------ Change in control costs $ 179 $ 155 Transaction costs 22 22 Restructuring costs 71 46 Deferred tax asset valuation allowance -- 24 - ------------------------------------------------------------ Total $ 272 $ 247 - ------------------------------------------------------------
Change in control costs consist primarily of severance and supplemental retirement plan payments to USLIFE executives, payable under various USLIFE plans in effect prior to the merger. A substantial portion of these payments are considered excess parachute payments for tax purposes and are not tax deductible by the company. Transaction costs include expenses for investment bankers, attorneys, accountants, and proxy printing costs. Restructuring costs consist primarily of severance and the elimination of redundant facilities in connection with the merger and the concurrent realignment of the Life Insurance division. The new structure will include centralized support units focused on product development, insurance administration, and customer service. Severance and related costs of $34 million relate to the elimination of approximately 1,200 positions, which began in third quarter 1997. The positions being eliminated relate to USLIFE's corporate operations and to administrative service functions that are being centralized. Costs of $37 million to eliminate redundant facilities relate to contractual payments under lease obligations for facilities to be vacated, and the write-off of computer equipment and related software at various locations that will be centralized. The integration of USLIFE is proceeding as planned. As of December 31, 1997, $7 million of severance had been paid to 229 terminated employees and $2 million had been incurred to eliminate redundant facilities. A valuation allowance for the deferred tax asset related to a portion of USLIFE's net operating loss carryforward was provided at the acquisition date since, as a result of the acquisition, it is more likely than not that some portion of the deferred tax asset will not be realized. 3.2 Sale of Non-strategic Assets Losses related to the sale of non-strategic assets were as follows:
1997 1996 ---------------- ---------------- In millions Pretax Aftertax Pretax Aftertax ============================================================== Finance receivables $ 42 $ 27 $ 145 $ 93 Other non-strategic assets 71 46 20 18 - -------------------------------------------------------------- Total $ 113 $ 73 $ 165 $ 111 - --------------------------------------------------------------
In fourth quarter 1996, the company reached a decision to offer for sale $875 million of non-strategic finance receivable portfolios, consisting of $520 million of bank credit card receivables and $355 million of private label loans. Accordingly, these receivables and an associated allowance for losses were reclassified to assets held for sale at December 31, 1996, and a loss was recognized to reduce the carrying amount of the portfolios to net realizable value. The portfolios were sold in 1997, and the company recorded an additional loss to establish a liability for estimated future payments to the purchaser under a five-year loss sharing agreement. Other non-strategic assets consist of the company's land development operations and a Canadian life insurance subsidiary. During 1997, the company completed the sale of these assets. 3.3 Litigation Settlement Two real estate subsidiaries of American General were defendants in a lawsuit that alleged damages based on lost profits and related claims arising from certain loans and joint venture contracts. Pursuant to court-ordered mediation, the parties agreed to a settlement of $50 million as a final resolution of this lawsuit. As a result, the company recorded an aftertax charge of $33 million in second quarter 1997. 3.4 Write-Down of Group Business In first quarter 1996, USLIFE discontinued new sales of its traditional indemnity group major medical products. In subsequent months, the company experienced an unexpected deterioration in persistency on this business, with lapse rates approaching 60%. This experience resulted in a reevaluation of the related DPAC and insurance liabilities. Based on this reevaluation, the company recorded a $50 million ($32 million aftertax) charge in second quarter 1996. AMERICAN GENERAL CORPORATION 40 21 4 Earnings Per Share 4.1 Calculation The calculation of basic and diluted earnings per share follows:
In millions, except share data 1997 1996 1995 =========================================================================================================================== Net income $542 $653 $650 Net dividends on convertible preferred stock (6) (5) -- - --------------------------------------------------------------------------------------------------------------------------- Earnings available to common shareholders(a) 536 648 650 Net dividends on dilutive securities Convertible preferred securities of subsidiary 11 11 6 Convertible preferred stock -- 5 -- - --------------------------------------------------------------------------------------------------------------------------- Earnings available to common shareholders assuming dilution(b) $547 $664 $656 - --------------------------------------------------------------------------------------------------------------------------- Average shares outstanding(a) 242,068,777 242,853,420 242,797,805 Dilutive securities Convertible preferred securities of subsidiary 6,144,016 6,144,016 3,602,245 Convertible preferred stock(c) -- 2,019,766 84,858 Stock options 1,018,318 912,275 733,093 - --------------------------------------------------------------------------------------------------------------------------- Average shares outstanding assuming dilution(b) 249,231,111 251,929,477 247,218,001 - --------------------------------------------------------------------------------------------------------------------------- Net income per share Basic $ 2.21 $ 2.67 $ 2.68 Diluted 2.19 2.63 2.66 - ---------------------------------------------------------------------------------------------------------------------------
(a) Used to compute basic earnings per share. (b) Used to compute diluted earnings per share. (c) Excludes 2,344,320 shares in 1997 due to antidilution. 4.2 Subsequent Issuance of Shares On February 25, 1998, the company issued 10.2 million shares of common stock as part of the acquisition of Western National. Additionally, the company issued options to acquire 1.4 million shares of American General common stock with an average exercise price of $24.75. These options replaced outstanding options to acquire Western National common stock. 5 Investments 5.1 Fixed Maturity and Equity Securities VALUATION. Amortized cost and fair value of fixed maturity and equity securities at December 31 were as follows:
Gross Gross Amortized Cost Unrealized Gains Unrealized Losses Fair Value ---------------------- -------------------- ----------------- ------------------------ In millions 1997 1996 1995 1997 1996 1995 1997 1996 1995 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Fixed maturity securities Corporate bonds Investment grade $31,926 $28,770 $25,574 $2,021 $1,209 $2,177 $(23)$(153) $(40) $33,924 $29,826 $27,711 Below investment grade 1,892 1,655 1,584 73 56 76 (7) (15) (10) 1,958 1,696 1,650 Mortgage-backed 8,919 10,401 11,019 514 315 650 (5) (74) (6) 9,428 10,642 11,663 Foreign governments 834 863 854 90 80 104 (4) (1) (1) 920 942 957 U.S. government 740 737 657 91 57 93 - (3) - 831 791 750 States/political subdivisions 546 336 307 33 15 21 - (1) - 579 350 328 Redeemable preferred stocks 104 105 154 3 4 8 - (1) (1) 107 108 161 - --------------------------------------------------------------------------------------------------------------------------- Total fixed maturity securities $44,961 $42,867 $40,149 $2,825 $1,736 $3,129 $(39)$(248) $(58) $47,747 $44,355 $43,220 - --------------------------------------------------------------------------------------------------------------------------- Equity securities $ 93 $ 111 $ 144 $ 24 $ 27 $ 50 $ (1)$ (1) $ (3) $ 116 $ 137 $ 191 - ---------------------------------------------------------------------------------------------------------------------------
41 1997 ANNUAL REPORT 22 NET UNREALIZED GAINS. Net unrealized gains (losses) on fixed maturity and equity securities included in shareholders' equity at December 31 were as follows:
In millions 1997 1996 1995 ============================================================ Gross unrealized gains $2,849 $1,763 $ 3,179 Gross unrealized losses (40) (249) (61) DPAC and CIP fair value adjustments (1,062) (598) (1,208) Deferred income taxes (636) (348) (707) Equity in Western National's net unrealized gains 58 59 93 - ------------------------------------------------------------ Net unrealized gains on securities $1,169 $ 627 $ 1,296 - ------------------------------------------------------------
MATURITIES. The contractual maturities of fixed maturity securities at December 31, 1997 were as follows:
Amortized Fair In millions Cost Value - ------------------------------------------------------------ Fixed maturity securities, excluding mortgage-backed securities, due In one year or less $ 465 $ 468 In years two through five 7,747 8,091 In years six through ten 14,295 15,051 After ten years 13,535 14,709 Mortgage-backed securities 8,919 9,428 - ------------------------------------------------------------ Total fixed maturity securities $ 44,961 $ 47,747 - ------------------------------------------------------------
Actual maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations. Corporate requirements and investment strategies may result in the sale of investments before maturity. 5.2 Mortgage Loans on Real Estate DIVERSIFICATION. Diversification of the geographic location and type of property collateralizing mortgage loans reduces the concentration of credit risk. For new loans, the company generally requires loan-to-value ratios of 75% or less, based on management's credit assessment of the borrower. At December 31, the mortgage loan portfolio was distributed as follows:
In millions 1997 1996 1995 ============================================================ Geographic distribution Atlantic $1,586 $1,393 $ 1,372 Central 896 952 1,091 Pacific and Mountain 844 967 970 Allowance for losses (54) (84) (96) - ------------------------------------------------------------ Total mortgage loans $3,272 $3,228 $ 3,337 - ------------------------------------------------------------ Property type Office $1,128 $1,082 $ 1,117 Retail 1,099 1,132 1,146 Industrial 594 539 552 Apartments 363 352 380 Other 142 207 238 Allowance for losses (54) (84) (96) - ------------------------------------------------------------ Total mortgage loans $3,272 $3,228 $ 3,337 - ------------------------------------------------------------
ALLOWANCE. Activity in the allowance for mortgage loan losses was as follows:
In millions 1997 1996 1995 ============================================================ Balance at January 1 $ 84 $ 96 $ 101 Provision for mortgage loan losses (20) 2 28 Deductions (10) (14) (33) - ------------------------------------------------------------ Balance at December 31 $ 54 $ 84 $ 96 - ------------------------------------------------------------
IMPAIRED LOANS. Impaired mortgage loans on real estate and related interest income were as follows:
In millions 1997 1996 1995 ============================================================ Impaired loans With allowance* $ 55 $ 100 $ 104 Without allowance 10 6 22 - ------------------------------------------------------------ Total impaired loans $ 65 $ 106 $ 126 - ------------------------------------------------------------ Average investment $ 86 $ 116 $ 141 - ------------------------------------------------------------ Interest income Accrual basis loans $ 4 $ 9 $ 3 Cash basis loans -- -- 7 - ------------------------------------------------------------ Total interest income $ 4 $ 9 $ 10 - ------------------------------------------------------------
*Represents gross amounts before allowance for losses of $15 million, $16 million, and $29 million, respectively. 5.3 Realized Investment Gains Realized investment gains (losses) were as follows:
In millions 1997 1996 1995 ============================================================ Fixed maturity securities Gross gains $ 57 $ 107 $ 87 Gross losses (70) (107) (65) - ------------------------------------------------------------ Total fixed maturity securities (13) -- 22 - ------------------------------------------------------------ Equity securities Gross gains 5 53 21 Gross losses (1) (2) (1) - ------------------------------------------------------------ Total equity securities 4 51 20 - ------------------------------------------------------------ Mortgage loans on real estate 26 5 (34) Investment real estate 14 2 (11) Other 9 4 21 - ------------------------------------------------------------ Realized investment gains $ 40 $ 62 $ 18 - ------------------------------------------------------------
5.4 Investment Income Investment income was as follows:
In millions 1997 1996 1995 ============================================================ Fixed maturity securities $3,523 $3,274 $ 3,093 Mortgage loans on real estate 319 339 346 Other 265 260 225 - ------------------------------------------------------------ Gross investment income 4,107 3,873 3,664 - ------------------------------------------------------------ Investment expense Real estate 58 69 51 Other 29 31 29 - ------------------------------------------------------------ Total investment expense 87 100 80 - ------------------------------------------------------------ Net investment income $4,020 $3,773 $ 3,584 - ------------------------------------------------------------
AMERICAN GENERAL CORPORATION 42 23 The carrying amount of investments that produced no investment income during 1997 was less than 1% of total invested assets. The ultimate disposition of these investments is not expected to have a material effect on the company's consolidated results of operations and financial position. Derivative financial instruments related to investment securities did not have a material effect on net investment income in any of the three years ended December 31, 1997. 5.5 Cash Flows from Investing Activities Uses of cash for investment purchases were as follows:
In millions 1997 1996 1995 ============================================================ Fixed maturity securities $10,489 $10,118 $ 7,954 Other 521 560 604 - ------------------------------------------------------------ Total $11,010 $10,678 $ 8,558 - ------------------------------------------------------------
Sources of cash from investment dispositions and repayments were as follows:
In millions 1997 1996 1995 ============================================================ Fixed maturity securities Sales $ 6,846 $ 6,164 $ 2,779 Maturities 1,038 621 491 Calls 768 677 1,095 Repayments of mortgage- backed securities 496 885 686 Mortgage loans 795 593 402 Equity securities 87 167 177 Other 260 173 472 - ------------------------------------------------------------ Total $10,290 $ 9,280 $ 6,102 - ------------------------------------------------------------
6 Finance Receivables 6.1 Detail of Finance Receivables Finance receivables, which are reported net of unearned finance charges, at December 31 were as follows:
In millions 1997 1996 1995 ============================================================ Consumer loans Real estate $ 4,155 $ 3,734 $ 2,904 Other 2,556 2,516 2,765 - ------------------------------------------------------------ Total consumer loans 6,711 6,250 5,669 - ------------------------------------------------------------ Retail sales finance Retail sales contracts 1,050 998 1,240 Private label 251 377 943 - ------------------------------------------------------------ Total retail sales finance 1,301 1,375 2,183 - ------------------------------------------------------------ Credit cards -- -- 558 - ------------------------------------------------------------ Total finance receivables 8,012 7,625 8,410 Allowance for losses (373) (395) (492) - ------------------------------------------------------------ Finance receivables, net $ 7,639 $ 7,230 $ 7,918 - ------------------------------------------------------------
At December 31, 1997, 52% of finance receivables were secured by real estate. 6.2 Contractual Maturities and Collections Contractual maturities of finance receivables at December 31, 1997 were as follows:
After In millions 1998 1999 2000 2001 2002 2002 - ------------------------------------------------------------- Maturities $2,386 $1,475 $ 927 $ 516 $ 322 $ 2,386 - -------------------------------------------------------------
Contractual maturities are not a forecast of future cash collections. A substantial portion of finance receivables may be renewed, converted, or repaid prior to maturity. 6.3 Cash Collections Cash collections of principal and collections as a percentage of average finance receivable balances were as follows:
In millions 1997 1996 1995 ============================================================= Consumer loans Cash collections $2,859 $ 2,653 $ 2,588 % of average balances 46% 47% 46% Retail sales finance Cash collections $1,484 $ 1,777 $ 1,885 % of average balances 117% 93% 86% - -------------------------------------------------------------
6.4 Geographic Concentration The geographic concentration of finance receivables at December 31 was as follows:
In millions 1997 1996 1995 ============================================================= California $ 843 $ 698 $ 887 North Carolina 696 672 738 Florida 519 535 627 Ohio 465 454 440 Indiana 438 398 455 Illinois 434 453 490 Virginia 357 350 392 Georgia 310 312 373 Other 3,950 3,753 4,008 - ------------------------------------------------------------- Total finance receivables $ 8,012 $ 7,625 $ 8,410 - -------------------------------------------------------------
6.5 Allowance for Finance Receivable Losses Activity in the allowance for finance receivable losses was as follows:
In millions 1997 1996 1995 ============================================================= Balance at January 1 $ 395 $ 492 $ 226 Provision for finance receivable losses 248 417 574 Charge offs, net of recoveries (270) (444) (308) Reclassified to assets held for sale -- (70) -- - ------------------------------------------------------------- Balance at December 31 $ 373 $ 395 $ 492 - -------------------------------------------------------------
43 1997 ANNUAL REPORT 24 7 Debt 7.1 Short-Term Debt Short-term debt consists primarily of commercial paper. The weighted-average interest rates on short-term borrowings at December 31 were as follows:
1997 1996 1995 ============================================================= Corporate 6.1% 5.9% 6.0% Consumer Finance 5.9 5.6 5.8 - -------------------------------------------------------------
7.2 Long-Term Debt Long-term debt at December 31 was as follows:
In millions 1997 1996 1995 ============================================================= Corporate 6.3% - 9.7%, through 2025 $ 1,341 $ 1,471 $ 1,519 - ------------------------------------------------------------- Consumer Finance 5.1% - 10%, through 2009 $ 4,011 $ 4,499 $ 4,980 - -------------------------------------------------------------
Derivative financial instruments related to debt securities did not have a material effect on the weighted-average borrowing rate or reported interest expense in any of the three years ended December 31, 1997. 7.3 Long-Term Debt Maturities Scheduled maturities of long-term debt for each of the next five years at December 31, 1997 were as follows:
In millions 1998 1999 2000 2001 2002 - -------------------------------------------------------------- Corporate $ 354 $100 $ 350 $ -- $ -- Consumer Finance 825 610 1,277 42 548 - --------------------------------------------------------------
One $150 million debt issue of the Consumer Finance division that is scheduled to mature after 2002 is redeemable in 1999 at par, at the option of the holders. 7.4 Interest Paid Interest paid was as follows:
In millions 1997 1996 1995 ============================================================= Corporate $ 150 $ 162 $ 186 Consumer Finance 485 497 502 - -------------------------------------------------------------
7.5 Credit Facilities American General and certain subsidiaries use commercial paper to meet short-term funding requirements. Unsecured bank credit facilities are used to support commercial paper borrowings. At December 31, 1997, American General and certain of its subsidiaries maintained unsecured committed credit facilities of $4.0 billion with a total of 48 domestic and foreign banks. Interest rates are based on a money market index, and annual commitment fees range from five to seven basis points. There were no borrowings under these facilities at December 31, 1997. 8 Deferred Policy Acquisition Costs (DPAC) Activity in DPAC was as follows:
In millions 1997 1996 1995 ============================================================= Balance at January 1 $ 2,954 $ 2,343 $ 3,356 Deferrals 631 604 646 Accretion of interest 215 197 193 Amortization (659) (626)* (559) Effect of net unrealized gains (losses) on securities (406) 460 (1,302) Other (17) (24) 9 - ------------------------------------------------------------- Balance at December 31 $ 2,718 $ 2,954 $ 2,343 - -------------------------------------------------------------
*Includes $37 million reported in write-down of USLIFE group business. 9 Cost of Insurance Purchased (CIP) Activity in CIP was as follows:
In millions 1997 1996 1995 ============================================================= Balance at January 1 $ 755 $ 504 $ 168 Additions from acquisitions 66 233 658 Accretion of interest 74 76 65 Amortization (176) (178) (110) Effect of net unrealized gains (losses) on securities (55) 109 (270) Other 16 11 (7) - ------------------------------------------------------------- Balance at December 31 $ 680 $ 755 $ 504 - -------------------------------------------------------------
CIP amortization, net of accretion, expected to be recorded in each of the next five years is $82 million, $75 million, $68 million, $62 million, and $57 million. 10 Guaranty Fund Assessments Information about state guaranty fund assessments was as follows:
In millions 1997 1996 1995 ============================================================= Expense, included in operating costs and expenses $ 9 $ 14 $ 34 Liability for anticipated assessments 39 54 58 Receivable for expected recoveries against future premium taxes 47 56 57 - -------------------------------------------------------------
Changes in state laws could decrease the amount recoverable against future premium taxes. AMERICAN GENERAL CORPORATION 44 25 11 INCOME TAXES 11.1 TAX EXPENSE Components of income tax expense were as follows:
In millions 1997 1996 1995 ==================================================== Current Federal $ 393 $ 403 $ 353 State 16 8 6 - ---------------------------------------------------- Total current 409 411 359 Deferred 38 (24) (18) - ---------------------------------------------------- Income tax expense* $ 447 $ 387 $ 341 - ----------------------------------------------------
*Excludes tax benefit of $45 million in 1997, $21 million in 1996, and $11 million in 1995 related to preferred securities of subsidiaries. A reconciliation between the federal income tax rate and the effective tax rate follows:
1997 1996 1995 ===================================================================== Federal income tax rate 35% 35% 35% Merger-related costs 7 -- -- Tax-exempt investment income (2) (2) (2) State taxes, net 1 1 -- Acquisition-related goodwill 1 1 1 Other, net -- 1 -- - --------------------------------------------------------------------- Effective tax rate 42% 36% 34% - ---------------------------------------------------------------------
11.2 DEFERRED TAX LIABILITIES Components of deferred tax liabilities and assets, included in income tax liabilities on the consolidated balance sheet, at December 31 were as follows:
In millions 1997 1996 1995 ================================================================================ Deferred tax liabilities, applicable to Basis differential of investments $ 987 $ 514 $ 1,026 DPAC and CIP 795 984 815 Prepaid pension expense 87 81 73 Other 543 530 517 - -------------------------------------------------------------------------------- Total deferred tax liabilities 2,412 2,109 2,431 - -------------------------------------------------------------------------------- Deferred tax assets, applicable to Policy reserves (541) (542) (544) Finance receivables (93) (183) (138) Other (498) (338) (347) - -------------------------------------------------------------------------------- Gross deferred tax assets (1,132) (1,063) (1,029) Valuation allowance 68 46 42 - -------------------------------------------------------------------------------- Total deferred tax assets, net (1,064) (1,017) (987) - -------------------------------------------------------------------------------- Net deferred tax liabilities $ 1,348 $ 1,092 $ 1,444 - --------------------------------------------------------------------------------
The deferred tax asset valuation allowances at December 31, 1997, 1996, and 1995 were related to operating loss carryovers not expected to be utilized. At December 31, 1997, the company had operating loss carryovers for federal income tax purposes of approximately $195 million, which are available to offset future taxable income through 2012. The operating loss carryovers are predominantly associated with recent acquisitions and, therefore, their use is subject to separate return year limitations. A portion of life insurance income earned prior to 1984 is not taxable unless it exceeds certain statutory limitations or is distributed as dividends. Such income, accumulated in policyholders' surplus accounts, totaled $907 million at December 31, 1997. At current corporate income tax rates, the maximum amount of tax on such income is approximately $317 million. Deferred income taxes on these accumulations are not required because no distributions are expected. 11.3 TAXES PAID Income taxes paid were as follows:
In millions 1997 1996 1995 ========================================================== Federal $ 419 $364 $ 325 State 9 10 13 - ----------------------------------------------------------
11.4 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 returns through 1988 and has raised certain issues related to 1987 and 1988, which the company is currently contesting. The IRS is currently examining the company's tax returns for 1989 through 1996. Although the final outcome of any issues raised in examination is uncertain, the company believes that the ultimate liability, including interest, will not materially exceed amounts recorded in the consolidated financial statements. 12 REDEEMABLE EQUITY Two wholly owned subsidiaries and two subsidiary trusts of American General (collectively, subsidiaries) have issued preferred securities. The sole assets of these subsidiaries are Junior Subordinated Debentures (Subordinated Debentures) issued by American General and U.S. Treasury bonds. These subsidiaries have no independent operations. The Subordinated Debentures are eliminated in the consolidated financial statements. The interest terms and payment dates of the company's Subordinated Debentures held by the subsidiaries correspond to those of the subsidiaries' preferred securities. American General's obligations 45 1997 ANNUAL REPORT 26 under the Subordinated Debentures and related agreements, when taken together, constitute a full and unconditional guarantee of payments due on the preferred securities. The Subordinated Debentures are redeemable at the option of the company. Upon such event, the preferred securities are redeemable on a proportionate basis. Information about the preferred securities and the assets held by the issuing subsidiaries at December 31, 1997 was as follows:
American American American American American General General General General General Institutional Institutional Capital, Capital, Delaware, In millions, except share data Capital B Capital A L.L.C. L.L.C. L.L.C. - --------------------------------------------------------------------------------------------------------------------------- Preferred securities Securities issued and outstanding 500,000 500,000 8,600,000 11,500,000 5,000,000 Par value $ 500 $ 500 $ 215 $ 287 $ 250 Dividends paid $ 20 $ 38 $ 17 $ 24 $ 15 Date issued 3/14/97 12/4/96 8/29/95 6/5/95 6/1/95 Earliest/mandatory redemption dates 2046/2046 2045/2045 2000/2025(a) 2000/2025(a) 2003(b)/2025 - --------------------------------------------------------------------------------------------------------------------------- Assets of issuing subsidiary Subordinated Debentures Principal $ 516 $ 516 $ 269 $ 360 $ 313 Interest rate 8.125% 7.57% 8.125% 8.45% 6% Mandatory redemption date 2046 2045 2025(a) 2025(a) 2025 U.S. Treasury bonds -- -- $ 3 $ 4 $ 4 - ---------------------------------------------------------------------------------------------------------------------------
(a) Subject to possible extension to 2044. (b) Under certain circumstances, may be redeemed in 2000. The preferred securities issued by American General Delaware, L.L.C. are each convertible into 1.2288 shares of American General common stock at any time at the option of the holders. This conversion ratio is equivalent to a conversion price of $40.69 per share of common stock. Beginning in 2000, the company has the option to cause the conversion rights to expire, provided that American General's common stock is trading above $49 per share and certain other conditions are met. 13 CAPITAL STOCK 13.1 CLASSES OF CAPITAL STOCK American General has two classes of capital stock: preferred stock ($1.50 par value, 60 million shares authorized) that may be issued in series with rights to be determined by the board of directors, and common stock ($.50 par value, 300 million shares authorized). The only series of preferred stock outstanding is the 7% Convertible Preferred Stock. At December 31, 1997, approximately 12.2 million shares of common stock were reserved for issuance, related to the conversion of convertible preferred securities and preferred stock and the exercise of stock options. 13.2 CONVERTIBLE PREFERRED STOCK American General issued 2.3 million shares of 7% Convertible Preferred Stock in connection with the acquisition of Independent Life. Holders of the preferred stock are entitled to receive annual cumulative dividends of 7% and have the right to vote, together with holders of American General common stock, on the basis of four-fifths of one vote for each share of preferred stock. The stated liquidation preference is $36.7625 per share. Each preferred share is convertible into .8264 share of American General common stock at any time at the option of the holder. Beginning in 2000, the company may, at its option, convert the preferred stock into a minimum of .8264 share of common stock. Each preferred share is mandatorily convertible into one share of common stock in 2001. 13.3 PREFERRED SHARE PURCHASE RIGHTS One preferred share purchase right is attached to each share of common stock. These rights will become exercisable only upon the occurrence of certain events related to a change in control of American General. Each right will entitle the holder to purchase 1/100 of a share of American General's Series A Junior Participating Preferred Stock. All rights expire in 1999 unless extended or redeemed. AMERICAN GENERAL CORPORATION 46 27 14 STOCK AND INCENTIVE PLANS 14.1 STOCK OPTIONS Stock option activity was as follows:
1997 1996 1995 --------------------- -------------------- ------ Average Average Exercise Exercise Shares in thousands Shares Price Shares Price Shares ============================================================================================= Balance at January 1 4,498 $ 26.14 4,093 $ 24.11 3,957 Granted 1,496 43.68 1,115 33.85 811 Exercised* (2,170) 23.13 (503) 24.12 (596) Forfeited (187) 39.05 (206) 32.67 (75) Expired -- -- (1) 32.00 (4) - --------------------------------------------------------------------------------------------- Balance at December 31 3,637 $ 34.48 4,498 $ 26.14 4,093 - --------------------------------------------------------------------------------------------- Exercisable at December 31 2,028 $ 29.13 3,116 $ 23.98 2,804 - ---------------------------------------------------------------------------------------------
*Average exercise price of options exercised in 1995 was $19.89. Options may not be exercised within at least six months of, nor after 10 years from, the date of grant. Information about options outstanding at December 31, 1997 was as follows:
Outstanding Exercisable --------------------------- ----------------- Average Average Average Range of Shares Remaining Exercise Shares Exercise Exercise Prices (000's) Life Price (000's) Price - ----------------------------------------------------------------- $14.51-$19.99 262 1 $16.27 262 $ 16.27 20.00- 29.99 776 6 25.29 763 25.21 30.00- 39.99 1,251 7 33.86 792 33.28 40.00- 50.19 1,348 9 43.86 211 43.60 - ----------------------------------------------------------------- Total 3,637 7 $34.48 2,028 $ 29.13 - -----------------------------------------------------------------
14.2 PRO FORMA DISCLOSURES Under an alternative accounting method, compensation expense arising from stock options would be measured at the estimated fair value of the options at the date of grant. Had compensation expense been determined using this method, net income and net income per share would have been as follows:
In millions, except per share data 1997 1996 1995 ======================================================================= Net income As reported $ 542 $ 653 $ 650 Pro forma 536 650 649 - ----------------------------------------------------------------------- Net income per share Basic As reported $ 2.21 $ 2.67 $ 2.68 Pro forma 2.19 2.66 2.67 Diluted As reported 2.19 2.63 2.66 Pro forma 2.17 2.62 2.65 - -----------------------------------------------------------------------
The average fair values of the options granted during 1997, 1996, and 1995 were $10.41, $6.79, and $6.69, respectively. The fair value of each option was estimated at the date of grant using a Black-Scholes option pricing model. The assumptions used to estimate the fair value of the stock options were as follows:
1997 1996 1995 ======================================================================= Dividend yield 3.0% 4.0% 4.0% Expected volatility 22.0% 22.3% 23.0% Risk-free interest rate 6.4% 6.2% 6.9% Expected life 6 years 6 years 6 years - -----------------------------------------------------------------------
14.3 SHARES AVAILABLE Shares available for issuance under American General's stock and incentive plans at December 31, 1997, 1996, and 1995 totaled 8.8 million, 5.7 million, and 6.7 million, respectively. 15 BENEFIT PLANS 15.1 PENSION PLANS The company has non-contributory defined benefit pension plans covering most employees. Pension benefits are based on the participant's compensation and length of credited service. Equity and fixed maturity securities were 63% and 28%, respectively, of the plans' assets at the plans' most recent balance sheet dates. Additionally, 5% of plan assets were invested in general investment accounts of the company's subsidiaries through deposit administration insurance contracts. The pension plans have purchased annuity contracts from American General subsidiaries to provide benefits for certain retirees. During 1997, 1996, and 1995, benefits paid to retirees under these contracts were $53 million, $54 million, and $46 million, respectively. The components of pension expense and underlying assumptions were as follows:
In millions 1997 1996 1995 ================================================================================ Service cost (benefits earned) $ 18 $ 22 $ 16 Interest cost 46 46 37 Actual return on plan assets (209) (128) (134) Net amortization and deferrals 126 56 63 - -------------------------------------------------------------------------------- Pension income $ (19) $ (4) $ (18) - -------------------------------------------------------------------------------- Discount rate on benefit obligation 7.25% 7.5% 7.25% Rate of increase in compensation levels 4% 4% 4% Expected long-term rate of return on plan assets 10% 10% 10% - --------------------------------------------------------------------------------
47 1997 ANNUAL REPORT 28 The company's funding policy is to contribute annually no more than the maximum deductible for federal income tax purposes. The funded status of the plans and the prepaid pension expense included in other assets at December 31 were as follows:
In millions 1997 1996 1995 ============================================================================== Accumulated benefit obligation* $ 629 $ 591 $ 492 Effect of increase in compensation levels 38 71 69 - ------------------------------------------------------------------------------ Projected benefit obligation 667 662 561 Plan assets at fair value 1,175 976 796 - ------------------------------------------------------------------------------ Plan assets at fair value in excess of projected benefit obligation 508 314 235 Other unrecognized items, net (274) (139) (63) - ------------------------------------------------------------------------------ Prepaid pension expense $ 234 $ 175 $ 172 - ------------------------------------------------------------------------------ *Over 92% vested.
15.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The company has life, medical, supplemental major medical, and dental plans for certain retired employees and agents. Most plans are contributory, with retiree contributions adjusted annually to limit employer contributions to predetermined amounts. The company has reserved the right to change or eliminate these benefits at any time. The life plans are insured for a two-year period. A portion of the retiree medical and dental plans is funded through a voluntary employees' beneficiary association (VEBA); the remainder is unfunded and self-insured. All of the retiree medical and dental plans' assets held in the VEBA were invested in readily marketable securities at its most recent balance sheet date. Postretirement benefit expense in 1997, 1996, and 1995 was $8 million, $8 million, and $7 million, respectively. The plans' combined funded status and the accrued postretirement benefit cost included in other liabilities at December 31 were as follows:
In millions 1997 1996 1995 ================================================================== Actuarial present value of benefit obligation Retirees $ 76 $ 71 $ 56 Active plan participants 62 43 40 - ------------------------------------------------------------------ Accumulated postretirement benefit obligation (APBO) 138 114 96 Plan assets at fair value 3 3 2 - ------------------------------------------------------------------ APBO in excess of plan assets at fair value 135 111 94 Other unrecognized items, net 34 38 28 - ------------------------------------------------------------------ Accrued benefit expense $169 $149 $122 - ------------------------------------------------------------------ Discount rate on benefit obligation 7.25% 7.5% 7.25% - ------------------------------------------------------------------
16 STATUTORY ACCOUNTING State insurance laws and regulations prescribe accounting practices for calculating statutory net income and equity of insurance companies. In addition, state regulators may permit statutory accounting practices that differ from prescribed practices. The use of such permitted practices by American General's insurance subsidiaries did not have a material effect on their statutory equity at December 31, 1997. Statutory accounting practices differ from GAAP. Significant differences for American General's insurance subsidiaries were as follows:
In millions 1997 1996 1995 ======================================================================== Statutory net income $ 791 $ 688 $ 452 Change in DPAC and CIP 112 110 234 Investment valuation differences 23 62 60 Policy reserve adjustments (21) (42) (95) Other, net 8 (37) 69 - ------------------------------------------------------------------------ GAAP net income $ 913 $ 781 $ 720 - ------------------------------------------------------------------------ Statutory equity $ 3,240 $ 2,927 $ 2,540 Asset valuation reserve 452 562 517 Investment valuation differences* 2,640 1,258 2,787 DPAC and CIP 3,388 3,698 2,834 Deferred income taxes (1,372) (1,133) (1,464) Policy reserve adjustments 574 409 344 Acquisition-related goodwill 376 292 303 Other, net 114 231 270 - ------------------------------------------------------------------------ GAAP equity $ 9,412 $ 8,244 $ 8,131 - ------------------------------------------------------------------------
*Primarily GAAP unrealized gains on securities. 17 DERIVATIVE FINANCIAL INSTRUMENTS 17.1 USE OF DERIVATIVE FINANCIAL INSTRUMENTS The company's use of derivative financial instruments is generally limited to interest rate and currency swap agreements, treasury rate lock agreements, and options to enter into interest rate swap agreements (call swaptions). The company accounts for its derivative financial instruments as hedges. Hedge accounting requires a high correlation between changes in fair values or cash flows of the derivative financial instrument and the specific item being hedged, both at inception and throughout the life of the hedge. 17.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS Interest rate swap agreements convert specific investment securities from a floating to a fixed-rate basis, or vice versa. Currency swap agreements are used to convert cash flows from specific investment AMERICAN GENERAL CORPORATION 48 29 securities denominated in foreign currencies into U.S. dollars at specified exchange rates, and to hedge against currency rate fluctuations on anticipated security purchases. Interest rate swap agreements are also used to convert a portion of floating-rate borrowings to a fixed rate and to hedge against the risk of rising interest rates on anticipated debt issuances. The difference between amounts paid and received on swap agreements is recorded on an accrual basis as an adjustment to net investment income or interest expense, as appropriate, over the periods covered by the agreements. The related amount payable to or receivable from counterparties is included in other liabilities or assets. The fair values of swap agreements are recognized in the consolidated balance sheet if they hedge investments carried at fair value or if they hedge anticipated purchases of such investments. In this event, changes in the fair value of a swap agreement are reported in net unrealized gains on securities included in shareholders' equity, consistent with the treatment of the related investment security. The fair values of swap agreements hedging debt are not recognized in the consolidated balance sheet. For swap agreements hedging anticipated investment purchases or debt issuances, the net swap settlement amount or unrealized gain or loss is deferred and included in the measurement of the anticipated transaction when it occurs. Swap agreements generally have terms of two to ten years. Any gain or loss from early termination of a swap agreement is deferred and amortized into income over the remaining term of the related investment or debt. If the underlying investment or debt is extinguished or sold, any related gain or loss on swap agreements is recognized in income. Interest rate and currency swap agreements related to investment securities at December 31 were as follows:
In millions 1997 1996 1995 =========================================================================== Interest rate swap agreements to receive fixed rate Notional amount $ 169 $ 54 $ 24 Average receive rate 6.95% 7.00% 7.03% Average pay rate 6.39 5.91 6.82 Interest rate swap agreements to pay fixed rate Notional amount $ 15 $ 60 $ 45 Average receive rate 6.74% 6.19% 5.82% Average pay rate 6.48 6.42 6.41 - ---------------------------------------------------------------------------- Currency swap agreements (receive U.S. $/pay Canadian $) Notional amount (in U.S. $) $ 139 $ 99 $ 72 Average exchange rate 1.50 1.57 1.62 - ----------------------------------------------------------------------------
Interest rate swap agreements related to debt at December 31 were as follows:
In millions 1997 1996 1995 ===================================================================== Swap agreements to pay fixed rate Corporate Notional amount $ 400 -- -- Average receive rate 5.72% -- -- Average pay rate 6.15 -- -- Consumer Finance Notional amount $ 940 $ 540 $ 590 Average receive rate 5.69% 5.92% 5.90% Average pay rate 7.39 8.05 8.08 - ---------------------------------------------------------------------
During 1995, swap agreements hedging anticipated debt issuances were terminated, and related settlement costs were deferred and are being recognized as an increase to interest expense over the terms of the related debt. At December 31, 1997, the remaining deferred costs were $10 million. 17.3 TREASURY RATE LOCK AGREEMENTS Treasury rate lock agreements are used to hedge against the risk of rising interest rates on anticipated debt issuances. These agreements provide for future cash settlements that are a function of specified U.S. Treasury rates. Treasury rate lock agreements are accounted for in the same manner as interest rate swap agreements that hedge anticipated debt issuances. During 1997, the company's consumer finance subsidiary entered into treasury rate lock agreements with settlement dates in 1998. At December 31, 1997, the notional amount of these agreements was $390 million and the company's related exposure to market risk was immaterial. 17.4 CALL SWAPTIONS Options to enter into interest rate swap agreements are used to limit the company's exposure to reduced spreads between investment yields and interest crediting rates should interest rates decline significantly over prolonged periods. During such periods, the spread between investment yields and interest crediting rates may be reduced as a result of certain limitations on the company's ability to manage interest crediting rates. Call swaptions allow the company to enter into interest rate swap agreements to receive fixed rates and pay lower floating rates, effectively increasing the spread between investment yields and interest crediting rates. Premiums paid to purchase call swaptions are included in investments and are amortized to net investment income over the exercise period of the swaptions. If a call swaption is terminated, any gain is deferred and amortized to insurance and annuity benefits over the expected life of the insurance and annuity contracts and any unamortized premium is charged to 49 1997 ANNUAL REPORT 30 income. If a call swaption ceases to be an effective hedge, any related gain or loss is recognized in income. During 1997, the company purchased call swaptions that expire in 1998. These call swaptions had a notional amount of $3.0 billion and strike rates ranging from 4.5% to 5.5% at December 31, 1997. Should the strike rates remain below market rates, the call swaptions will expire and the company's exposure would be limited to the premiums paid. 17.5 CREDIT AND MARKET RISK Derivative financial instruments expose the company to credit risk in the event of non-performance by counterparties. The company limits this exposure by entering into agreements with counterparties having high credit ratings and by regularly monitoring the ratings. The company does not expect any counterparty to fail to meet its obligation; however, non-performance would not have a material impact on the company's consolidated results of operations and financial position. The company's exposure to market risk is mitigated by the offsetting effects of changes in the value of the agreements and the related items being hedged. 18 FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts and fair values for certain of the company's financial instruments at December 31 are presented below. Care should be exercised in drawing conclusions based on fair value, since (1) the fair values presented do not include the value associated with all of the company's assets and liabilities, and (2) the reporting of investments at fair value without a corresponding revaluation of related policyholder liabilities can be misinterpreted.
1997 1996 1995 ---------------------- ---------------------- ---------------------- Fair Carrying Fair Carrying Fair Carrying In millions Value Amount Value Amount Value Amount ========================================================================================================================== Assets Fixed maturity and equity securities $47,863 $ 47,863 $ 44,492 $44,492 $ 43,411 $ 43,411 Mortgage loans on real estate 3,399 3,272 3,290 3,228 3,456 3,337 Policy loans 2,196 2,156 1,986 2,011 1,892 1,887 Finance receivables, net 7,639 7,639 7,230 7,230 7,918 7,918 Assets held for sale -- -- 667 667 -- -- Liabilities Insurance investment contracts 27,623 28,139 26,876 28,331 27,129 27,508 Short-term debt 3,830 3,830 3,762 3,762 3,266 3,266 Long-term debt Corporate 1,407 1,341 1,538 1,471 1,648 1,519 Consumer Finance 4,117 4,011 4,608 4,499 5,225 4,980 - --------------------------------------------------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of financial instruments. FIXED MATURITY AND EQUITY SECURITIES. Fair values of fixed maturity and equity securities were based on quoted market prices, where available. For investments not actively traded, fair values were estimated using values obtained from independent pricing services or, in the case of some private placements, by discounting expected future cash flows using a current market rate applicable to yield, credit quality, and average life of the investments. MORTGAGE LOANS ON REAL ESTATE. Fair value of mortgage loans was estimated primarily using discounted cash flows, based on contractual maturities and risk-adjusted discount rates. POLICY LOANS. Fair value of policy loans was estimated using discounted cash flows and actuarially determined assumptions, incorporating market rates. FINANCE RECEIVABLES, NET. Fair value of finance receivables, which approximated carrying amount, was estimated using projected cash flows, discounted at the weighted-average rates currently being offered for similar finance receivables. ASSETS HELD FOR SALE. Fair value of assets held for sale approximated the carrying amount. INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment contracts was estimated using cash flows discounted at market interest rates. DEBT. Fair value of short-term debt approximated the carrying amount. Fair value of long-term debt was estimated using cash flows discounted at current borrowing rates. AMERICAN GENERAL CORPORATION 50 31 OFF-BALANCE-SHEET DERIVATIVE FINANCIAL INSTRUMENTS. Had the company elected to terminate its interest rate swap and treasury rate lock agreements related to debt at December 31, 1997, 1996, and 1995, it would have paid $30 million, $30 million, and $50 million, respectively. These fair values were estimated using cash flows discounted at current market rates. 19 RESTRICTIONS AND CONTINGENCIES 19.1 SUBSIDIARY DIVIDEND RESTRICTIONS American General's insurance subsidiaries are restricted by state insurance laws as to the amounts they may pay as dividends without prior approval from their respective state insurance departments. Certain non-insurance subsidiaries are similarly restricted in the payment of dividends by long-term debt agreements. At December 31, 1997, the amount of dividends available to American General from subsidiaries during 1998 not limited by such restrictions is approximately $900 million. 19.2 LEGAL PROCEEDINGS 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 such purported class action lawsuits filed in 1996 and 1997, asserting claims related to pricing and sales practices. These claims are being defended vigorously by the subsidiaries. Given the uncertain nature of litigation and the early stages of this litigation, the outcome of these actions cannot be predicted at this time. American General nevertheless believes that the ultimate outcome of all such pending litigation should not have a material adverse effect on American General's consolidated financial position. It is possible that settlements or adverse determinations in one or more of these actions or other future proceedings could have a material adverse effect on American General's consolidated results of operations for a given period. No provision for any adverse determinations in this pending litigation has been made in the consolidated financial statements because the amount of the loss, if any, from these actions cannot be reasonably estimated at this time. 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, 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 continues to increase and creates the potential for an unpredictable judgment in any given suit. 20 DIVISION OPERATIONS 20.1 NATURE OF OPERATIONS The company reports the results of its business operations in three divisions. RETIREMENT SERVICES. The Variable Annuity Life Insurance Company (VALIC) provides tax-deferred retirement annuities and employer-sponsored retirement plans to employees of educational, health care, public sector, and other not-for-profit organizations. VALIC markets products nationwide through exclusive sales representatives. VALIC holds claims-paying ability ratings that are among the strongest in the life insurance industry. LIFE INSURANCE. American General's life insurance companies provide life insurance and annuity products throughout the United States. A broad range of products are offered through independent and career agents by All American Life, American General Life, American General Life and Accident, Franklin Life, Old Line Life, United States Life, and USLIFE Credit Life. These companies hold claims-paying ability ratings that are among the strongest in the life insurance industry. CONSUMER FINANCE. American General Finance (AGF) provides consumer and home equity loans and other credit-related products through branch offices in 41 states, Puerto Rico, and the U.S. Virgin Islands. AGF also operates financing programs through retail merchants. AGF holds debt ratings that are among the strongest in the consumer finance industry. 51 1997 ANNUAL REPORT 32 20.2 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. Division information was as follows:
Revenues Income before Taxes Assets --------------------------- --------------------------- -------------------------------- In millions 1997 1996 1995 1997 1996 1995 1997 1996 1995 =========================================================================================================================== Retirement Services $1,836 $1,742 $1,655 $ 375 $ 341 $ 305 $34,981 $30,257 $27,084 Life Insurance 5,314 5,088 4,665 822(a) 778(b) 735 34,802 32,738 31,317 Consumer Finance 1,523 1,726 1,790 204(c) 55(c) 115 9,239 9,440 9,466 - --------------------------------------------------------------------------------------------------------------------------- Total divisions 8,673 8,556 8,110 1,401 1,174 1,155 79,022 72,435 67,867 - --------------------------------------------------------------------------------------------------------------------------- Corporate 346 225 217 (368)(d) (156)(e) (163) 1,924 2,012 1,532 Realized investment gains 40 62 18 40 62 18 -- -- -- Interdivision eliminations (132) (129) (109) -- -- -- (326) (313) (316) - --------------------------------------------------------------------------------------------------------------------------- Consolidated $8,927 $8,714 $8,236 $1,073(f) $1,080(f) $1,010(f) $80,620 $74,134 $69,083 - ---------------------------------------------------------------------------------------------------------------------------
(a)Includes $71 million of restructuring costs. (b)Includes $50 million write-down of USLIFE group business. (c)Includes loss on sale of non-strategic assets of $42 million in 1997 and $145 million in 1996. (d)Includes $201 million merger-related costs, $71 million loss on sale of non-strategic assets, and $50 million litigation settlement. (e)Includes $20 million loss on sale of non-strategic assets. (f)Before dividends on preferred securities of subsidiaries. 21 QUARTERLY DATA (UNAUDITED)
1997 1996 In millions, --------------------------------------------------- ------------------------ except per share data 4th 3rd 2nd 1st 4th 3rd - -------------------------------------------------------------------------------------------------------------- Premiums and other considerations $ 890 $ 839 $ 832 $ 801 $ 820 $ 820 Net investment income 1,037 1,010 1,002 971 961 943 Total revenues 2,324 2,235 2,226 2,142 2,190 2,197 Insurance and annuity benefits 1,135 1,074 1,083 1,040 1,057 1,052 Operating costs and expenses 389 360 349 349 364 349 Provision for finance receivable losses 61 56 63 68 116 90 Total benefits and expenses 1,940 1,851 2,272(a) 1,791 2,028(b) 1,863(c) Net realized investment gains (losses) 11 6 14 (4) 3 17 Net income (loss) 230 226 (124)(a) 210 95(b) 199(c) - -------------------------------------------------------------------------------------------------------------- Per common share Net income Basic $ .94 $ .92 $ (.52) $ .87 $ .39 $ .81 Diluted .92 .91 (.52)(a) .85 .39(b) .80(c) Dividends paid .35 .35 .35 .35 .32 .33 Market price High 56 1/4 54 3/4 49 5/8 44 5/8 41 3/4 38 3/4 Low 46 9/16 46 13/16 36 1/2 39 3/8 35 3/4 34 Close 54 1/16 51 7/8 47 3/4 40 3/4 40 7/8 37 3/4 - -------------------------------------------------------------------------------------------------------------- 1996 1995 In millions, ----------------------- ------------------------------------------------- except per share data 2nd 1st 4th 3rd 2nd 1st - ------------------------------------------------------------------------------------------------------------ Premiums and other considerations $ 824 $ 780 $ 768 $ 756 $ 752 $ 693 Net investment income 945 924 928 920 894 842 Total revenues 2,180 2,147 2,123 2,106 2,070 1,937 Insurance and annuity benefits 1,057 1,052 1,073 1,038 1,032 942 Operating costs and expenses 360 332 348 318 310 299 Provision for finance receivable losses 102 109 313(e) 114 75 72 Total benefits and expenses 1,911(d) 1,832 2,053 1,799 1,746 1,628 Net realized investment gains (losses) 2 18 4 5 1 2 Net income (loss) 163(d) 196 37(e) 207 206 200 - ------------------------------------------------------------------------------------------------------------ Per common share Net income Basic $ .66 $ .80 $ .15 $ .85 $ .85 $ .82 Diluted .65(d) .79 .15(e) .84 .84 .82 Dividends paid .32 .33 .31 .31 .31 .31 Market price High 37 5/8 37 7/8 39 1/8 38 7/8 35 1/2 33 1/4 Low 32 7/8 33 1/4 31 33 5/8 31 1/8 27 1/2 Close 36 3/8 34 1/2 34 7/8 37 3/8 33 3/4 32 1/4 - ----------------------------------------------------------------------------------------------------------------
(a)Includes $272 million pretax ($247 million aftertax or $1.02 per share) merger-related costs, $113 million pretax ($73 million aftertax or $.30 per share) loss on sale of non-strategic assets, and $50 million pretax ($33 million aftertax or $.14 per share) litigation settlement. (b)Includes $145 million pretax ($93 million aftertax or $.39 per share) loss on sale of non-strategic assets. (c)Includes $20 million pretax ($18 million aftertax or $.07 per share) loss on sale of non-strategic assets. (d)Includes $50 million pretax ($32 million aftertax or $.13 per share) write-down of USLIFE group business. (e)Includes $216 million pretax ($140 million aftertax or $.58 per share) adjustment to the allowance for finance receivable losses. AMERICAN GENERAL CORPORATION 52 33 REPORT OF INDEPENDENT AUDITORS - ------------------------------------------------------------------------------- To the Board of Directors and Shareholders American General Corporation We have audited the accompanying consolidated balance sheets of American General Corporation and subsidiaries as of December 31, 1997, 1996, and 1995, and the related consolidated statements of income, shareholders' equity, common stock activity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American General Corporation and subsidiaries as of December 31, 1997, 1996, and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Houston, Texas February 26, 1998 EX-21 12 SUBSIDIARIES OF AMERICAN GENERAL CORPORATION 1 - -------------------------------------------------------------------------------- AMERICAN GENERAL CORPORATION EXHIBIT 21 - SUBSIDIARIES OF AMERICAN GENERAL CORPORATION The following list includes certain, but not all, of American General Corporation's subsidiaries at February 28, 1998. Subsidiaries of subsidiaries are indicated by indentations.
Jurisdiction Name of Incorporation - ----------------------------------------------------------------------------------------- AGC Life Insurance Company.................................. Missouri American General Life and Accident Insurance Company...... Tennessee Independent Fire Insurance Company..................... Florida American General Property Insurance Company of Florida............................................. Florida American General Life Insurance Company................... Texas American General Annuity Service Corporation........... Texas American General Life Insurance Company of New York.... New York American General Securities Incorporated............... Texas The Variable Annuity Life Insurance Company............ Texas VALIC Investment Services Company.................... Texas VALIC Retirement Services Company.................... Texas The Variable Annuity Marketing Company............... Texas The Franklin Life Insurance Company....................... Illinois The American Franklin Life Insurance Company........... Illinois Franklin Financial Services Corporation................ Delaware Western National Corporation.............................. Delaware American General Annuity Insurance Company (formerly Western National Life Insurance Company).............. Texas American General Capital, L.L.C. ........................... Delaware American General Capital Services, Inc. .................... Delaware American General Delaware, L.L.C. .......................... Delaware American General Delaware Management Corporation............ Delaware American General Finance, Inc. ............................. Indiana AGF Investment Corp. ..................................... Indiana American General Auto Finance, Inc. ...................... Delaware American General Finance Corporation...................... Indiana American General Finance Group, Inc. .................. Delaware American General Financial Services, Inc............. Delaware The National Life and Accident Insurance Company............................................ Texas CommoLoCo, Inc. ................................ Puerto Rico Merit Life Insurance Co. .............................. Indiana Yosemite Insurance Company............................. California American General Finance, Inc. ........................... Alabama American General Financial Center......................... Utah American General Independent Producer Division.............. Delaware American General Investment Holding Corporation............. Delaware American General Investment Management Corporation.......... Delaware American General Property Insurance Company................. Tennessee American General Realty Advisors, Inc. ..................... Delaware American General Realty Investment Corporation ............. Texas Knickerbocker Corporation................................... Texas USLIFE Corporation.......................................... New York All American Life Insurance Company....................... Illinois American General Life Insurance Company of Pennsylvania... Pennsylvania The Old Line Life Insurance Company of America............ Wisconsin The United States Life Insurance Company in the City of New York............................................... New York USLIFE Credit Life Insurance Company...................... Illinois
AMERICAN GENERAL CORPORATION 22 EX-23 13 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23 -- CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of American General Corporation of our report dated February 26, 1998, included in the 1997 Annual Report to Shareholders of American General Corporation. Our audits also included the financial statement schedules of American General Corporation listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth herein. We also consent to the incorporation by reference in
REGISTRATION STATEMENT NUMBER ON FORM - ----------------------------------------------------------------------------------- 333-13407................................................... S-8 33-39200.................................................... S-8 333-13401................................................... S-8 33-39201.................................................... S-8 333-13395................................................... S-8 33-51973.................................................... S-8 2-98021..................................................... S-8 333-23275................................................... S-8 333-29383................................................... S-8 333-29393................................................... S-8 333-46895................................................... S-8 333-37851................................................... S-3 333-37877................................................... S-3 33-58317.................................................... S-3 33-58317-01................................................. S-3 33-58317-02................................................. S-3 33-51045.................................................... S-3 333-40583................................................... S-3 333-40583-01................................................ S-3 333-40583-02................................................ S-3 333-40583-03................................................ S-3 333-40583-04................................................ S-3 - -----------------------------------------------------------------------------------
of our report dated February 26, 1998, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of American General Corporation. /s/ ERNST & YOUNG LLP Houston, Texas March 26, 1998 EX-24 14 POWERS OF ATTORNEY 1 American General Corporation: Board of Directors Date: January 29, 1998 Subject: Form 10-K; Limited Power of Attorney for Purpose. The purpose of this limited power of attorney is to authorize certain officers of the company to execute, on behalf of the undersigned person, the company's 1997 annual report on Form 10-K, with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other related documents, and to file the Form 10-K with the SEC. LIMITED POWER OF ATTORNEY WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation (company), will file with the Securities and Exchange Commission (Commission) under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its annual report on Form 10-K for the fiscal year ended December 31, 1997 (Form 10-K), with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other documents related thereto; NOW, THEREFORE, the undersigned in his/her capacity as a director or officer or both, as the case may be, of the company does hereby appoint JON P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally, his/her true and lawful attorney or attorneys-in-fact with or without the others and with full power of substitution and resubstitution, to execute in his/her name, place, and stead, in his/her capacity as a director or officer or both, as the case may be, of the company, the Form 10-K and any and all amendments thereto as said attorneys-in-fact or any of them shall deem necessary or appropriate, together with all instruments necessary or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Each of said attorneys-in-fact shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable in connection with the Form 10-K, as fully and for all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument this 29th day of January, 1998. /s/ ROBERT M. DEVLIN ----------------------------- 2 American General Corporation: Board of Directors Date: January 29, 1998 Subject: Form 10-K; Limited Power of Attorney for Purpose. The purpose of this limited power of attorney is to authorize certain officers of the company to execute, on behalf of the undersigned person, the company's 1997 annual report on Form 10-K, with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other related documents, and to file the Form 10-K with the SEC. LIMITED POWER OF ATTORNEY WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation (company), will file with the Securities and Exchange Commission (Commission) under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its annual report on Form 10-K for the fiscal year ended December 31, 1997 (Form 10-K), with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other documents related thereto; NOW, THEREFORE, the undersigned in his/her capacity as a director or officer or both, as the case may be, of the company does hereby appoint JON P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally, his/her true and lawful attorney or attorneys-in-fact with or without the others and with full power of substitution and resubstitution, to execute in his/her name, place, and stead, in his/her capacity as a director or officer or both, as the case may be, of the company, the Form 10-K and any and all amendments thereto as said attorneys-in-fact or any of them shall deem necessary or appropriate, together with all instruments necessary or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Each of said attorneys-in-fact shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable in connection with the Form 10-K, as fully and for all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument this 29th day of January, 1998. /s/ J. EVANS ATTWELL ----------------------------- 3 American General Corporation: Board of Directors Date: January 29, 1998 Subject: Form 10-K; Limited Power of Attorney for Purpose. The purpose of this limited power of attorney is to authorize certain officers of the company to execute, on behalf of the undersigned person, the company's 1997 annual report on Form 10-K, with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other related documents, and to file the Form 10-K with the SEC. LIMITED POWER OF ATTORNEY WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation (company), will file with the Securities and Exchange Commission (Commission) under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its annual report on Form 10-K for the fiscal year ended December 31, 1997 (Form 10-K), with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other documents related thereto; NOW, THEREFORE, the undersigned in his/her capacity as a director or officer or both, as the case may be, of the company does hereby appoint JON P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally, his/her true and lawful attorney or attorneys-in-fact with or without the others and with full power of substitution and resubstitution, to execute in his/her name, place, and stead, in his/her capacity as a director or officer or both, as the case may be, of the company, the Form 10-K and any and all amendments thereto as said attorneys-in-fact or any of them shall deem necessary or appropriate, together with all instruments necessary or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Each of said attorneys-in-fact shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable in connection with the Form 10-K, as fully and for all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument this 29th day of January, 1998. /s/ BRADY F. CARRUTH ----------------------------- 4 American General Corporation: Board of Directors Date: January 29, 1998 Subject: Form 10-K; Limited Power of Attorney for Purpose. The purpose of this limited power of attorney is to authorize certain officers of the company to execute, on behalf of the undersigned person, the company's 1997 annual report on Form 10-K, with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other related documents, and to file the Form 10-K with the SEC. LIMITED POWER OF ATTORNEY WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation (company), will file with the Securities and Exchange Commission (Commission) under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its annual report on Form 10-K for the fiscal year ended December 31, 1997 (Form 10-K), with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other documents related thereto; NOW, THEREFORE, the undersigned in his/her capacity as a director or officer or both, as the case may be, of the company does hereby appoint JON P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally, his/her true and lawful attorney or attorneys-in-fact with or without the others and with full power of substitution and resubstitution, to execute in his/her name, place, and stead, in his/her capacity as a director or officer or both, as the case may be, of the company, the Form 10-K and any and all amendments thereto as said attorneys-in-fact or any of them shall deem necessary or appropriate, together with all instruments necessary or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Each of said attorneys-in-fact shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable in connection with the Form 10-K, as fully and for all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument this 29th day of January, 1998. /s/ JAMES S. D'AGOSTINO JR. ----------------------------- 5 American General Corporation: Board of Directors Date: January 29, 1998 Subject: Form 10-K; Limited Power of Attorney for Purpose. The purpose of this limited power of attorney is to authorize certain officers of the company to execute, on behalf of the undersigned person, the company's 1997 annual report on Form 10-K, with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other related documents, and to file the Form 10-K with the SEC. LIMITED POWER OF ATTORNEY WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation (company), will file with the Securities and Exchange Commission (Commission) under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its annual report on Form 10-K for the fiscal year ended December 31, 1997 (Form 10-K), with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other documents related thereto; NOW, THEREFORE, the undersigned in his/her capacity as a director or officer or both, as the case may be, of the company does hereby appoint JON P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally, his/her true and lawful attorney or attorneys-in-fact with or without the others and with full power of substitution and resubstitution, to execute in his/her name, place, and stead, in his/her capacity as a director or officer or both, as the case may be, of the company, the Form 10-K and any and all amendments thereto as said attorneys-in-fact or any of them shall deem necessary or appropriate, together with all instruments necessary or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Each of said attorneys-in-fact shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable in connection with the Form 10-K, as fully and for all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument this 29th day of January, 1998. /s/ W. LIPSCOMB DAVIS JR. ----------------------------- 6 American General Corporation: Board of Directors Date: January 29, 1998 Subject: Form 10-K; Limited Power of Attorney for Purpose. The purpose of this limited power of attorney is to authorize certain officers of the company to execute, on behalf of the undersigned person, the company's 1997 annual report on Form 10-K, with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other related documents, and to file the Form 10-K with the SEC. LIMITED POWER OF ATTORNEY WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation (company), will file with the Securities and Exchange Commission (Commission) under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its annual report on Form 10-K for the fiscal year ended December 31, 1997 (Form 10-K), with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other documents related thereto; NOW, THEREFORE, the undersigned in his/her capacity as a director or officer or both, as the case may be, of the company does hereby appoint JON P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally, his/her true and lawful attorney or attorneys-in-fact with or without the others and with full power of substitution and resubstitution, to execute in his/her name, place, and stead, in his/her capacity as a director or officer or both, as the case may be, of the company, the Form 10-K and any and all amendments thereto as said attorneys-in-fact or any of them shall deem necessary or appropriate, together with all instruments necessary or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Each of said attorneys-in-fact shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable in connection with the Form 10-K, as fully and for all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument this 29th day of January, 1998. /s/ LARRY D. HORNER ----------------------------- 7 American General Corporation: Board of Directors Date: January 29, 1998 Subject: Form 10-K; Limited Power of Attorney for Purpose. The purpose of this limited power of attorney is to authorize certain officers of the company to execute, on behalf of the undersigned person, the company's 1997 annual report on Form 10-K, with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other related documents, and to file the Form 10-K with the SEC. LIMITED POWER OF ATTORNEY WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation (company), will file with the Securities and Exchange Commission (Commission) under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its annual report on Form 10-K for the fiscal year ended December 31, 1997 (Form 10-K), with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other documents related thereto; NOW, THEREFORE, the undersigned in his/her capacity as a director or officer or both, as the case may be, of the company does hereby appoint JON P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally, his/her true and lawful attorney or attorneys-in-fact with or without the others and with full power of substitution and resubstitution, to execute in his/her name, place, and stead, in his/her capacity as a director or officer or both, as the case may be, of the company, the Form 10-K and any and all amendments thereto as said attorneys-in-fact or any of them shall deem necessary or appropriate, together with all instruments necessary or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Each of said attorneys-in-fact shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable in connection with the Form 10-K, as fully and for all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument this 29th day of January, 1998. /s/ RICHARD J.V. JOHNSON ----------------------------- 8 American General Corporation: Board of Directors Date: January 29, 1998 Subject: Form 10-K; Limited Power of Attorney for Purpose. The purpose of this limited power of attorney is to authorize certain officers of the company to execute, on behalf of the undersigned person, the company's 1997 annual report on Form 10-K, with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other related documents, and to file the Form 10-K with the SEC. LIMITED POWER OF ATTORNEY WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation (company), will file with the Securities and Exchange Commission (Commission) under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its annual report on Form 10-K for the fiscal year ended December 31, 1997 (Form 10-K), with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other documents related thereto; NOW, THEREFORE, the undersigned in his/her capacity as a director or officer or both, as the case may be, of the company does hereby appoint JON P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally, his/her true and lawful attorney or attorneys-in-fact with or without the others and with full power of substitution and resubstitution, to execute in his/her name, place, and stead, in his/her capacity as a director or officer or both, as the case may be, of the company, the Form 10-K and any and all amendments thereto as said attorneys-in-fact or any of them shall deem necessary or appropriate, together with all instruments necessary or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Each of said attorneys-in-fact shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable in connection with the Form 10-K, as fully and for all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument this 29th day of January, 1998. /s/ MICHAEL E. MURPHY ----------------------------- 9 American General Corporation: Board of Directors Date: January 29, 1998 Subject: Form 10-K; Limited Power of Attorney for Purpose. The purpose of this limited power of attorney is to authorize certain officers of the company to execute, on behalf of the undersigned person, the company's 1997 annual report on Form 10-K, with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other related documents, and to file the Form 10-K with the SEC. LIMITED POWER OF ATTORNEY WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation (company), will file with the Securities and Exchange Commission (Commission) under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its annual report on Form 10-K for the fiscal year ended December 31, 1997 (Form 10-K), with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other documents related thereto; NOW, THEREFORE, the undersigned in his/her capacity as a director or officer or both, as the case may be, of the company does hereby appoint JON P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally, his/her true and lawful attorney or attorneys-in-fact with or without the others and with full power of substitution and resubstitution, to execute in his/her name, place, and stead, in his/her capacity as a director or officer or both, as the case may be, of the company, the Form 10-K and any and all amendments thereto as said attorneys-in-fact or any of them shall deem necessary or appropriate, together with all instruments necessary or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Each of said attorneys-in-fact shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable in connection with the Form 10-K, as fully and for all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument this 29th day of January, 1998. /s/ JON P. NEWTON ----------------------------- 10 American General Corporation: Board of Directors Date: January 29, 1998 Subject: Form 10-K; Limited Power of Attorney for Purpose. The purpose of this limited power of attorney is to authorize certain officers of the company to execute, on behalf of the undersigned person, the company's 1997 annual report on Form 10-K, with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other related documents, and to file the Form 10-K with the SEC. LIMITED POWER OF ATTORNEY WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation (company), will file with the Securities and Exchange Commission (Commission) under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its annual report on Form 10-K for the fiscal year ended December 31, 1997 (Form 10-K), with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other documents related thereto; NOW, THEREFORE, the undersigned in his/her capacity as a director or officer or both, as the case may be, of the company does hereby appoint JON P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally, his/her true and lawful attorney or attorneys-in-fact with or without the others and with full power of substitution and resubstitution, to execute in his/her name, place, and stead, in his/her capacity as a director or officer or both, as the case may be, of the company, the Form 10-K and any and all amendments thereto as said attorneys-in-fact or any of them shall deem necessary or appropriate, together with all instruments necessary or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Each of said attorneys-in-fact shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable in connection with the Form 10-K, as fully and for all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument this 29th day of January, 1998. /s/ MICHAEL J. POULOS ----------------------------- 11 American General Corporation: Board of Directors Date: January 29, 1998 Subject: Form 10-K; Limited Power of Attorney for Purpose. The purpose of this limited power of attorney is to authorize certain officers of the company to execute, on behalf of the undersigned person, the company's 1997 annual report on Form 10-K, with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other related documents, and to file the Form 10-K with the SEC. LIMITED POWER OF ATTORNEY WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation (company), will file with the Securities and Exchange Commission (Commission) under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its annual report on Form 10-K for the fiscal year ended December 31, 1997 (Form 10-K), with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other documents related thereto; NOW, THEREFORE, the undersigned in his/her capacity as a director or officer or both, as the case may be, of the company does hereby appoint JON P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally, his/her true and lawful attorney or attorneys-in-fact with or without the others and with full power of substitution and resubstitution, to execute in his/her name, place, and stead, in his/her capacity as a director or officer or both, as the case may be, of the company, the Form 10-K and any and all amendments thereto as said attorneys-in-fact or any of them shall deem necessary or appropriate, together with all instruments necessary or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Each of said attorneys-in-fact shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable in connection with the Form 10-K, as fully and for all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument this 29th day of January, 1998. /s/ ROBERT E. SMITTCAMP ----------------------------- 12 American General Corporation: Board of Directors Date: January 29, 1998 Subject: Form 10-K; Limited Power of Attorney for Purpose. The purpose of this limited power of attorney is to authorize certain officers of the company to execute, on behalf of the undersigned person, the company's 1997 annual report on Form 10-K, with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other related documents, and to file the Form 10-K with the SEC. LIMITED POWER OF ATTORNEY WHEREAS, AMERICAN GENERAL CORPORATION, a Texas corporation (company), will file with the Securities and Exchange Commission (Commission) under Section 13 of the Securities Exchange Act of 1934, as amended (Act), its annual report on Form 10-K for the fiscal year ended December 31, 1997 (Form 10-K), with such amendments thereto as may be necessary or appropriate, together with any and all exhibits and other documents related thereto; NOW, THEREFORE, the undersigned in his/her capacity as a director or officer or both, as the case may be, of the company does hereby appoint JON P. NEWTON, MARK S. BERG, and ELLEN H. MASTERSON, and each of them, severally, his/her true and lawful attorney or attorneys-in-fact with or without the others and with full power of substitution and resubstitution, to execute in his/her name, place, and stead, in his/her capacity as a director or officer or both, as the case may be, of the company, the Form 10-K and any and all amendments thereto as said attorneys-in-fact or any of them shall deem necessary or appropriate, together with all instruments necessary or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Each of said attorneys-in-fact shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable in connection with the Form 10-K, as fully and for all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument this 29th day of January, 1998. /s/ ANNE M. TATLOCK ----------------------------- EX-27 15 FINANCIAL DATA SCHEDULE
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 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 47,747 0 0 116 3,272 233 54,006 263 0 3,398 80,620 45,095 192 385 1,987 9,182 1,726 85 326 7,172 80,620 3,362 4,020 40 1,505 4,332 546 (646) 1,073 447 542 0 0 0 542 2.21 2.19 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: NET UNREALIZED GAINS (LOSSES) ON SECURITIES; RETAINED EARNINGS; COST OF TREASURY STOCK; AND FOREIGN CURRENCY TRANSLATION GAINS (LOSSES). INCLUDES INSURANCE CHARGES. INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES. CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET OF ACCRETION OF INTEREST. CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP. EXCLUDES $129 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $45 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
EX-27.1 16 FINANCIAL DATA SCHEDULE - RESTATED
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 12-MOS 12-MOS DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 44,355 43,220 0 0 0 0 137 191 3,228 3,337 626 607 50,832 49,598 176 227 0 0 3,709 2,847 74,134 69,083 43,538 41,224 217 236 373 337 1,894 1,921 9,732 9,765 1,227 729 85 0 572 532 6,187 6,577 74,134 69,083 3,244 2,969 3,773 3,584 62 18 1,635 1,665 4,218 4,085 494 412 (618) (647) 1,080 1,010 387 341 653 650 0 0 0 0 0 0 653 650 2.67 2.68 2.63 2.66 0 0 0 0 0 0 0 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: NET UNREALIZED GAINS (LOSSES) ON SECURITIES; RETAINED EARNINGS; COST OF TREASURY STOCK; AND FOREIGN CURRENCY TRANSLATION GAINS (LOSSES). INCLUDES INSURANCE CHARGES. INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES. CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET OF ACCRETION OF INTEREST. CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP. EXCLUDES $61 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $21 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES. EXCLUDES $30 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $11 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
EX-27.2 17 FINANCIAL DATA SCHEDULE - RESTATED
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 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 47,557 0 0 110 3,258 245 53,589 218 0 3,612 79,416 45,078 189 380 1,945 8,881 1,726 85 318 6,916 79,416 2,472 2,983 25 1,123 3,197 405 (476) 689 315 312 0 0 0 312 1.27 1.27 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: NET UNREALIZED GAINS (LOSSES) ON SECURITIES; RETAINED EARNINGS; COST OF TREASURY STOCK; AND FOREIGN CURRENCY TRANSLATION GAINS (LOSSES). INCLUDES INSURANCE CHARGES. INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES. CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET OF ACCRETION OF INTEREST. CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP. EXCLUDES $95 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $33 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
EX-27.3 18 FINANCIAL DATA SCHEDULE - RESTATED
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 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 45,985 0 0 110 3,389 587 52,707 289 0 3,927 77,387 44,898 229 370 1,896 8,972 1,725 85 321 6,340 77,387 1,633 1,973 14 748 2,123 260 (311) 305 180 86 0 0 0 86 0.34 0.34 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: NET UNREALIZED GAINS (LOSSES) ON SECURITIES; RETAINED EARNINGS; COST OF TREASURY STOCK; AND FOREIGN CURRENCY TRANSLATION GAINS (LOSSES). INCLUDES INSURANCE CHARGES. INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES. CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET OF ACCRETION OF INTEREST. CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP. EXCLUDES $60 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $21 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
EX-27.4 19 FINANCIAL DATA SCHEDULE - RESTATED
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-31-1997 JAN-01-1997 MAR-31-1997 43,876 0 0 120 3,202 617 50,581 207 0 4,166 74,443 43,875 197 374 1,897 9,489 1,725 85 574 5,700 74,443 801 971 (6) 376 1,040 125 (150) 351 124 210 0 0 0 210 0.87 0.85 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: NET UNREALIZED GAINS (LOSSES) ON SECURITIES; RETAINED EARNINGS; COST OF TREASURY STOCK; AND FOREIGN CURRENCY TRANSLATION GAINS (LOSSES). INCLUDES INSURANCE CHARGES. INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES. CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET OF ACCRETION OF INTEREST. CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP. EXCLUDES $26 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $9 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
EX-27.5 20 FINANCIAL DATA SCHEDULE - RESTATED
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 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 42,912 0 0 137 3,415 638 49,600 227 0 3,934 72,178 43,128 222 362 1,949 9,888 731 85 570 5,872 72,178 2,424 2,812 57 1,231 3,161 381 (473) 918 331 558 0 0 0 558 2.28 2.24 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: NET UNREALIZED GAINS (LOSSES) ON SECURITIES; RETAINED EARNINGS; COST OF TREASURY STOCK; AND FOREIGN CURRENCY TRANSLATION GAINS (LOSSES). INCLUDES INSURANCE CHARGES. INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES. CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET OF ACCRETION OF INTEREST. CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP. EXCLUDES $44 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $15 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
EX-27.6 21 FINANCIAL DATA SCHEDULE - RESTATED
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 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 42,514 0 0 148 3,460 637 49,154 246 0 3,867 70,794 42,729 225 370 1,938 9,555 731 85 569 5,791 70,794 1,604 1,869 31 823 2,109 251 (318) 584 206 359 0 0 0 359 1.47 1.44 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 POLICY HOLDER 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: NET UNREALIZED GAINS (LOSSES) ON SECURITIES; RETAINED EARNINGS; COST OF TREASURY STOCK; AND FOREIGN CURRENCY TRANSLATION GAINS (LOSSES). INCLUDES INSURANCE CHARGES. INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES. CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET OF ACCRETION OF INTEREST. CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP. EXCLUDES $29 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $10 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
EX-27.7 22 FINANCIAL DATA SCHEDULE - RESTATED
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-31-1996 JAN-01-1996 MAR-31-1996 43,020 0 0 178 3,399 648 49,588 238 0 3,660 70,114 42,432 230 364 1,924 9,501 730 85 567 6,064 70,114 780 924 28 415 1,052 127 (156) 315 109 196 0 0 0 196 0.80 0.79 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: NET UNREALIZED GAINS (LOSSES) ON SECURITIES; RETAINED EARNINGS; COST OF TREASURY STOCK; AND FOREIGN CURRENCY TRANSLATION GAINS (LOSSES). INCLUDES INSURANCE CHARGES. INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES. CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET OF ACCRETION OF INTEREST. CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP. EXCLUDES $15 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $5 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
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