-----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, QxfWGbkbULyu6dKsczjHpPOWLmEQprWcXipav+GxLhb3NVvFsFh9zdBA4MmVWm9m 4neuBhRi4vm00fos5Za4lg== 0000950129-00-001285.txt : 20000322 0000950129-00-001285.hdr.sgml : 20000322 ACCESSION NUMBER: 0000950129-00-001285 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000321 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: 574466 BUSINESS ADDRESS: STREET 1: 2929 ALLEN PKWY CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135221111 10-K405 1 AMERICAN GENERAL CORPORATION - DATED 12/31/1999 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM .............. TO .............. COMMISSION FILE NUMBER 1-7981 AMERICAN GENERAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS ARTICLES OF INCORPORATION) TEXAS 74-0483432 (State of incorporation) (I.R.S. Employer Identification No.) 2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019-2155 (Address of principal executive offices) (Zip Code)
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 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. [ ] The aggregate market value based on published prices as of March 1, 2000 of American General's Common Stock held by non-affiliates was approximately $13.1 billion. As of March 1, 2000, there were 249,227,351 shares of American General's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE
PART OF THE FORM 10-K DOCUMENT INTO WHICH INCORPORATED -------- ----------------------- Portions of American General's 1999 Annual Report to Shareholders Parts I, II, and IV Portions of American General's definitive Proxy Statement filed March 21, 2000, for the Annual Meeting of Shareholders to be held April 27, 2000 Part III
1999 FORM 10-K 2 PART I ITEM 1. BUSINESS GENERAL American General Corporation (American General) and its subsidiaries (collectively, the company or we) is a diversified financial services organization with assets of $115 billion at December 31, 1999. The company is a leading provider of retirement services, life insurance, consumer loans, and investments to 12 million customers. 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. Much of the information provided in response to Item 1 is incorporated herein by reference to selected sections of our 1999 Annual Report to Shareholders (ARS). Portions of our 1999 ARS are provided as Exhibit 13 to this Form 10-K. CORPORATE DEVELOPMENT. Over the last five years, we acquired eight companies with assets of $34 billion for total consideration of nearly $6 billion. The three years of financial data included in this Form 10-K reflect our acquisitions in those years, as follows: - During 1999, we acquired North Central Life Insurance Company (North Central Life), a credit life insurance company, and Standard Pacific Savings, F.A., which we renamed American General Bank, FSB, for a combined purchase price of $95 million. - On February 25, 1998, we acquired the remaining 54% equity interest in Western National Corporation for $1.2 billion. Prior to 1997, we had acquired the original 46% for $400 million. - On June 17, 1997, we acquired USLIFE Corporation (USLIFE) in an all-stock merger transaction valued at $1.8 billion. We reported this acquisition using the pooling of interests method of accounting. - On April 16, 1997, we acquired Home Beneficial Life Insurance Company for $665 million. Additional information regarding our acquisitions during the past three years is incorporated herein by reference to Note 2 of Notes to Financial Statements in our 1999 ARS. BUSINESS DIVISIONS. We report the results of our 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 19.1 of Notes to Financial Statements in our 1999 ARS. Financial information for each division is incorporated herein by reference to the sections "Retirement Services," "Life Insurance," "Consumer Finance," "Asset/Liability Management," "Capital Resources," and "Liquidity" of Management's Discussion and Analysis (MD&A) and Note 19.2 of Notes to Financial Statements in our 1999 ARS, and to Schedule III of Item 14 of this Form 10-K. EMPLOYEES. As of December 31, 1999, we had approximately 15,800 full-time salaried employees. LIFE INSURANCE AND ANNUITY PRODUCTS INSURANCE DEPOSITS AND PREMIUMS. The following table lists deposits and premiums and other considerations of our retirement services and insurance companies for the past three years:
In millions 1999 1998 1997 - ---------------------------------------------------------------------- Deposits* $10,343 $ 8,210 $ 5,046 - ---------------------------------------------------------------------- Direct premiums and other considerations Individual life premiums $ 1,480 $ 1,490 $ 1,530 Insurance charges 967 863 768 Group and credit health premiums 620 621 608 Group and credit life premiums 382 360 310 Individual health premiums 138 157 174 Other premiums 436 226 152 - ---------------------------------------------------------------------- Total direct premiums and other considerations 4,023 3,717 3,542 Reinsurance premiums assumed 303 373 119 Reinsurance premiums ceded (554) (485) (299) - ---------------------------------------------------------------------- Premiums and other considerations $ 3,772 $ 3,605 $ 3,362 - ----------------------------------------------------------------------
*Represents premiums received for interest-sensitive life insurance and annuity products. AMERICAN GENERAL 1 3 LIFE INSURANCE SALES AND IN FORCE. The following table summarizes the face amounts of life insurance sales and life insurance in force for our insurance companies for the past three years:
In millions 1999 1998 1997 - ------------------------------------------------------------------- Individual life insurance sales: Permanent (non-participating) Interest-sensitive $ 10,957 $ 11,590 $ 13,293 Guaranteed-cost 6,020 5,242 4,062 Term 33,590 24,059 23,269 Permanent (participating) 2,330 3,547 5,778 Group life insurance sales 12,298 15,284 8,428 Credit life insurance sales 8,682 7,872 9,098 - ------------------------------------------------------------------- Total 73,877 67,594 63,928 Less: reinsurance assumed 46 394 386 - ------------------------------------------------------------------- Total direct sales $ 73,831 $ 67,200 $ 63,542 - ------------------------------------------------------------------- Individual life insurance in force (at December 31): Permanent (non-participating) Interest-sensitive $108,082 $106,165 $103,069 Guaranteed-cost 38,022 38,135 36,806 Term 118,695 104,465 98,267 Permanent (participating) 28,176 28,813 28,686 Group life insurance in force 61,440 56,555 50,854 Credit life insurance in force 17,302 13,198 13,994 - ------------------------------------------------------------------- Total life insurance in force* $371,717 $347,331 $331,676 - -------------------------------------------------------------------
* Before deductions for reinsurance ceded; includes reinsurance assumed. ANNUITY PRODUCTS. The following table summarizes annuity liabilities by product type for our retirement services and life insurance divisions at December 31:
In millions 1999 1998 1997 - ------------------------------------------------------------------- Retirement Services division Fixed $ 36,607 $ 34,024 $ 21,355 Variable 21,566 14,771 10,545 Payout annuities 3,135 2,791 659 - ------------------------------------------------------------------- Total annuity liabilities $ 61,308 $ 51,586 $ 32,559 - ------------------------------------------------------------------- Life Insurance division Fixed $ 4,666 $ 5,012 $ 5,263 Variable 1,767 1,066 721 Payout annuities 2,158 2,114 1,952 - ------------------------------------------------------------------- Total annuity liabilities $ 8,591 $ 8,192 $ 7,936 - -------------------------------------------------------------------
Our retirement services division offers both tax-qualified and non-qualified fixed annuities. In 1999, minimum guaranteed interest crediting rates for these fixed annuities ranged from 3.0% to 6.0%; actual interest crediting rates ranged from 4.5% to 11.0%; and the weighted-average crediting rate was 5.3%. Our life insurance division also offers a variety of fixed annuity products. In 1999, minimum guaranteed interest crediting rates on these annuities ranged from 2.5% to 5.5%; actual interest crediting rates ranged from 3.0% to 10.0%; and the weighted-average crediting rate was 5.9%. Both our retirement services and life insurance divisions offer annuity accounts with a variable investment option. A key feature of variable annuities is that the investment risk lies predominantly with the policyholder, rather than with the company. When a variable investment option is selected, deposits are invested in a mutual fund in accordance with the policyholder's instructions and recorded as separate account assets. To reflect the policyholder's right to these assets, an equivalent separate account liability is established. Our payout annuities consist primarily of structured settlements of indemnity claims. We credit interest to these annuities at fixed rates determined when the contracts are issued, consistent with the related investment yield at the time. In 1999, interest crediting rates ranged from 2.0% to 14.0%. 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 our 1999 ARS. REINSURANCE. Information regarding reinsurance is incorporated herein by reference to Notes 1.11 and 16 of Notes to Financial Statements in our 1999 ARS, and to Schedule IV of Item 14 of this Form 10-K. INVESTMENTS Information regarding our investments is incorporated herein by reference to the sections "Investments" and "Asset/Liability Management" of MD&A and Notes 1.2, 1.14, 4, and 10 of Notes to Financial Statements in our 1999 ARS, and to Schedule I of Item 14 of this Form 10-K. FACTORS AFFECTING PRICING OF PRODUCTS INSURANCE AND ANNUITY PRODUCTS. Our premium rates are based on assumptions, which we believe are realistic, for future mortality, investment yields, expenses, and lapses. In addition, pricing is influenced by competition and our objectives for return on capital. Although a profit margin is included in the price of our products, the actual profitability of the products can be significantly affected by the difference between actual and assumed experience. CONSUMER FINANCE PRODUCTS. Pricing of our consumer finance products is influenced by such factors as cost of borrowed funds, credit risk, competition, the expense of operations, and our target for return on capital. In addition, pricing is affected by state regulation of interest rates 1999 FORM 10-K 2 4 PART I (Continued) 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 continuing consolidations in the industry may affect, among other matters, our corporate development activities, business growth, distribution methods, and the pricing of our products and services. On November 12, 1999, the Financial Services Modernization Act became federal law, breaking down regulatory barriers between banks, insurance companies, and securities firms which had existed for over 60 years. We anticipate that the new law will hasten the pace of consolidation in the financial services industry, as well as provide new opportunities and increase competition among diversified financial services companies. However, we do not expect this law to have a significant impact on our corporate or capital strategy. Our retirement services and life insurance businesses operate in a highly competitive industry that consists of a large number of insurance companies, banks, mutual fund companies, and other financial institutions. No single competitor, nor any small group of competitors, dominates any of the markets in which we operate. Principal competitive factors include price, financial strength ratings, selection of products, quality of service, and investment management performance with respect to variable insurance, annuity, and mutual fund products. The consumer finance business is highly competitive due to the large number of companies offering financial products and services, the sophistication of those products, technological improvements, and more rapid communications. We compete with other consumer finance companies and other types of financial institutions that offer similar products and services, including, but not limited to, industrial banks, industrial loan companies, mortgage banks, commercial banks, sales finance companies, savings and loan associations, federal savings banks, and credit unions. The availability of the Internet as a distribution channel for financial products and services is making the financial services industry more competitive by allowing companies to promote or advertise life insurance, annuity, retirement services, and consumer financial products over the Internet. REGULATION INSURANCE. Our insurance companies 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 our 1999 ARS. Information regarding statutory accounting practices is incorporated herein by reference to Note 17 of Notes to Financial Statements in our 1999 ARS. Most states also regulate affiliated groups, such as American General and our subsidiaries, under insurance holding company laws. Additional information regarding dividend restrictions is incorporated herein by reference to Note 18.1 of Notes to Financial Statements in our 1999 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. Our probable costs related to state guaranty associations are immaterial. The Insurance Marketplace Standards Association (IMSA) was created in 1997 by the American Council of Life Insurers, the industry's largest trade association, to provide a framework by which participating life insurers design, implement, and monitor sales and marketing practices of high ethical content to benefit and protect consumers. Certification by IMSA signifies that a company has committed to maintain the standards set forth in IMSA's principles of ethical market conduct. Our principal retirement services and life insurance subsidiaries are certified by IMSA. REGISTERED PRODUCTS. Certain of our companies 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. AMERICAN GENERAL 3 5 CONSUMER FINANCE. Our consumer finance companies 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, the Truth in Lending Act, certain Federal Trade Commission rules, and state laws that regulate the consumer loan and retail sales finance businesses. In addition, our 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 the examination, regulation, and reporting requirements of the Office of Thrift Supervision. TAXATION. Tax laws affect not only the way we are taxed but also the design of many of our products. Changes in tax laws or regulations could adversely affect operating results. ENVIRONMENTAL. Our principal exposure to environmental regulation arises from our ownership of investment real estate. Probable costs related to environmental cleanup are immaterial. ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT Information as of March 10, 2000 regarding the company's executive officers who currently make disclosure filings pursuant to Section 16 of the Securities Exchange Act of 1934 is as follows:
Present Principal Position with the Company and Name and Age Other Material Positions Held during Last Five Years - ----------------------------------------------------------------------------------------------- ROBERT M. DEVLIN (59) Chairman (since 1997), President (1995-97 and since 1998), and Chief Executive Officer (since 1996), Director (since 1993), and Vice Chairman (1993-95), American General Corporation. Director, Cooper Industries, Inc. and Phillips Petroleum Company. FREDERICK W. GEISSINGER (54) Vice Chairman and Group Executive - Consumer Finance (since 1999), American General Corporation. President and Chief Executive Officer (since 1995), American General Finance, Inc., a subsidiary; Director and Chairman (1995-99), A.G. Financial Service Center, Inc. (formerly American General Financial Center), a subsidiary (see Part I, Item 3, "Satellite Dish" of this Form 10-K for additional information); President and Chief Executive Officer (1994-95), American General Land Development, Inc., a former subsidiary. JOHN A. GRAF (40) Vice Chairman and Group Executive - Retirement Services (since 1999), American General Corporation. President (since 1998) and Chief Executive Officer (since 1999), The Variable Annuity Life Insurance Company, a subsidiary; Chairman and CEO (since 1998), American General Annuity Insurance Company, a subsidiary. Vice Chairman, Chief Marketing Officer and Chief Administrative Officer (1996-97), and Executive Vice President and Chief Marketing Officer (1993-96), Western National Life Insurance Company. RODNEY O. MARTIN JR. (47) Vice Chairman and Group Executive - Life Insurance (since 1998), American General Corporation. Chairman (since 1998), and President and Chief Executive Officer (1997-99), American General Life Companies, a subsidiary; Senior Chairman (since 1999) and President and Chief Executive Officer (1996-99), American General Life Insurance Company, a subsidiary; President and Chief Executive Officer (1995-96), American General Life Insurance Company of New York, a subsidiary. President (1993-95), Connecticut Mutual Insurance Services. JON P. NEWTON (58) Vice Chairman and Group Executive - Corporate Operations (since 1999), Director (since 1995), Vice Chairman (1995-99), Vice Chairman and General Counsel (1995-97), and Senior Vice President and General Counsel (1993-95), American General Corporation. Director, Newmark Homes Corp. RICHARD W. SCOTT (46) Vice Chairman and Group Executive - Investment Management (since January 2000), Executive Vice President (1998-2000), and Chief Investment Officer (since 1998), American General Corporation. President and Chief Executive Officer (since 1998), American General Investment Management, L.P., a subsidiary. Vice Chairman and Chief Investment Officer (1996-98), General Counsel (1994-97), and Executive Vice President and Chief Investment Officer (1994-96), Western National Corporation. MARK S. BERG (41) Executive Vice President and General Counsel (since 1998), Corporate Secretary (since 1999), and Senior Vice President and General Counsel (1997-98), American General Corporation. Partner (1990-97), Vinson & Elkins L.L.P. DAVID W. ENTREKIN (38) Executive Vice President - Strategic Development (since 1999), Senior Vice President - Investor Relations (1998-99), Vice President - Investor Relations (1997-98), Director, Investor Relations (1996-97), and Senior Investment Manager, Investment Research (1994-96), American General Corporation. NICHOLAS R. RASMUSSEN (53) Executive Vice President, Chief Financial Officer and Treasurer (since 1999) and Senior Vice President - Corporate Development (1993-99), American General Corporation.
1999 FORM 10-K 4 6 PART I (Continued) ITEM 2. PROPERTIES Our corporate headquarters is located in the American General Center, a complex of office buildings with 2.2 million square feet on a 46-acre tract near downtown Houston. American General and certain subsidiaries own all of the buildings and underlying land in the complex. We occupy approximately 50% of the total office space available in the American General Center. Our subsidiaries also own various other properties, including properties held for investment 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; and (3) The Franklin Life Insurance Company in Springfield, Illinois. ITEM 3. LEGAL PROCEEDINGS SATELLITE DISH. In the mid-1990's, one of our subsidiaries, American General Financial Center (renamed A.G. Financial Service Center, Inc.) (Financial Service Center), provided financing for satellite dishes sold by independent unaffiliated dealers. On May 18, 1999, the Chancery Court of the First Judicial District of Jones County, Mississippi in a case captioned Clayton D. Smith, et al. v. Delta TV Corporation, Don Acy, US Electronics, American General Financial Center, Civil Action No. 96-0254 (the Clayton Smith matter), rendered a judgment awarding approximately $500,000 in compensatory damages and $167 million in punitive damages against Financial Service Center. The lawsuit was filed on November 15, 1996, by 29 individuals who had each purchased a satellite dish. Financial Service Center, together with certain other American General companies, currently are named as defendants in other pending cases involving the financing of satellite dishes. In August 1999, Financial Service Center filed a voluntary petition to reorganize under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Southern District of Indiana. The decision to reorganize was necessitated by the judgment rendered against Financial Service Center by the Mississippi state court. The filing for reorganization under Chapter 11 is limited to Financial Service Center and was intended to provide a fair and orderly process for managing the claims against Financial Service Center. Prior to the bankruptcy filing, Financial Service Center had assets of approximately $7 million. In January 2000, settlement agreements were entered into in connection with the Clayton Smith matter and other pending cases relating to satellite dish financing. Accordingly, we recorded a charge of $57 million ($36 million aftertax) in fourth quarter 1999 to cover the proposed settlements and other litigation. Resolution of the satellite dish litigation is dependent upon a number of factors, including the bankruptcy court's approval of Financial Service Center's plan of reorganization. If court approvals are obtained and appeals are not taken, we expect that the settlements will be final in third quarter 2000. WORKERS' COMPENSATION. Prior to our acquisition of USLIFE Corporation, one of its subsidiaries entered the workers' compensation reinsurance business in 1997. We discontinued writing new workers' compensation reinsurance business in 1998. Our largest contract was a quota share reinsurance agreement with Superior National Insurance Group (Superior National), effective May 1, 1998. On November 29, 1999, we initiated an arbitration proceeding to rescind this contract from its inception, based in part on misrepresentations and nondisclosures which we believe were made by Superior National. On March 3, 2000, the California Department of Insurance ordered seizure of Superior National as a result of its financial condition. We do not believe that this action will prevent the company from ultimately arbitrating its claim for recission, and we plan to fully pursue all remedies through the arbitration process. Although we believe, based on the advice of counsel, that the company will succeed in rescinding the contract, risks and uncertainties remain with respect to the ultimate outcome. However, in the unlikely event the company does not prevail in the arbitration, we do not expect the additional aftertax losses from our workers' compensation reinsurance business to exceed $85 million, based on our current estimates. We believe that our ultimate loss, if any, related to our workers' compensation reinsurance business will not have a material adverse effect on our future results of operations and financial position. 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. A number of these lawsuits have resulted in substantial settlements across the life insurance industry. Certain of our subsidiaries were defendants in similar class action lawsuits. In 1998, our life insurance subsidiaries entered into agreements to resolve substantially all of the material pending market conduct class action lawsuits. We recorded a charge of $378 million ($246 million aftertax) for policyholder benefits and other anticipated expenses resulting from the proposed settlements, as well as other AMERICAN GENERAL 5 7 administrative and legal costs. All of these settlements were finalized in 1999. OTHER. The company is party to various other lawsuits and proceedings arising in the ordinary course of business. These lawsuits and proceedings include certain class action claims, claims filed by individuals who excluded themselves from market conduct settlements, and claims concerning the sale of industrial life insurance policies. In addition, many of these claims arise in jurisdictions, such as Alabama and Mississippi, that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. Based upon information presently available, we believe that the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on the company's results of operations and financial position. However, it should be noted that the frequency of large damage awards, including large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for 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 1999. 1999 FORM 10-K 6 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 18.1, respectively, of Notes to Financial Statements in our 1999 ARS. Common stock was owned by 36,129 shareholders of record and approximately 85,000 beneficial owners at March 1, 2000. The quarterly cash dividends paid on common stock are incorporated herein by reference to Note 21 of Notes to Financial Statements in our 1999 ARS. The common stock of American General is traded in the United States on the New York Stock Exchange and the Pacific Exchange. Our common stock is also traded on the London Stock Exchange and the Swiss Stock Exchanges of Basel, Geneva, and Zurich. On November 12, 1999, we issued 839,290 shares of American General common stock (valued at $66 million on November 12, 1999) in connection with our acquisition of North Central Life. These shares were issued to 30 individuals as consideration for the acquisition in exchange for those individuals' shares of Financial Life Companies, Inc., the parent company of North Central Life. The transaction did not involve a public offering of securities, and the shares issued were not registered under the Securities Act of 1933 (Securities Act) based on section 4(2) of the Securities Act and Regulation D as they relate to private offerings. 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 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Revenues $ 10,679 $ 10,251 $ 8,927 $ 8,714 $ 8,236 Net income 1,131(a) 764(b) 542(c) 653(d) 650(e) Net income per common share Basic 4.52(a) 3.02(b) 2.21(c) 2.67(d) 2.68(e) Diluted 4.40(a) 2.96(b) 2.19(c) 2.63(d) 2.66(e) Assets(f) 115,447 105,107 80,620 74,134 69,083 Debt Corporate 3,120 2,743 1,916 2,102 2,295 Consumer Finance 10,206 8,863 7,266 7,630 7,470 Redeemable equity 1,924 1,728 1,726 1,227 729 Shareholders' equity(f) 6,420 8,871 7,583 6,844 7,109 Cash dividends per common share 1.60 1.50 1.40 1.30 1.24
- --------------- (a) Includes $36 million ($.14 per share) aftertax litigation settlements. (b) Includes $246 million ($.94 per share) aftertax litigation settlements and $42 million ($.16 per share) aftertax Year 2000 costs. (c) 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. (d) 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 insurance business. (e) Includes $140 million ($.57 per share) aftertax adjustment to the allowance for finance receivable losses. (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 1999 ARS. 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 21-35 in our 1999 ARS. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK American General's exposure to market risk is primarily related to changes in interest rates. Quantitative and qualitative disclosures about our market risk resulting from changes in interest rates are incorporated herein by reference to "Asset/Liability Management" of MD&A in our 1999 ARS. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The company's financial statements and supplementary data are incorporated herein by reference to pages 36-56 in our 1999 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 7 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing in the sections "Election of Directors - Information About the Nominees" and "Section 16(a) Beneficial Ownership Reporting Compliance" in American General's definitive Proxy Statement filed March 21, 2000 (2000 Proxy Statement) is incorporated herein by reference. Information regarding the company's executive officers is included in Part I, Item 1A of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information appearing in the sections "Election of Directors" and "Executive Compensation" in our 2000 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing in the section "Security Ownership" in our 2000 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 our 2000 Proxy Statement is incorporated herein by reference. 1999 FORM 10-K 8 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 ---------------------------------- 1999 Form 10-K Annual Report - ------------------------------------------------------------------------------------------------ 1. Financial Statements Report of Ernst & Young LLP, Independent Auditors - 57 Consolidated Financial Statements Income Statement - 36 Balance Sheet - 37 Statements of Shareholders' Equity and Comprehensive Income - 38 Statement of Cash Flows - 39 Notes to Financial Statements - 40-56 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. (continued on next page) AMERICAN GENERAL 9 11 3. Exhibits
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 3.2 Articles of Amendment to the Restated Articles of Incorporation 4 Form 10-Q for First of American General Quarter 1998 3.3 Statement of Resolution Establishing Series of Shares of 7% 4(d) 333-00513 Convertible Preferred Stock 3.4 Statement of Resolution Establishing Series of Shares of Series A 4(o) 33-58317 Cumulative Convertible Preferred Stock 3.5 Resolutions Establishing American General's 6% Series A 4(k) 333-00513 Convertible Junior Subordinated Debentures 3.6 Amended and Restated Bylaws of American General Corporation 3.6* NA 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 Junior Subordinated Indenture, dated as of May 15, 1995, between 4(g) 333-00513 American General and The Chase Manhattan Bank (formerly known as Chemical Bank), as Trustee, relating to American General's 6% Series A Convertible Junior Subordinated Debentures 4.3 Terms of the 6% Convertible Monthly Income Preferred Securities, 4(i) 333-00513 Series A, of American General Delaware, L.L.C. 4.4 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 American General Corporation 1984 Stock and Incentive Plan 10.1 Form 10-Q for Second Quarter 1998 10.2 Amendment to American General Corporation 1984 Stock and 10.2* NA Incentive Plan (January 2000) 10.3 American General Corporation 1994 Stock and Incentive Plan 10.2 Form 10-Q for Second Quarter 1998 10.4 Amendment to American General Corporation 1994 Stock and 10.4* NA Incentive Plan (January 1999) 10.5 Amendment to American General Corporation 1994 Stock and 10.5* NA Incentive Plan (January 2000) 10.6 American General Corporation 1997 Stock and Incentive Plan 10.3 Form 10-Q for Second Quarter 1998 10.7 Amendment to American General Corporation 1997 Stock and 10.7* NA Incentive Plan (January 1999) 10.8 American General Corporation 1999 Stock and Incentive Plan 10.4 Form 10-K for 1998 10.9 Amendment to American General Corporation 1999 Stock and 10.9* NA Incentive Plan (January 1999) 10.10 American General Corporation Deferred Compensation Plan 4.4 333-52103 10.11 First Amendment to American General Corporation Deferred 10.11* NA Compensation Plan
(continued on next page) 1999 FORM 10-K 10 12 PART IV (Continued)
Filed Herewith(*), Nonapplicable (NA), or Incorporated by Reference to ---------------------------------------- American General Exhibit Registration No. or Number Exhibit Report - ------------------------------------------------------------------------------------------------------------------------------------ 10.12 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) 10.13 First Amendment to Restoration of Retirement Income Plan 10.4 Form 10-K for 1993 10.14 Second Amendment to Restoration of Retirement Income Plan 10.5 Form 10-K for 1993 10.15 Third Amendment to Restoration of Retirement Income Plan 10.7 Form 10-K for 1996 10.16 Fourth Amendment to Restoration of Retirement Income Plan 10.16* NA 10.17 American General Supplemental Thrift Plan 10.6 Form 10-K for 1993 10.18 First Amendment to American General Supplemental Thrift Plan 10.7 Form 10-K for 1993 10.19 Second Amendment to American General Supplemental Thrift Plan 10.8 Form 10-K for 1993 10.20 Third Amendment to American General Supplemental Thrift Plan 10.9 Form 10-K for 1993 10.21 Employment Agreement between American General and Robert M. 10.12 Form 10-K Devlin for 1997 10.22 First Amendment to Employment Agreement between American General 10.3 Form 10-Q for First and Robert M. Devlin Quarter 1998 10.23 Employment Agreement between Western National Corporation and 10.23* NA John A. Graf 10.24 Employment Agreement between American General and Jon P. Newton 10.13 Form 10-K for 1997 10.25 First Amendment to Employment Agreement between American General 10.4 Form 10-Q for First and Jon P. Newton Quarter 1998 10.26 Employment Agreement between American General and Richard W. 10.26* NA Scott 10.27 Supplemental Executive Retirement Agreement between American 10.15 Form 10-K General and Robert M. Devlin for 1997 10.28 First Amendment to Supplemental Executive Retirement Agreement 10.6 Form 10-Q for First between American General and Robert M. Devlin Quarter 1998 10.29 Supplemental Executive Retirement Agreement between American 10.16 Form 10-K General and Jon P. Newton for 1997 10.30 First Amendment to Supplemental Executive Retirement Agreement 10.7 Form 10-Q for First between American General and Jon P. Newton Quarter 1998 10.31 American General Corporation Supplemental Executive Retirement 10.1 Form 10-Q for Third Plan Quarter 1998 10.32 Form of Change in Control Severance Agreement for Executive 10.32* NA Officers 10.33 Forms of Split-Dollar Agreement and Assignment of Life Insurance 10.9 Form 10-Q for First Policy as Collateral Agreement Quarter 1998
(continued on next page) AMERICAN GENERAL 11 13
Filed Herewith(*), Nonapplicable (NA), or Incorporated by Reference to ---------------------------------------- American General Exhibit Registration No. or Number Exhibit Report - ------------------------------------------------------------------------------------------------------------------------------------ 10.34 American General Corporation Performance-Based Plan for Executive 10.19 Form 10-K Officers, Amended and Restated Effective January 1, 1995 for 1994 10.35 American General Corporation Retirement Plan for Directors (as 10.18 Form 10-K amended and restated) for 1997 10.36 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 20 of Notes NA NA to Financial Statements in American General's 1999 Annual Report to Shareholders) 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 1999 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 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. (b) Reports on Form 8-K. None. 1999 FORM 10-K 12 14 PART IV (Continued) AMERICAN GENERAL CORPORATION SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES In millions
At December 31, 1999 ----------------------------------------------------- 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 $ 661 $ 685 $ 685 States and political subdivisions 809 796 796 Foreign governments 562 569 569 Mortgage-backed securities 13,013 12,893 12,893 Public utilities 3,907 3,880 3,880 All other corporates 43,279 41,655 41,655 Redeemable preferred stocks 144 147 147 - ------------------------------------------------------------------------------------------------------------------- Total fixed maturity securities 62,375 60,625 60,625 - ------------------------------------------------------------------------------------------------------------------- Equity securities Common stocks 191 231 231 Perpetual preferred stocks 108 108 108 - ------------------------------------------------------------------------------------------------------------------- Total equity securities 299 339 339 - ------------------------------------------------------------------------------------------------------------------- Mortgage loans on real estate* 3,686 3,686 Investment real estate* Investment properties 153 153 Acquired in satisfaction of debt 69 69 Policy loans 2,375 2,375 Other long-term investments 412 412 Short-term investments 676 676 - ------------------------------------------------------------------------------------------------------------------- Total investments $70,045 $ 68,335 - -------------------------------------------------------------------------------------------------------------------
* Net of applicable allowance for losses. See Schedule V of this Form 10-K. AMERICAN GENERAL 13 15 AMERICAN GENERAL CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT INCOME STATEMENT OF AMERICAN GENERAL CORPORATION (PARENT ONLY) In millions
For the Years Ended December 31, -------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Revenues Dividends - affiliated $ 682 $ 793 $ 827 Interest income - affiliated 217 198 138 Net realized investment gains (losses) (1) 67 16 Other income Affiliated 53 42 57 Other 8 3 1 - ---------------------------------------------------------------------------------------------------------------------- Total revenues 959 1,103 1,039 - ---------------------------------------------------------------------------------------------------------------------- Expenses Operating costs and expenses Affiliated 17 6 20 Other 140 120 118 Interest expense Affiliated(a) 187 181 165 Other 196 179 140 Other charges Litigation settlements(b) - 56 - Merger-related costs - - 102 Loss on sale of non-strategic assets - - 13 - ---------------------------------------------------------------------------------------------------------------------- Total expenses 540 542 558 - ---------------------------------------------------------------------------------------------------------------------- Income before income tax benefit and equity in undistributed net income of subsidiaries 419 561 481 Income tax benefit 94 81 107 Equity in undistributed net income of subsidiaries (net of dividends paid to parent) 618 122 (46) - ---------------------------------------------------------------------------------------------------------------------- Net income $1,131 $ 764 $ 542 - ----------------------------------------------------------------------------------------------------------------------
(a) Includes $155 million in 1999, $150 million in 1998, and $141 million in 1997 related to subordinated debentures issued in conjunction with the issuances of preferred securities of subsidiaries. Additional information is incorporated herein by reference to Note 14 of Notes to Financial Statements in American General's 1999 ARS. (b) Represents a portion of administrative and legal costs related to settlements of market conduct class action lawsuits involving American General's life insurance subsidiaries. Additional information is incorporated herein by reference to Notes 3.1 and 18.2 of Notes to Financial Statements in American General's 1999 ARS. 1999 FORM 10-K 14 16 PART IV (Continued) AMERICAN GENERAL CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) BALANCE SHEET OF AMERICAN GENERAL CORPORATION (PARENT ONLY) In millions
At December 31, ----------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------- Assets Investments Subsidiaries, at equity $ 9,581 $11,507 $10,251 Other - 7 9 Cash 1 - - Receivables from subsidiaries 31 337 33 Indebtedness from subsidiaries 2,595 2,604 1,585 Other 133 129 195 - ------------------------------------------------------------------------------------------------- Total assets $12,341 $14,584 $12,073 - ------------------------------------------------------------------------------------------------- Liabilities Short-term debt $ 1,932 $ 1,607 $ 575 Long-term debt(a) Senior(b) 1,198 1,147 1,351 Subordinated, held by subsidiaries(c) 2,221 2,018 2,021 Indebtedness to subsidiaries 327 426 360 Liability for litigation settlements(d) 130 366 - Federal income taxes (6) 8 (10) Other 119 141 193 - ------------------------------------------------------------------------------------------------- Total liabilities 5,921 5,713 4,490 - ------------------------------------------------------------------------------------------------- Shareholders' equity Convertible preferred stock 85 85 85 Common stock 962 939 326 Retained earnings 7,732 7,007 6,624 Accumulated other comprehensive income (loss)(e) (1,278) 1,599 1,169 Cost of treasury stock(f) (1,081) (759) (621) - ------------------------------------------------------------------------------------------------- Total shareholders' equity 6,420 8,871 7,583 - ------------------------------------------------------------------------------------------------- Total liabilities and equity $12,341 $14,584 $12,073 - -------------------------------------------------------------------------------------------------
(a) The five-year schedule of debt maturities is as follows: 2000 - $353 million; 2001 - $3 million; 2002 - $35 million; 2003 - $100 million; and 2004 - $149 million. (b) The principal amount of American General senior notes held by subsidiaries was $10 million at December 31, 1999, 1998, and 1997. (c) Includes $2.18 billion in 1999 and $1.97 billion in 1998 and 1997 of subordinated debentures issued in conjunction with the issuances of preferred securities of subsidiaries. Additional information is incorporated herein by reference to Note 14 of Notes to Financial Statements in American General's 1999 ARS. (d) Represents liability for settlements of market conduct class action lawsuits. This liability includes $130 million and $310 million at December 31, 1999 and 1998, respectively, assumed from American General's life insurance subsidiaries; the parent company had a related receivable from subsidiaries in 1998. Additional information is incorporated herein by reference to Notes 3.1 and 18.2 of Notes to Financial Statements in American General's 1999 ARS. (e) 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 1999 ARS. (f) Includes 699,614 shares, at a cost of $8 million in 1999, 1998, and 1997, which are held by a subsidiary. AMERICAN GENERAL 15 17 AMERICAN GENERAL CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) STATEMENT OF CASH FLOWS OF AMERICAN GENERAL CORPORATION (PARENT ONLY) In millions
For the Years Ended December 31, -------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Operating activities Net income $1,131 $ 764 $ 542 Reconciling adjustments Equity in undistributed net income of subsidiaries (net of dividends paid to parent) (618) (122) 46 Other, net 78 93 (64) - ------------------------------------------------------------------------------------------------ Net cash provided by operating activities 591 735 524 - ------------------------------------------------------------------------------------------------ Investing activities Net (increase) decrease in indebtedness from subsidiaries 9 (870) (30) Net increase (decrease) in indebtedness to subsidiaries (99) 66 339 Capital contributions to subsidiaries (257) (152) (667) Return of capital from subsidiaries 4 10 10 Acquisitions (20) - (283) Net decrease in other investments 7 75 16 Other, net (2) 9 46 - ------------------------------------------------------------------------------------------------ Net cash used for investing activities (358) (862) (569) - ------------------------------------------------------------------------------------------------ Financing activities Net increase in short-term debt 325 1,032 421 Long-term debt issuances 356 - 515 Long-term debt redemptions (103) (357) (133) Common stock repurchases (425) (195) (467) Dividends on common and preferred stock (406) (381) (335) Other, net 21 28 44 - ------------------------------------------------------------------------------------------------ Net cash provided by (used for) financing activities (232) 127 45 - ------------------------------------------------------------------------------------------------ Net increase in cash 1 - - Cash at beginning of year - - - - ------------------------------------------------------------------------------------------------ Cash at end of year $ 1 $ - $ - - ------------------------------------------------------------------------------------------------
1999 FORM 10-K 16 18 PART IV (Continued) 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 - ------------------------------------------------------------------------------------------------------------------------------- 1999 Retirement Services $2,338 $39,714 $ 568 $2,972 $2,377 $126 $ 212 Life Insurance 3,800 26,300 3,022 2,199 2,846 524 921 Consumer Finance 11 465 181 78 86 8 10 Other(f) 1 (78) 1 (17) 4 1 849 - ------------------------------------------------------------------------------------------------------------------------------- Consolidated $6,150 $66,401 $3,772 $5,232 $5,313 $659 $1,992 - ------------------------------------------------------------------------------------------------------------------------------- 1998 Retirement Services $1,328 $36,792 $ 320 $2,753 $2,114 $113 $ 169 Life Insurance 2,871 25,680 3,113 2,240 2,959 558 968 Consumer Finance 10 441 172 76 86 8 10 Other(f) - (69) - 26 - 1 871 - ------------------------------------------------------------------------------------------------------------------------------- Consolidated $4,209 $62,844 $3,605 $5,095 $5,159 $680 $2,018 - ------------------------------------------------------------------------------------------------------------------------------- 1997 Retirement Services $ 392 $21,995 $ 113 $1,706 $1,286 $ 42 $ 133 Life Insurance 2,995 25,283 3,065 2,099 2,949 494 965 Consumer Finance 10 443 184 69 93 9 10 Other(f) 1 (62) - 146 4 1 814 - ------------------------------------------------------------------------------------------------------------------------------- Consolidated $3,398 $47,659 $3,362 $4,020 $4,332 $546 $1,922 - -------------------------------------------------------------------------------------------------------------------------------
(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 1999 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, goodwill amortization, and interdivision eliminations. AMERICAN GENERAL 17 19 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 - --------------------------------------------------------------------------------------------------------------- 1999 Life insurance in force at year end $369,346 $94,450 $ 2,371 $277,267 .9% Premiums and other considerations for the year Life insurance and annuities $ 3,182 $ 250 $ 17 $ 2,949 .5% Accident and health insurance 758 294 251 715 35.1 Property-liability insurance 83 10 35 108 32.5 - --------------------------------------------------------------------------------------------------------------- Total premiums and other considerations $ 4,023 $ 554 $ 303 $ 3,772 8.0% - --------------------------------------------------------------------------------------------------------------- 1998 Life insurance in force at year end $344,857 $65,643 $ 2,474 $281,688 .9% Premiums and other considerations for the year Life insurance and annuities $ 2,832 $ 205 $ 116 $ 2,743 4.2% Accident and health insurance 778 277 225 726 31.0 Property-liability insurance 107 3 32 136 23.3 - --------------------------------------------------------------------------------------------------------------- Total premiums and other considerations $ 3,717 $ 485 $ 373 $ 3,605 10.3% - --------------------------------------------------------------------------------------------------------------- 1997 Life insurance in force at year end $310,162 $57,261 $21,514 $274,415 7.8% 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% - ---------------------------------------------------------------------------------------------------------------
1999 FORM 10-K 18 20 PART IV (Continued) 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 - ----------------------------------------------------------------------------------------------------------------------- 1999 Allowance for losses on: Finance receivables $382 $207 $ - $ 14(b) $207 $396 Mortgage loans on real estate 34 - (3) - 5 26 Investment real estate 14 - - - 4 10 Restructuring liability 30 - - - 16(c) 14 Valuation allowance on deferred tax asset 69 - - 381(d) 2 448 - ----------------------------------------------------------------------------------------------------------------------- Total $529 $207 $ (3) $395 $234 $894 - ----------------------------------------------------------------------------------------------------------------------- 1998 Allowance for losses on: Finance receivables $373 $212 $ - $ 17(b) $220 $382 Mortgage loans on real estate 54 - (15) - 5 34 Investment real estate 18 - 3 - 7 14 Restructuring liability 62 - - - 32(c) 30 Valuation allowance on deferred tax asset 68 - - 1(e) - 69 - ----------------------------------------------------------------------------------------------------------------------- Total $575 $212 $(12) $ 18 $264 $529 - ----------------------------------------------------------------------------------------------------------------------- 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 - Restructuring liability - - - 71(c) 9(c) 62 Valuation allowance on deferred tax asset 46 - - 22(e) - 68 - ----------------------------------------------------------------------------------------------------------------------- Total $560 $248 $(12) $ 93 $314 $575 - -----------------------------------------------------------------------------------------------------------------------
(a) Resulting from write-offs of uncollectible receivables, mortgage loan payoffs, sales of real estate, foreclosures of real estate, and utilization of net loss carryforwards, unless otherwise noted. (b) Relates to allowance for acquired receivables. (c) Restructuring costs related to the integration of USLIFE into the company's operations and the concurrent realignment of the life insurance division. Additional information is incorporated herein by reference to Note 3.2 of Notes to Financial Statements in American General's 1999 ARS. (d) Relates to unrealized losses on fixed maturity securities not expected to be realized; charged to other comprehensive income within shareholders' equity. (e) Relates to operating loss carryovers not expected to be utilized; charged to deferred tax expense. AMERICAN GENERAL 19 21 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 21, 2000. AMERICAN GENERAL CORPORATION By: /s/ Nicholas R. Rasmussen ---------------------------------------- Nicholas R. Rasmussen (Executive Vice President, Chief Financial Officer and Treasurer) 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 21, 2000. Robert M. Devlin* - ----------------------------------------------------------------- Robert M. Devlin (Chairman, President and Chief Executive Officer - Principal Executive Officer) /s/ Nicholas R. Rasmussen - ----------------------------------------------------------------- Nicholas R. Rasmussen (Executive Vice President, Chief Financial Officer and Treasurer - Principal Financial Officer and Principal Accounting Officer) J. Evans Attwell* - ----------------------------------------------------------------- J. Evans Attwell (Director) Brady F. Carruth* - ----------------------------------------------------------------- Brady F. Carruth (Director) W. Lipscomb Davis Jr.* - ----------------------------------------------------------------- W. Lipscomb Davis Jr. (Director) J. Edward Easler II* - ----------------------------------------------------------------- J. Edward Easler II (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) 1999 FORM 10-K 20 22 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 3.2 Articles of Amendment to the Restated Articles of Incorporation 4 Form 10-Q for First of American General Quarter 1998 3.3 Statement of Resolution Establishing Series of Shares of 7% 4(d) 333-00513 Convertible Preferred Stock 3.4 Statement of Resolution Establishing Series of Shares of Series A 4(o) 33-58317 Cumulative Convertible Preferred Stock 3.5 Resolutions Establishing American General's 6% Series A 4(k) 333-00513 Convertible Junior Subordinated Debentures 3.6 Amended and Restated Bylaws of American General Corporation 3.6* NA 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 Junior Subordinated Indenture, dated as of May 15, 1995, between 4(g) 333-00513 American General and The Chase Manhattan Bank (formerly known as Chemical Bank), as Trustee, relating to American General's 6% Series A Convertible Junior Subordinated Debentures 4.3 Terms of the 6% Convertible Monthly Income Preferred Securities, 4(i) 333-00513 Series A, of American General Delaware, L.L.C. 4.4 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 American General Corporation 1984 Stock and Incentive Plan 10.1 Form 10-Q for Second Quarter 1998 10.2 Amendment to American General Corporation 1984 Stock and 10.2* NA Incentive Plan (January 2000) 10.3 American General Corporation 1994 Stock and Incentive Plan 10.2 Form 10-Q for Second Quarter 1998 10.4 Amendment to American General Corporation 1994 Stock and 10.4* NA Incentive Plan (January 1999) 10.5 Amendment to American General Corporation 1994 Stock and 10.5* NA Incentive Plan (January 2000) 10.6 American General Corporation 1997 Stock and Incentive Plan 10.3 Form 10-Q for Second Quarter 1998 10.7 Amendment to American General Corporation 1997 Stock and 10.7* NA Incentive Plan (January 1999) 10.8 American General Corporation 1999 Stock and Incentive Plan 10.4 Form 10-K for 1998 10.9 Amendment to American General Corporation 1999 Stock and 10.9* NA Incentive Plan (January 1999) 10.10 American General Corporation Deferred Compensation Plan 4.4 333-52103 10.11 First Amendment to American General Corporation Deferred 10.11* NA Compensation Plan 10.12 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) 10.13 First Amendment to Restoration of Retirement Income Plan 10.4 Form 10-K for 1993 10.14 Second Amendment to Restoration of Retirement Income Plan 10.5 Form 10-K for 1993 10.15 Third Amendment to Restoration of Retirement Income Plan 10.7 Form 10-K for 1996 10.16 Fourth Amendment to Restoration of Retirement Income Plan 10.16* NA
23
Filed Herewith(*), Nonapplicable (NA), or Incorporated by Reference to ---------------------------------------- American General Exhibit Registration No. or Number Exhibit Report - ------------------------------------------------------------------------------------------------------------------------------------ 10.17 American General Supplemental Thrift Plan 10.6 Form 10-K for 1993 10.18 First Amendment to American General Supplemental Thrift Plan 10.7 Form 10-K for 1993 10.19 Second Amendment to American General Supplemental Thrift Plan 10.8 Form 10-K for 1993 10.20 Third Amendment to American General Supplemental Thrift Plan 10.9 Form 10-K for 1993 10.21 Employment Agreement between American General and Robert M. 10.12 Form 10-K Devlin for 1997 10.22 First Amendment to Employment Agreement between American General 10.3 Form 10-Q for and Robert M. Devlin First Quarter 1998 10.23 Employment Agreement between Western National Corporation and 10.23* NA John A. Graf 10.24 Employment Agreement between American General and Jon P. Newton 10.13 Form 10-K for 1997 10.25 First Amendment to Employment Agreement between American General 10.4 Form 10-Q for and Jon P. Newton First Quarter 1998 10.26 Employment Agreement between American General and Richard W. 10.26* NA Scott 10.27 Supplemental Executive Retirement Agreement between American 10.15 Form 10-K General and Robert M. Devlin for 1997 10.28 First Amendment to Supplemental Executive Retirement Agreement 10.6 Form 10-Q for between American General and Robert M. Devlin First Quarter 1998 10.29 Supplemental Executive Retirement Agreement between American 10.16 Form 10-K General and Jon P. Newton for 1997 10.30 First Amendment to Supplemental Executive Retirement Agreement 10.7 Form 10-Q for between American General and Jon P. Newton First Quarter 1998 10.31 American General Corporation Supplemental Executive Retirement 10.1 Form 10-Q for Plan Third Quarter 1998 10.32 Form of Change in Control Severance Agreement for Executive 10.32* NA Officers 10.33 Forms of Split-Dollar Agreement and Assignment of Life Insurance 10.9 Form 10-Q for Policy as Collateral Agreement First Quarter 1998 10.34 American General Corporation Performance-Based Plan for Executive 10.19 Form 10-K Officers, Amended and Restated Effective January 1, 1995 for 1994 10.35 American General Corporation Retirement Plan for Directors (as 10.18 Form 10-K amended and restated) for 1997 10.36 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 20 of Notes NA NA to Financial Statements in American General's 1999 Annual Report to Shareholders) 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 1999 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 Consent of Ernst & Young LLP, Independent Auditors 23* NA
24
Filed Herewith(*), Nonapplicable (NA), or Incorporated by Reference to ---------------------------------------- American General Exhibit Registration No. or Number Exhibit Report - ------------------------------------------------------------------------------------------------------------------------------------ 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-3.6 2 AMENDED BYLAWS 1 Amended and Restated Bylaws (as of March 2, 2000) of American General Corporation Houston, Texas [LOGO OF AMERICAN GENERAL APPEARS HERE] 2 AMENDED AND RESTATED BYLAWS OF AMERICAN GENERAL CORPORATION ARTICLE I. Capital Stock SECTION 1. Certificates for Shares. The certificates for shares of the capital stock of the company shall be in such form as shall be approved by the board of directors. The certificates shall be signed by the chairman of the board or president, and also by the secretary, and may be sealed with the seal of the company or a facsimile thereof. Where any such certificate is countersigned by a transfer agent, or registered by a registrar, either of which is other than the company itself or an employee of the company, the signatures of the chairman of the board or president and of the secretary may be facsimiles. The certificates shall be consecutively numbered and shall be entered on the stock records of the company as they are issued, and each shall exhibit the holder's name and the number of shares. SECTION 2. Transfer of Shares. The shares of stock of the company shall be transferable only on the stock records of the company by the registered holders thereof in person or by their duly authorized attorneys or legal representatives, upon surrender of certificates representing such shares duly endorsed or in proper form for transfer, with appropriate evidence of authority to transfer, and cancellation thereof. SECTION 3. Fixing of Record Date; Closing of Transfer Books. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, or entitled to receive payment of any dividend, or for any other proper purpose, the board of directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than fifty (50) days and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. In lieu of fixing a record date, the board of directors may provide that the stock transfer books of the company shall be closed for a stated period not to exceed, in any case, fifty (50) days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which the notice of the meeting is mailed or the date on which the resolution of the board of directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided herein, such determination shall apply to any adjournment of the meeting except Page 1 of 20 3 where the determination has been made through the closing of stock transfer books and the stated period of closing has expired. SECTION 4. Registered Shareholders. The company shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person or entity, whether or not it shall have express or other notice thereof, except as expressly provided by the laws of the State of Texas. SECTION 5. Lost, Destroyed, or Stolen Stock Certificates. No certificate for shares of stock in the company shall be issued in place of any certificate alleged to have been lost, destroyed, or stolen except on production of evidence satisfactory to the board of directors, or such person or persons as it may designate, of such loss, destruction, or theft, and, if the board of directors so requires, upon the furnishing of an indemnity bond in such amount (but not to exceed twice the then-market value of the shares represented by the certificate) and with such terms and such surety or sureties as the board of directors may, in its discretion, require. SECTION 6. Regulations. The board of directors shall have the power and authority to make all such rules and regulations to the extent permitted by law, the articles of incorporation, and these bylaws, as it may deem expedient concerning the issue, transfer, registration, or replacement of certificates for shares of the capital stock of the company. ARTICLE II. Shareholders SECTION 1. Annual Meeting. The annual meeting of the shareholders shall be held at such hour as shall be designated by the board of directors either (i) on the last business day of April of each year, or (ii) on such other date, not more than thirteen (13) months after the last preceding annual meeting, as the board of directors shall designate, for the purpose of electing directors and for the transaction of such other business as may properly be brought before the meeting. SECTION 2. Special Meetings. A special meeting of shareholders for any purpose or purposes may be called at any time by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president, or the secretary upon the written request therefor, stating the purpose or purposes of the meeting, delivered to such officer, signed by the holders of at least ten percent (10%) of the issued and outstanding shares entitled to vote at such meeting. Only such business as shall be stated or indicated in the notice of the meeting shall be transacted at any such special meeting of shareholders. SECTION 3. Place. The annual meeting of shareholders may be held at any place as may be designated in the call of the meeting. Meetings of shareholders shall be held at the principal office of the company unless another place is designated for a meeting in the manner provided herein. Page 2 of 20 4 SECTION 4. Notice. Written or printed notice stating the place, day, and hour of each meeting of shareholders, and in case of a special meeting the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than fifty (50) days before the date of the meeting, either personally or by mail, by or at the direction of the officer calling the meeting, to each shareholder of record entitled to vote at such meeting. SECTION 5. Quorum. Except as may be otherwise provided by law or the articles of incorporation, no meeting of shareholders shall elect directors, or transact other business of the company, unless there shall be present, in person or by proxy, a quorum, which is defined as the holders of a majority of the issued and outstanding shares of capital stock of the company entitled to vote at the meeting, and the act of a majority of the shares represented at any meeting at which a quorum is present shall be the act of the meeting. The shareholders present at any meeting, though less than a quorum, may adjourn the meeting, and any business may be transacted at the adjourned meeting that could have been transacted at the original meeting. No notice of adjournment, other than the announcement at the meeting, need be given. SECTION 6. Proxies. At any meeting of shareholders, a shareholder may vote either in person or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Such proxies shall be filed with the secretary of the company before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless it is expressly provided therein that the proxy shall be irrevocable or unless it is otherwise made irrevocable by law. SECTION 7. Voting of Shares. Each outstanding share of a class of stock entitled to vote upon a matter submitted to a vote at a meeting of shareholders shall be entitled to one vote on such matter. Votes for directors, and upon demand of any shareholder votes upon any question before a meeting, shall be by ballot. SECTION 8. Presiding Officer and Secretary. The chairman of the board, or in his absence the president, shall preside at each meeting of shareholders, and in the absence of both such officers, a vice chairman of the board shall preside. Should none be present, the meeting shall appoint one of the vice presidents, or in the absence of all vice presidents, one of the shareholders, to preside at the meeting. The records of each meeting shall be kept by the secretary, or in his absence an assistant secretary, or in the absence of both, a person appointed by the chairman of the meeting. SECTION 9. List of Shareholders. A complete list of shareholders entitled to vote at each shareholders' meeting, arranged in alphabetical order, with the address of each and number of shares of each class and series of stock held by each, shall be prepared by the secretary and filed at the registered office of the company, and shall be subject to inspection by any shareholder during usual business hours for a period of ten (10) days prior to such meeting. It shall be produced at such meeting and shall at all times during such meeting be subject to inspection by any shareholder. SECTION 10. Inspectors of Election. The chairman of each meeting of shareholders shall appoint a committee to act as inspectors of election. Such committee shall report to the meeting the number of shares of each class and series of stock, and of all classes, represented by proxy and shall prepare Page 3 of 20 5 a list showing the total number of shares of each class and series of stock, and of all classes, represented either in person or by proxy. The inspectors of election shall oversee the vote of the shareholders for the election of directors and for any other matters that are put to a vote of shareholders at the meeting; receive a ballot evidencing votes cast by the proxy committee; judge the qualifications of shareholders voting; collect, count, and report the results of ballots cast by any shareholders voting in person; and perform such other duties as may be required by the chairman of the meeting or the shareholders. SECTION 11. Nature of Business at Meetings of Shareholders. No business may be transacted at an annual meeting of shareholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the board of directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by a shareholder of the company (i) who is a shareholder of record on the date of the giving of the notice provided for in this Section 11 and on the record date for the determination of shareholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 11. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, such shareholder must have given timely notice thereof in proper written form to the Secretary of the company. To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the company not less than one hundred and twenty (120) days nor more than one hundred and fifty (150) days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a shareholder's notice to the Secretary must set forth as to each matter such shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such shareholder, (iii) the class or series and number of shares of capital stock of the company which are owned beneficially or of record by such shareholder, (iv) a description of all arrangements or understandings between such shareholder and any other person or persons (including their names) in connection with the proposal of such business by such shareholder and any material interest of such shareholder in such business and (v) a representation that such shareholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of shareholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 11; provided, however, that, once business has been properly brought before the annual meeting in accordance with Page 4 of 20 6 such procedures, nothing in this Section 11 shall be deemed to preclude discussion by any shareholder of any such business. If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. ARTICLE III. Board of Directors SECTION 1. Number, Term of Office, Nomination, Vacancy and Removal. The business affairs and property of the company shall be managed and controlled by the board of directors, and, subject to the restrictions imposed by law, by the articles of incorporation, or by these bylaws, the board of directors may exercise all of the powers of the company. (a) Number. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock of the company as to dividends or upon liquidation to elect additional directors under specified circumstances, the number of the directors of the company shall be fixed from time to time by the board of directors but shall not be fewer than three (3) nor more than twenty-five (25). Within these limits, the number of directors may be increased or decreased (provided that any decrease does not shorten the term of any incumbent director) from time to time by resolution of the board of directors. Directors must be shareholders, but they need not be residents of the State of Texas. (b) Election and Terms. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock of the company as to dividends or upon liquidation to elect additional directors under specified circumstances, directors shall be elected at the annual meeting of the shareholders. Each director shall serve until the next annual meeting and until his successor shall have been elected and qualified, or until his earlier death, resignation, or removal; provided, however, that the term of any director who is also an officer of the company or of any subsidiary of the company shall simultaneously terminate when that director ceases, for whatever reason, to be an officer of the company or of any subsidiary of the company, unless the board of directors, in its discretion and upon resolution adopted by a majority of the remaining directors then in office, waives the applicability hereof. (c) Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the company, except as may be otherwise provided in the Certificate of Incorporation with respect to the right of holders of preferred stock of the company to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the board of directors may be made at any annual meeting of shareholders, or at any special meeting of shareholders called for the purpose of electing directors, (a) by or at the direction of the board of directors (or any duly authorized committee thereof) or Page 5 of 20 7 (b) by any shareholder of the company (i) who is a shareholder of record on the date of the giving of the notice provided for in this Section 1(c) and on the record date for the determination of shareholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section 1(c). In addition to any other applicable requirements, for a nomination to be made by a shareholder, such shareholder must have given timely notice thereof in proper written form to the Secretary of the company. To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the company (a) in the case of an annual meeting, not less than one hundred and twenty (120) days nor more than one hundred fifty (150) days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of shareholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. To be in proper written form, a shareholder's notice to the Secretary must set forth (a) as to each person whom the shareholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the company which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the shareholder giving the notice (i) the name and record address of such shareholder, (ii) the class or series and number of shares of capital stock of the company which are owned beneficially or of record by such shareholder, (iii) a description of all arrangements or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such shareholder, (iv) a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by Page 6 of 20 8 a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the company unless nominated in accordance with the procedures set forth in this Section 1(c). If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. (d) Vacancies. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock of the company as to dividends or upon liquidation to elect directors under specified circumstances, any vacancies on the board of directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the board of directors. Any director so elected by the board of directors to fill a vacancy shall hold office for the remainder of the full term of the director whose departure from the board created the vacancy. A directorship to be filled by reason of an increase in the number of directors by action of the board of directors (within the limits set forth in paragraph (a) of Section 1 of this article) may be filled by the board of directors for a term of office continuing only until the next election at an annual meeting or at a special meeting of shareholders called for that purpose; provided, however, that the board of directors shall not fill more than two such directorships during the period between two successive annual meetings of shareholders. (e) Removal. Subject to the rights of any class or series of stock having a preference over the Common Stock of the company as to dividends or upon liquidation to elect directors under specified circumstances, any director may be removed from office, with or without cause, only by the affirmative vote of the holders of at least seventy-five percent (75%) of the combined voting power of the then outstanding shares of all classes of stock of the company entitled to vote generally in the election of directors, voting together as a single class. SECTION 2. Annual Meeting. Each newly elected board of directors shall hold its first meeting immediately following the annual meeting of shareholders each year, for the purposes of organization, the election of officers of the company, and the transaction of such other business as may properly come before such meeting, and no notice of such meeting shall be necessary. SECTION 3. Regular Meetings. In addition to the annual meeting of the board of directors, four (4) regular meetings shall be held in each year at the time and place designated by the chairman of the board, for the purpose of transacting any business within the powers of the board. Notice of such regular meetings shall be given as provided herein. SECTION 4. Special Meetings. A special meeting of the board of directors shall be held whenever called by the chief executive officer or by the secretary on the written request of any five Page 7 of 20 9 (5) of the directors, and at such time and place as may be specified in the notice thereof. Such notice, or any waiver pursuant to Article VII, Section 6 hereof, need not state the purpose or purposes of such meeting. SECTION 5. Notice. The secretary shall give notice to each director of each regular and special meeting in person or by mail or by any form of telecommunication, at least twenty-four (24) hours before the meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting has not been lawfully called or convened. SECTION 6. Quorum. A majority of the directors in office shall constitute a quorum for the transaction of business, but if at any meeting of the board of directors there is less than a quorum present, a majority of those present or any director solely present may adjourn the meeting from time to time without further notice. The act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the board of directors, unless the act of a greater number is required by law, the articles of incorporation, or these bylaws. SECTION 7. Order of Business and Officers at Meetings. At meetings of the board of directors, business shall be transacted in such order as the board may determine from time to time. At all meetings of the board of directors, the chairman of the board shall preside, and in the absence of the chairman of the board the president shall preside, and in the absence of both, a vice chairman shall preside. Should all three be absent, a chairman shall be chosen by the board of directors from among the directors present. The secretary of the company shall act as secretary of all meetings of the board of directors, or in the absence of the secretary an assistant secretary shall so act; or in the absence of both, the presiding officer shall appoint any person to act as secretary of the meeting. SECTION 8. Compensation. Directors shall not receive any stated salary for their service as directors, but by resolution of the board of directors an annual retainer may be paid and a fixed sum and expenses of attendance, if any, may be allowed for attendance at any meeting of the board of directors; provided that nothing contained herein shall be construed to preclude any director from serving the company in any other capacity and receiving compensation therefor. SECTION 9. Presumption of Assent. A director of the company who is present at a meeting of the board of directors at which action on any company matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the company immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 10. Retirement. No director of the company shall stand for reelection as a director following his seventieth birthday with the exception of any person who shall serve, or has served, as chief executive officer of the company at any time, who shall not be prevented by this provision from standing for reelection as a director for five years after retirement from the position of chief Page 8 of 20 10 executive officer, or until the annual meeting following the attainment of age seventy-five, whichever shall first occur. Any director who is also an officer, other than the chief executive officer, of the company or an officer of any subsidiary of the company shall retire as provided in Section 1 of this article. ARTICLE IV. Committees of the Board of Directors SECTION 1. Executive Committee. The board of directors, acting by resolution adopted by a majority of the full board of directors, may elect from among its members an executive committee of not fewer than three (3) nor more than ten (10) members, which committee shall have and may exercise all of the authority of the board of directors in the business and affairs of the company except where action of the full board of directors is specified by law. The chief executive officer shall be a member of the executive committee and shall be chairman of such committee. The executive committee shall meet at such times and places as may be fixed by the committee, or on the call of the chief executive officer, at such times and places as may be designated in the call of such meetings. The executive committee shall maintain a record of its proceedings and shall report to each regular meeting of the board of directors a summary of the actions taken by such committee since the last regular meeting of the board of directors. The executive committee shall function as the company's nominating committee. In its capacity as nominating committee, it has the power and duty to recommend candidates for election to the board of directors, to the committees of the board, and for the chairmanship of each committee except the executive committee. SECTION 2. Audit Committee. The following shall be the charter of the audit committee: (a) Membership. The board of directors, acting by resolution adopted by a majority of the full board of directors, may elect from among its members an audit committee of not fewer than three (3) nor more than ten (10) members, none of whom shall be an officer of the company or any of its subsidiaries, or have any relationship to the company or any of its subsidiaries that, in the opinion of the board of directors, would interfere with the exercise of independent judgment as a committee member. The chairman of the committee shall be elected by a majority of the full board of directors at the time the committee is elected or at such time as it becomes necessary to elect a new chairman because of the chairman's death, resignation or removal. Each member of the committee shall be financially literate, or shall undertake to become financially literate within a reasonable period of time after being elected to the committee, and at least one member shall have accounting or related financial management expertise, as these qualifications are determined in the opinion of the board of directors. (b) Process. The audit committee shall meet at such times and places as may be fixed by the committee, or on the call of its chairman, at such times and places as may be designated in the call of such meetings. The committee shall also meet promptly upon Page 9 of 20 11 the request of the company's principal outside auditors. The committee shall maintain a record of its proceedings and shall report to the board of directors a summary of its activities not less frequently than twice each fiscal year, along with such recommendations as the committee deems appropriate. (c) Responsibilities. The audit committee shall have the following powers and duties: (1) subject to confirmation by the board of directors, to select, evaluate and, where appropriate, replace the principal outside auditors (or to nominate the principal outside auditors to be proposed for shareholder approval in any proxy statement); (2) to discuss with the principal outside auditors that the outside auditors are ultimately accountable to the board of directors and the audit committee; (3) to review at regular intervals audit arrangements for the company and its subsidiaries and the reports to be rendered; (4) to review in advance the plan and scope of the audit of the company and its subsidiaries to be performed by the principal outside auditors and the related estimate of fees, and to recommend such audit plan, scope, and fee estimate for board approval; (5) to review non-audit services and fees of the company's principal outside auditors, giving appropriate consideration to the possible effect on the auditors' independence of each non-audit service provided; (6) to ensure that the principal outside auditors submit to the committee at least annually a formal written statement delineating all relationships between the principal outside auditors and the company, and to review with the principal outside auditors any disclosed relationships or services that may impact the objectivity and independence of the outside auditors for the purpose of recommending, as necessary, that the board of directors take appropriate action to satisfy itself of the outside auditors' independence; (7) to review periodically with the company's principal outside auditors the accounting principles and policies of the company, including any matters required to be discussed by Statement on Auditing Standards No. 61, as it may be amended or supplemented; (8) to review periodically with the company's principal outside auditors such matters relating to the internal auditing systems and procedures and the internal accounting controls of the company and its subsidiaries as the committee or the board of directors may determine to be necessary or desirable; Page 10 of 20 12 (9) to review periodically the coordination between the company's principal outside auditors and the company's internal audit staff, and to review with the company's principal outside auditors, upon completion of their audit, their findings and recommendations and the responses of the company's management to such findings and recommendations; (10) to review and discuss with management the company's audited financial statements; (11) to recommend to the board of directors that the audited financial statements presented to the audit committee be included in the company's annual report on Form 10-K; (12) to periodically review the company's corporate responsibility program and receive information and assurances from management as to its effectiveness; (13) to conduct from time to time, or cause to be conducted, such investigations or inquiries relating to the committee's responsibilities, including accounting or audit matters, as the facts presented to the committee warrant and as the committee may deem necessary or appropriate in the interest of the company and its shareholders; (14) to confer with and direct the officers of the company to the extent necessary to exercise the committee's powers and to carry out its duties; (15) to meet with representatives of any outside auditors of the company and/or its internal audit staff in the absence of management, whenever the committee deems such to be appropriate; and (16) to perform such additional duties as may be assigned to the committee by the board of directors. SECTION 3. Personnel Committee. The board of directors, acting by resolution adopted by a majority of the full board of directors, may elect from among its members a personnel committee of not fewer than three (3) nor more than ten (10) members, none of whom shall be an officer of the company or of any of its subsidiaries during the time of service on this committee. The chairman of the committee shall be elected by a majority of the full board of directors at the time the committee is elected or at such time as it becomes necessary to elect a new chairman because of the chairman's death or resignation. The committee shall meet at such times and places as may be fixed by the committee, or on the call of its chairman, at such times and places as may be designated in the call of such meetings. The committee shall maintain a record of its proceedings and shall report to each regular meeting of the board of directors a summary of the actions taken by the committee since the last regular meeting of the board of directors. The personnel committee shall have the following powers and duties: Page 11 of 20 13 (a) to review the relationship of the contribution of key officers and employees to the company's performance and prospects; (b) to review and approve and recommend to the board of directors for approval or ratification the annual salary of any officer of the company or of a subsidiary of the company whose annual salary is or will be of an amount which will place him or her among the twenty-five most highly salaried officers in the group; (c) to review and approve or ratify the annual salary of any officer or employee of the company or of a subsidiary of the company whose annual salary is or will be of an amount which will place him or her among the second twenty-five most highly salaried officers in the group; (d) to review and approve incentive compensation and other employee benefit programs; (e) to review key personnel issues; and (f) to perform such additional duties as may be assigned to the committee by the board of directors. SECTION 4. Other Committees. In addition to the executive, audit, and personnel committees, the board of directors may, by resolution adopted by a majority of the full board of directors, elect from among its own members such other committees as it shall deem to be appropriate, each of which shall have and may exercise that authority of the board of directors which shall have been delegated to it in the resolution creating such committee, except as may be prohibited by law. SECTION 5. Term of Office and Committee Size. The term of office of each member of any committee shall be the period designated by the board of directors, but shall not be longer than one year and until his successor shall be elected, unless such member shall be removed by the board of directors, as provided in this section, or the committee is dissolved by the board of directors. A member of any committee may be removed during the period between annual meetings by action of the majority of the full board of directors at any regular or special meeting. The membership of any committee elected by the board of directors may be increased or decreased during the period between annual meetings, subject to any limitations of this article, by action of the majority of the full board of directors at any regular or special meeting. SECTION 6. Quorum. A majority of the members of any committee shall constitute a quorum for the transaction of business. The act of the majority of the members present at a meeting at which a quorum is present shall be the act of the committee. SECTION 7. Responsibility. The designation of any committee and the delegation thereto of authority shall not operate to relieve the board of directors, or any member thereof, of any responsibility imposed upon it or him by law. Page 12 of 20 14 SECTION 8. Vacancies. The board of directors may fill all vacancies in any committee. ARTICLE V. Officers SECTION 1. Titles and Term of Office. The board of directors at its annual meeting shall elect officers of the company as follows: a chairman of the board, a president and a secretary. The board of directors may also elect one or more vice chairmen. The board of directors or the executive committee may elect other officers, including one or more executive vice presidents, senior vice presidents, vice presidents, a general counsel, a controller, a general auditor, and other officers and assistant officers as the board of directors or the executive committee deems necessary. Each officer shall hold office for the term for which he is elected and until his successor shall have been duly elected and qualified, or until his death, resignation, or removal in the manner hereinafter provided. One person may hold more than one office except that the president shall not also hold the office of secretary. The chairman of the board, each vice chairman of the board, if any, and the president shall be directors of the company, but no other officer need be a director. SECTION 2. Removal. Any officer who may be elected only by the board of directors may be removed only by the board of directors. Any officer who may be elected by either the board of directors or the executive committee may be removed by either the board of directors or the executive committee. Removal of any officer may occur whenever in the judgment of the board of directors or the executive committee, as the case may be, the best interests of the company will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election of an officer shall not of itself create contract rights. SECTION 3. Vacancies. A vacancy in the office of any officer may be filled for the unexpired portion of the term by the board of directors. SECTION 4. Chief Executive Officer. The board of directors shall designate either the chairman of the board or the president to be the chief executive officer of the company. All other officers of the company shall be subordinate to the chief executive officer and shall report to him as he may direct. The chief executive officer shall have responsibility for the general management and direction of the business of the company and for the execution of all orders and resolutions of the board of directors. In addition to the powers prescribed in these bylaws, he shall have all of the powers usually vested in the chief executive officer of a corporation and such other powers as may be prescribed from time to time by the board of directors. He may delegate any of his powers and duties to any other officer with such limitations as he may deem proper. SECTION 5. Chairman of the Board. The chairman of the board shall preside at all meetings of the shareholders and of the board of directors; shall have authority to execute all legal instruments necessary for the transaction of the company's business; may sign certificates for shares of capital stock of the company; and may be designated as chief executive officer, as provided in these bylaws. Page 13 of 20 15 He shall be a member of all standing committees of the board of directors except those the membership of which is restricted to non-officer directors, and shall have such other responsibilities and powers as may be prescribed in these bylaws or from time to time by the board of directors. If he is not designated as chief executive officer, the chairman of the board shall have such powers and perform such duties as maybe delegated to him by the chief executive officer, and shall be vested with all the powers and authorized to perform all the duties of the chief executive officer in his absence or inability to act. SECTION 6. Vice Chairman of the Board. In the absence of the chairman of the board and the president, a vice chairman of the board shall preside at all meetings of the shareholders and the board of directors; shall have authority to execute all legal instruments necessary for the transaction of the company's business; and shall have such other powers and duties as may be delegated to him by the board of directors or the chief executive officer. SECTION 7. President. In the absence of the chairman of the board, the president shall preside at all meetings of the shareholders and of the board of directors; shall have authority to execute all legal instruments necessary for the transaction of the company's business; may sign certificates for shares of capital stock of the company; and may be designated as chief executive officer, as provided in these bylaws. He may delegate such of his powers and duties to other officers with such limitations as he may deem proper. The president shall have such other powers and duties as may be prescribed in these bylaws or from time to time by the board of directors. If he is not designated as chief executive officer, the president shall have such powers and perform such duties as may be delegated to him by the chief executive officer, and shall be vested with all the powers and authorized to perform all the duties of the chief executive officer in his absence or inability to act. SECTION 8. Vice President. Each vice president shall have such powers and duties as may be delegated to him by the board of directors or the chief executive officer, or any authorized officers senior to the vice president, and may exercise the powers of the president during his absence or inability to act. Any action taken by a vice president in the performance of the duties of the president shall be conclusive evidence of the absence or inability to act of the president at the time such action was taken. SECTION 9. Secretary. The secretary shall keep the minutes of all meetings of the board of directors, of the shareholders, and of the executive committee; shall issue all notices; may sign with the chairman of the board, a vice chairman of the board, or the president in the name of the company all legal instruments necessary for the transaction of the company's business and affix the seal of the company thereto; shall sign with the chairman of the board or president all certificates for shares of the capital stock of the company; and shall have such other powers and duties as may be prescribed by the board of directors or the chief executive officer. SECTION 10. Treasurer. The treasurer shall have responsibility for the safekeeping and custody of all the funds and securities of the company; shall establish and execute programs for the provision of the capital required by the company, including negotiating the procurement of capital and maintaining the required financial arrangements; shall establish and maintain adequate sources for the company's short-term borrowings; shall establish and maintain liaison with investment bankers and Page 14 of 20 16 financial analysts; shall establish and maintain banking arrangements; and shall have such other powers and duties as may be prescribed by the board of directors or the chief executive officer. SECTION 11. Powers and Duties of Assistant Secretaries. Each assistant secretary shall have the usual powers and duties pertaining to his office, together with such other powers and duties as may be assigned to him by the secretary, and may exercise the powers of the secretary during that officer's absence or inability to act. Any action taken by an assistant secretary in the performance of the duties of the secretary shall be conclusive evidence of the absence or inability to act of the secretary at the time such action was taken. SECTION 12. Powers and Duties of Assistant Treasurers. Each assistant treasurer shall have the usual powers and duties pertaining to his office, together with such other powers and duties as may be assigned to him by the treasurer, and may exercise the powers of the treasurer during that officer's absence or inability to act. Any action taken by an assistant treasurer in the performance of the duties of the treasurer shall be conclusive evidence of the absence or inability to act of the treasurer at the time such action was taken. ARTICLE VI. INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 1. Actions. The company shall indemnify any person who was or is a named defendant or respondent or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative, or investigative (including any action by or in the right of the company), or any appeal of such action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding, by reason of the fact that he is or was a director, officer or employee of the company, or is or was serving at the request of the company as a director, officer, partner, venturer, proprietor, trustee, employee, or similar functionary of another foreign or domestic corporation or non-profit corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise (any such person acting in any such capacity being hereinafter referred to as "potential indemnitee"), against judgments, penalties (including excise and similar taxes), fines, amounts paid in settlement, and reasonable expenses (including court costs and attorneys' fees) actually incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed, (i) in the case of conduct in his official capacity as a director of the company, to be in the best interests of the company and (ii) in all other cases, to be not opposed to the best interests of the company; and, with respect to any criminal action or proceeding, if he had no reasonable cause to believe his conduct was unlawful; provided, however, that in connection with any action, suit or proceeding in which the person shall have been adjudged to be liable to the company or liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the person's official capacity as a director or officer, (i) indemnification shall be limited to reasonable expenses (including court costs or attorneys' fees) actually incurred in connection with such proceeding, and (ii) indemnification shall be prohibited, if the person is found liable for willful or intentional misconduct in the performance of his duty to the company. The termination of Page 15 of 20 17 any action, suit or proceeding by judgment, order, settlement, or conviction, or on a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in the best interests of the company; and, with respect to any criminal action or proceeding, shall not create a presumption that the person had reasonable cause to believe that his conduct was unlawful. SECTION 2. Success on Merits or 0therwise. Where a potential indemnitee has been wholly successful, on the merits or otherwise, in defense of any such action, suit or proceeding, he shall be indemnified against reasonable expenses (including court costs and attorneys' fees) actually incurred by him in connection therewith. SECTION 3. Determination that Indemnification is Proper. Any indemnification under Section 1 of this article (unless otherwise ordered by a court of competent jurisdiction) shall be made by the company only as authorized in a specific case upon a determination that the applicable standard of conduct has been met. Such determination shall be made (i) by the board of directors by a majority vote of a quorum consisting of directors who at the time of the vote have not been named as defendants or respondents in such action, suit or proceeding, or (ii) if such a quorum cannot be obtained, by a majority vote of a committee of the board of directors, designated to act in the matter by a majority vote of all directors, consisting solely of two or more directors who at the time of the vote are not named defendants or respondents in such action, suit or proceeding, or (iii) by special legal counsel selected by the board of directors (or a committee thereof) by vote in the manner set forth in subparagraphs (i) and (ii) of this Section 3, or if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all directors, or (iv) by the shareholders in a vote that excludes the shares held by any director who is named as a defendant or respondent in such action, suit or proceeding. SECTION 4. Expenses Prior to Final Disposition. Reasonable expenses incurred by a director, officer, or employee of the company or other person entitled to indemnity hereunder, who was, is or is threatened to be made a named defendant or respondent in any such action, suit or proceeding described in Section 1 shall be paid by the company in advance of the final disposition thereof upon receipt of a written affirmation by the director, officer, employee or other person of his good faith belief that he has met the standard of conduct necessary for indemnification under this article and a written undertaking by or on behalf of the director, officer, employee or other person to repay such amount if it is ultimately determined that the person has not met such necessary standard of conduct or that indemnification is prohibited by Section 1 of this article. Determinations with respect to payments under this Section 4 shall be made in the manner specified by Section 3 for determining that indemnification is permissible, except as otherwise provided by law. SECTION 5. Nonexclusive Rights-Continuance Beyond Tenure. The indemnification provided by this article shall not be deemed (i) to be exclusive of any other rights consistent with law to which the person indemnified may be entitled under the articles of incorporation of the company, bylaws, any general or specific action of the board of directors, agreement, authorization of shareholders, or otherwise, or as may be permitted or required by law, both as to action in his official capacity as a director and as to action in another capacity while holding such office, or (ii) to be a limitation upon the power of the company to indemnify and to advance expenses, consistent with law. Page 16 of 20 18 The indemnification provided by this article shall continue as to a person who has ceased to be a director, officer, or employee of the company or other person entitled to indemnity hereunder or to serve in such other capacity in which he was entitled to indemnification hereunder, and shall inure to the benefit of his heirs and legal representatives. SECTION 6. Insurance Authorized. Subject to any restrictions now or hereafter established by applicable law, the company shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, or employee of the company or who is or was serving at the request of the company as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation or non-profit corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the company would have the power to indemnify him against that liability under the provisions of this article or the Texas Business Corporation Act. SECTION 7. Definitions. For purposes of this article, references to "the company" include any domestic or foreign predecessor entity of the company in a merger, consolidation, or other transaction in which the liabilities of the predecessor are transferred to the company by operation of law and in any other transaction in which the company assumes the liabilities of the predecessor but does not specifically exclude liabilities that are the subject matter of this article. For purposes of this article, references to "serving at the request of the company" shall include any service as a director, officer or employee of the company which imposes duties on, or involves services by, such director, officer or employee with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the company" as referred to in this article. SECTION 8. Expenses as Witness. Notwithstanding any other provision of this article, the company may pay or reimburse expenses incurred by any director, officer, or employee of the company or any other potential indemnitee hereunder in connection with his appearance as a witness or other participation in any action, suit or a proceeding described in Section 1 at a time when he is not a named defendant or respondent in such action, suit or proceeding. SECTION 9. Notice to Shareholders. Any indemnification of or advance of expenses to a director in accordance with this article shall be reported in writing to the shareholders of the company with or before the notice or waiver of notice of the next shareholders' meeting or with or before the next submission to shareholders of a consent to action without a meeting and, in any case, within the twelve-month period immediately following the date of the indemnification or advance. Page 17 of 20 19 ARTICLE VII. Miscellaneous Provisions SECTION 1. Registered Office. Unless the board of directors otherwise determines, the registered office of the company, required by the Texas Business Corporation Act to be maintained in the State of Texas, shall be the principal place of business of the company, but such registered office may be changed from time to time by the board of directors in the manner provided by law and need not be identical to the principal place of business of the company. SECTION 2. Books and Records. Correct and complete books and records of account of the company and the minutes of the proceedings of its shareholders, board of directors, and each committee of its board of directors shall be kept at the registered office of the company. Records of the original issuance of shares issued by the company and of each transfer of those shares that have been presented for registration of transfer shall be kept at the registered office of the company or at the office of its principal transfer agent or registrar. A record of the past and present shareholders of the company, giving the names and addresses of all such shareholders and the number of shares of each class and series of stock held by each, shall also be kept at the registered office of the company or at the office of its principal transfer agent or registrar. Any books, records, and minutes may be in written form or in any other form capable of being converted into written form within a reasonable time. Any person who shall have been a holder of record of shares for at least six (6) months immediately preceding his demand, or who shall be the holder of record of at least five percent (5%) of all the outstanding shares of the company, upon written demand stating the purpose thereof, or any director of the company shall have the right to examine, in person or by agent, accountant, or attorney, at any reasonable time or times, for any proper purpose, its relevant books and records of account, minutes, and share transfer records, and to make extracts therefrom. SECTION 3. Action Without Meeting and Telephone Meetings. Any action permitted, or required by law, these bylaws, or the articles of incorporation of the company, to be taken at a meeting of the board of directors or of any committee thereof may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the board of directors or of such committee, as the case may be. Such consent shall have the same force and effect as a unanimous vote at a meeting. Subject to the notice requirements of these bylaws, members of the board of directors or of any committee created by the board of directors may participate in and hold a meeting of such board or committee by means of conference telephone or similar communications equipment, including teleconferencing via a satellite communications system, provided all persons participating in the meeting can hear each other. SECTION 4. Fiscal Year. The fiscal year of the company shall be the calendar year. SECTION 5. Seal. The seal of the company shall be such as from time to time may be approved by the board of directors. Page 18 of 20 20 SECTION 6. Notice and Waiver of Notice. Whenever any notice is required to be given under the provisions of these bylaws, said notice shall be deemed to be sufficient if given by depositing the same in a post office box in a sealed postpaid wrapper addressed to the person entitled thereto at his post office address, as it appears on the records of the company, and such notice shall be deemed to have been given on the day of such mailing. A waiver of notice, signed by the person or persons entitled to said notice, whether before or after the date and time stated therein, shall be deemed equivalent thereto. SECTION 7. Resignations. Any director or officer may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of its receipt by the chairman of the board, the president, or the secretary. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. SECTION 8. Securities of Other Corporations. The board of directors shall by resolution designate the officers of the company who shall have power and authority to transfer, endorse for transfer, vote, or consent to or take any other action with respect to any securities of another issuer which may be held or owned by the company and to make, execute, and deliver any waiver, proxy, or consent with respect to any such securities. SECTION 9. Investments and Loans. Investments and loans of the company shall be made pursuant and subject to the provisions of the law. SECTION 10. Execution of Contracts and Other Instruments. All contractual or obligatory undertakings, including but not limited to deeds, conveyances, transfers, and releases, shall be signed by, (a) the chairman of the board, a vice chairman of the board, the president, or a vice president, or (b) any attorney-in-fact or agent of the company who has been, or at any time in the future may be, appointed by the chairman of the board, a vice chairman of the board, the president, or a vice president, and by the company secretary or an assistant secretary. When necessary, such instruments may have the corporate seal affixed and may be attested by the secretary or an assistant secretary. Checks may be signed by the chairman of the board, a vice chairman of the board, the president, a vice president, the secretary, the treasurer, or any other person who may be authorized by the board of directors or the chief executive officer. SECTION 11. Rules and Regulations. Rules and regulations for the conduct of the company's business not in conflict with these bylaws may be adopted by the executive committee by resolution duly recorded in the minutes of the committee; provided, however, that such action may be modified or abrogated by the board of directors. Page 19 of 20 21 ARTICLE VIII. Amendments Unless otherwise provided in the Articles of Incorporation, the power to alter, amend, or repeal these bylaws or adopt new bylaws shall be vested in the full board of directors subject, however, to repeal or change by action of the affirmative vote of the holders of at least seventy-five percent (75%) of the then outstanding shares of all classes of stock of the company entitled to vote generally in election of directors, voting together as a single class. Page 20 of 20 EX-10.2 3 AMENDED 1984 STOCK AND INCENTIVE PLAN 1 AMENDMENT TO AMERICAN GENERAL CORPORATION 1984 STOCK AND INCENTIVE PLAN WHEREAS, AMERICAN GENERAL CORPORATION and its shareholders have heretofore adopted the AMERICAN GENERAL CORPORATION 1984 STOCK AND INCENTIVE PLAN (the "Plan") for the benefit of certain eligible individuals; and WHEREAS, Section 12 of the Plan allows AMERICAN GENERAL CORPORATION to amend the Plan (subject to the limitations expressed therein); NOW, THEREFORE, the Plan shall be amended effective as of January 20, 2000, as follows: 1. The following shall be added as subparagraph (q) to Section 2: "(q) Immediate Family" means, with respect to a Holder, the Holder's spouse, children or grandchildren (including adopted children, step children and grandchildren)." 2. Subparagraph (f) to Section 7 shall be modified to read in its entirety, as follows: "(e) An Incentive Stock Option shall not be transferable or assignable otherwise than by will or the laws of descent and distribution." 3. The following shall be added as subparagph (d) to Section 13 : "(d) Restrictions on Transfer. An Award (other than an Incentive Stock Option, which shall be subject to the transfer restrictions set forth in Section 7(f)) shall not be transferable or assignable otherwise than (i) by will or the laws of descent and distribution, (ii) pursuant to a "qualified domestic relations order" (as defined by the Code), (iii) with respect to Awards of Non-Qualified Options, if such transfer is permitted in the sole discretion of the Committee, by transfer by a Holder to a member of the Holder's Immediate Family, to a trust solely for the benefit of the Holder and the Holder's Immediate Family, or to a partnership or limited liability company whose only partners or shareholders are the Holder and members of the Holder's Immediate Family, or (iv) with the consent of the Committee." 4. As amended hereby, the Plan is specifically ratified and reaffirmed. -1- 2 EXECUTED by the undersigned officer as of January 20, 2000. AMERICAN GENERAL CORPORATION By: /S/ JON P. NEWTON Jon P. Newton Vice Chairman -2- EX-10.4 4 AMENDMENT TO 1994 STOCK & INCENTIVE PLAN-JAN.1999 1 AMERICAN GENERAL CORPORATION 1984 STOCK AND INCENTIVE PLAN, RESTATED AS OF FEBRUARY 8, 1994, AS FURTHER AMENDED AND RESTATED AS OF FEBRUARY 1, 1998 WHEREAS, AMERICAN GENERAL CORPORATION and its shareholders have heretofore adopted the above-captioned stock and incentive plan (the "1994 Plan") for the benefit of certain eligible individuals; and WHEREAS, Section 12 of the 1994 Plan allows AMERICAN GENERAL CORPORATION to amend the 1994 Plan (subject to the limitations expressed therein); NOW, THEREFORE, the Plan shall be amended effective as of January 20, 1999, as follows: 1. The following subparagraph (i) shall be added to Section 7 of the 1994 Plan: "(i) Reload Options. The Committee (concurrently with the grant of an Option or subsequent to such grant) may, in its sole discretion, provide in an Option Grant Document respecting an Option that, if the Holder pays the costs associated with exercising such Option in shares of Common Stock, upon the date of such payment a new option shall be granted under this Plan or under another available plan. The number of shares of Common Stock subject to such new option shall be equal to the number of shares of Common Stock tendered in payment. The new option shall not be exercisable after the original term of the exercised Option." 2. As amended hereby, the 1994 Plan is specifically ratified and reaffirmed. EXECUTED by the undersigned officer as of January 20, 1999. AMERICAN GENERAL CORPORATION By: /S/ JON P. NEWTON Jon P. Newton Vice Chairman EX-10.5 5 AMENDMENT TO 1994 STOCK & INCENTIVE PLAN-JAN.2000 1 AMERICAN GENERAL CORPORATION 1984 STOCK AND INCENTIVE PLAN, RESTATED AS OF FEBRUARY 8, 1994, AS FURTHER AMENDED AND RESTATED AS OF FEBRUARY 1, 1998 WHEREAS, AMERICAN GENERAL CORPORATION and its shareholders have heretofore adopted the above-captioned stock and incentive plan (the"1994 Plan") for the benefit of certain eligible individuals; and WHEREAS, Section 12 of the 1994 Plan allows AMERICAN GENERAL CORPORATION to amend the 1994 Plan (subject to the limitations expressed therein); NOW, THEREFORE, the 1994 Plan shall be amended effective as of January 20, 2000, as follows: 1. The following shall be added as subparagraph (q) to Section 2: "(q) Immediate Family" means, with respect to a Holder, the Holder's spouse, children or grandchildren (including adopted children, step children and grandchildren)." 2. Subparagraph (e) to Section 7 shall be modified to read in its entirety, as follows: "(e) An Incentive Stock Option shall not be transferable or assignable otherwise than by will or the laws of descent and distribution." 3. The following shall be added as subparagph (d) to Section 13 : "(d) Restrictions on Transfer. An Award (other than an Incentive Stock Option, which shall be subject to the transfer restrictions set forth in Section 7(e)) shall not be transferable or assignable otherwise than (i) by will or the laws of descent and distribution, (ii) pursuant to a "qualified domestic relations order" (as defined by the Code), (iii) with respect to Awards of Non-Qualified Options, if such transfer is permitted in the sole discretion of the Committee, by transfer by a Holder to a member of the Holder's Immediate Family, to a trust solely for the benefit of the Holder and the Holder's Immediate Family, or to a partnership or limited liability company whose only partners or shareholders are the Holder and members of the Holder's Immediate Family, or (iv) with the consent of the Committee." 4. As amended hereby, the 1994 Plan is specifically ratified and reaffirmed. -1- 2 EXECUTED by the undersigned officer as of January 20, 2000. AMERICAN GENERAL CORPORATION By: /S/ JON P. NEWTON Jon P. Newton Vice Chairman -2- EX-10.7 6 AMENDMENT TO 1997 STOCK & INCENTIVE PLAN-JAN.1999 1 AMENDMENT TO AMERICAN GENERAL CORPORATION 1997 STOCK AND INCENTIVE PLAN WHEREAS, AMERICAN GENERAL CORPORATION and its shareholders have heretofore adopted the AMERICAN GENERAL CORPORATION 1997 STOCK AND INCENTIVE PLAN (the "Plan") for the benefit of certain eligible individuals; and WHEREAS, Section 12 of the Plan allows AMERICAN GENERAL CORPORATION to amend the Plan (subject to the limitations expressed therein); NOW, THEREFORE, the Plan shall be amended effective as of January 20, 1999, as follows: 1. The following subparagraph (h) shall be added to Section 7 of the Plan: "(h) Reload Options. The Committee (concurrently with the grant of an Option or subsequent to such grant) may, in its sole discretion, provide in an Option Grant Document respecting an Option that, if the Holder pays the costs associated with exercising such Option in shares of Common Stock, upon the date of such payment a new option shall be granted under this Plan or under another available plan. The number of shares of Common Stock subject to such new option shall be equal to the number of shares of Common Stock tendered in payment. The new option shall not be exercisable after the original term of the exercised Option. " 2. As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED by the undersigned officer as of January 20, 1999. AMERICAN GENERAL CORPORATION By: /S/ JON P. NEWTON Jon P. Newton Vice Chairman EX-10.9 7 AMENDMENT TO 1999 STOCK & INCENTIVE PLAN-JAN.1999 1 FIRST AMENDMENT TO AMERICAN GENERAL CORPORATION 1999 STOCK INCENTIVE PLAN WHEREAS, AMERICAN GENERAL CORPORATION and certain of its affiliates have heretofore adopted the AMERICAN GENERAL 1999 STOCK AND INCENTIVE PLAN (the "Plan") for the benefit of certain eligible individuals; and WHEREAS, AMERICAN GENERAL CORPORATION may amend the Plan on behalf of itself and its Affiliates; NOW, THEREFORE, the Plan shall be amended as of its effective date, January 21, 1999, as follows: 1. Section 12 is deleted in its entirety and replaced with the following: "12. AMENDMENT AND TERMINATION OF THE PLAN The Board may amend the Plan at any time and the Committee may amend an Award (and its related Grant Document) at any time, except as otherwise specifically provided in such Grant Document; provided that no change in any Award theretofore granted may be made that would impair the rights of the Holder of any Award under the Plan without the consent of the Holder; and provided further that (a) the Board may not, without approval of the shareholders, amend the Plan (i) to increase the maximum aggregate number of shares which may be issued under the Plan or (ii) to change the class of individuals eligible to receive Awards under the Plan and (b) the Committee may not, without approval of the shareholders, amend any outstanding Stock Options to lower the Option Price (or cancel and replace any outstanding Stock Options with new Stock Options having a lower Option Price). Subject to the last sentence of Section 3 hereof, the Board, in its discretion, may terminate the Plan at any time." 2. Section 11 is deleted in its entirety and replaced with the following: "11. EQUITABLE ADJUSTMENTS Subject to any required action by the Company's shareholders, upon the occurrence of any event which affects the shares of Common Stock in such a way that an adjustment of outstanding Awards is appropriate in order to prevent the dilution or enlargement of rights under the Awards (including, without limitation, any extraordinary dividend or other distribution (whether in cash or in kind), recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event ), the Committee shall make appropriate equitable adjustments, -1- 2 which may include, without limitation, adjustments to any or all of the number and kind of shares of stock (or other securities) which may thereafter be issued in connection with such outstanding Awards and adjustments to any exercise price specified in the outstanding Awards and shall also make appropriate equitable adjustments to the number and kind of shares of stock (or other securities) authorized by or to be granted under the Plan. Further, the Committee, in its sole discretion, may make appropriate equitable adjustments, including, without limitation, those described in the immediately preceding sentence, in any other circumstances under the Committee deems such adjustments to be desirable, except that the Committee may not, without approval of the shareholders, amend any outstanding Stock Options to lower the Option Price (or cancel and replace any outstanding Stock Options with new Stock Options having a lower Option Price). Any adjustment made to an Incentive Stock Option hereunder, with respect to either (i) the number or price of shares of stock subject to Incentive Stock Options or (ii) the aggregate number of shares which may be issued pursuant to Incentive Stock Options, shall be made in a manner which will permit such option to continue to constitute an Incentive Stock Option within the meaning of section 422 of the Code." 3. As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED by the undersigned officer of American General Corporation to be effective as of the 21st day of January, 1999. AMERICAN GENERAL CORPORATION By: /S/ JON P. NEWTON Jon P. Newton Vice Chairman -2- EX-10.11 8 FIRST AMENDMENT DEFERRED COMPENSATION PLAN 1 FIRST AMENDMENT TO AMERICAN GENERAL CORPORATION DEFERRED COMPENSATION PLAN WHEREAS, AMERICAN GENERAL CORPORATION and certain of its affiliates have heretofore adopted the AMERICAN GENERAL CORPORATION DEFERRED COMPENSATION PLAN (the "Plan") for the benefit of certain eligible individuals; WHEREAS, in accordance with Section 12.5 of the Plan, the Board of Directors of American General Corporation (the "Board") approved on January 21, 1999, an amendment to the Plan to include participation by non- employee directors; WHEREAS, the Plan Administrator is the administrative Committee appointed by the Board for the general administration of the Plan; and WHEREAS, in accordance with Section 8.5 of the Plan, the Plan Administrator is authorized to supply any omission that may appear in the Plan, in such manner and to such extent as it shall deem expedient to carry the Plan into effect for the greatest benefit of all interested parties, and to determine all questions relating to eligibility; and WHEREAS, the Plan Administrator has approved certain matters in accordance with such authority, which are reflected in this Plan amendment; NOW, THEREFORE, the Plan shall be amended as follows, effective as of January 21, 1999, to include participation by non-employee directors of American General Corporation and its affiliates: 1. The following new definition shall be added to Section 1.1 of the Plan: "(h)(h) Outside Director: A non-employee member of the Board or a non-employee member of the board of directors of an Affiliate." 2. Section 1.1(k) of the Plan shall be deleted and the following shall be substituted therefor: "(k) Eligible Individual: Any individual (i) who is employed by the Company as the Chairman or as an Executive designated by the Chairman, or (ii) who is an Outside Director. For all purposes herein, the 'service' of an individual as an Outside Director shall be deemed to be equivalent to 'employment' with the Company." 3. Section 1.1(s) of the Plan shall be deleted and the following shall be substituted therefor: 2 "(s) Retirement: As to a Member who is an Outside Director, cessation of board service in accordance with the board's mandatory retirement policy or, in the absence of such a policy, cessation of board service after age 70; as to a Member who is not an Outside Director, termination of employment with the Company and its Affiliates on or after 'normal retirement date' as defined in (i) the American General Supplemental Executive Retirement Plan, if such Member is participating therein, (ii) a Supplemental Executive Retirement Agreement with the Company, if such Member is a party thereto, or (iii) the American General Retirement Plan (or any successor plan thereto), if such Member is not so participating and is not such a party." 4. The last sentence of Section 2.2(a) of the Plan shall be deleted and the following shall be substituted therefor: "Notwithstanding any provision herein to the contrary, an Eligible Individual who first becomes an Eligible Individual on other than the first day of a Plan Year may become a Member (i) on the first day of the first pay period coinciding with or next following the date he first becomes an Eligible Individual, as to a Member who is not an Outside Director, or (ii) on the first day of the calendar month coinciding with or next following the date he first becomes an Eligible Individual, as to a Member who is an Outside Director for the remainder of such Plan Year, with respect to Deferrals pursuant to Section 3.1(a) by effecting, prior to or within 30 days after the date he first becomes an Eligible Individual and within the time period prescribed by the Plan Administrator, the Deferral election prescribed by the Plan Administrator." 5. Section 3.1(a)(1) of the Plan shall be deleted and the following shall be substituted therefor: "(1) Elect to defer from his Pay a fixed amount of his annual base salary (or of his annual retainers and/or attendance fees in the case of an Outside Director) for a Plan Year; and/or" 6. The third sentence of Section 3.1(b) of the Plan shall be deleted and the following shall be substituted therefor: "The reduction in a Member's Pay pursuant to Section 3.1(a)(1) shall be effected by (i) equal Pay reductions each pay period, as to a Member who is not an Outside Director, and (ii) by equal Pay reductions at the time annual retainer and/or attendance fees are paid, as to a Member who is an Outside Director, during the applicable portion of the Plan Year as determined by the Plan Administrator following the effective date of such election." 7. Section (iv) of the second sentence of the first paragraph of Article V of the Plan shall be deleted and the following shall be substituted therefor: 3 "(iv) his termination by the Company without 'cause' or by the Member for 'good reason,' as defined in the Member's employment agreement with American General Corporation, only if the Member is employed by American General Corporation as the Chairman or a Vice Chairman," 8. The provision in the third sentence of the first paragraph of Article V of the Plan shall be deleted and the following shall be substituted therefor: ", provided that with respect to a Member who is not an Outside Director the Deferral Awards (and net accretions attributable thereto) for the year of the year preceding Retirement shall be vested only to the extent such Deferral Awards (excluding net accretions attributable thereto) do not exceed the Deferral Awards (excluding net accretions attributable thereto) for the second and third Plan Years preceding the Plan Year in which Retirement occurs." 9. The word "Retirement" shall be substituted for the phrase "normal retirement" in the last sentence of Section 7.2 of the Plan. 10. The second sentence of the first paragraph of Article X of the Plan shall be deleted and the following shall be substituted therefor: "The Plan is intended to constitute an unfunded, unsecured plan of deferred compensation for a select group of management or highly compensated employees of the Company and for Outside Directors." 11. As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED this 5th day of January, 2000, by the undersigned member of the administrative Committee appointed by the Board for the general administration of the Plan. By: /S/ JON P. NEWTON Jon P. Newton EX-10.16 9 4TH AMEND.TO RESTORATION OF RETIREMENT INCOME PLAN 1 FOURTH AMENDMENT TO THE RESTORATION OF RETIREMENT INCOME PLAN FOR CERTAIN EMPLOYEES PARTICIPATING IN THE RESTATED AMERICAN GENERAL RETIREMENT PLAN WHEREAS, AMERICAN GENERAL CORPORATION (the "Company") and certain of its subsidiary companies (the other "Employers") have heretofore adopted the RESTORATION OF RETIREMENT INCOME PLAN FOR CERTAIN EMPLOYEES PARTICIPATING IN THE RESTATED AMERICAN GENERAL RETIREMENT PLAN (the "Plan") for the benefit of their eligible employees; and WHEREAS, pursuant to the rights granted to the Company in the Plan, the Company desires to amend the Plan in certain respects on behalf of itself and on behalf of the other Employers; NOW, THEREFORE, the Plan is hereby amended as follows: I. Effective as of July 4, 1998: 1. Section 3 of the Plan shall be deleted and the following shall be substituted therefor: "3. Eligibility. Employees, excluding Career Agents, who are Highly Compensated Participants who are participating in the Basic Plan, and either (1) whose pension or pension-related benefits under the Basic Plan are limited pursuant to section 401(a)(17) or section 415 of the Code or (2) who are eligible to participate in the American General Corporation Deferred Compensation Plan, shall be eligible for benefits under this Restoration Plan. In no event shall an employee who is not eligible for benefits under the Basic Plan be eligible for a benefit under this Restoration Plan." II. As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED this 31st day of December, 1998. AMERICAN GENERAL CORPORATION By: /s/ ELIZABETH DOBBS Name: Elizabeth Dobbs Title: Vice president - Benefits & Payroll EX-10.23 10 EMPLOYMENT AGREEMENT - JOHN A. GRAF 1 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into between Western National Corporation, a Delaware corporation ("Company"), and John A. Graf ("Executive") to be effective as of the Effective Time as hereinafter defined. WHEREAS, Company and Executive entered into an Employment Agreement dated February 8, 1994, an Amendment to Employment Agreement dated December 2, 1994, and a further Amendment to Employment Agreement dated May 14, 1997 (the "February 8, 1994 Employment Agreement"). WHEREAS, contemporaneously herewith, American General Corporation, which presently owns certain of the stock of Company, and a subsidiary of American General Corporation, have entered into an Agreement and Plan of Merger ("Merger Agreement") with Company pursuant to which American General Corporation shall acquire all or substantially all of the stock of Company through merger (the "Merger"). WHEREAS, it is an important element of American General Corporation's decision to acquire the stock of Company through such merger that Executive remain employed with Company and provide his personal services to Company in connection with the operation of Company's business, the creation and development of Company's products and services, and the marketing of Company's products and services for at least three years from the date of such acquisition. WHEREAS, during the three year Term of this Agreement, Company or AGC (as such term is herein defined) shall disclose to Executive, or place Executive in a position to have access to or develop, trade secrets or confidential information of Company or AGC or their customers or clients; and/or shall entrust Executive with business opportunities of Company or AGC; and/or shall place Executive in a position to develop business good will on behalf of Company or AGC, and there is a need and desire on the part of Company and AGC and Executive to specify the parties' rights and obligations with respect to the ownership and protection of such information, opportunities and goodwill. WHEREAS, Company is desirous of employing Executive pursuant to the terms and conditions and for the consideration set forth in this Agreement, and Executive is desirous of continuing in the employ of Company pursuant to such terms and conditions and for such consideration, subject to the condition subsequent that the contemplated Merger shall be consummated. WHEREAS, contemporaneously herewith, Executive and American General Corporation shall also enter into a Severance Agreement ("Severance Agreement"). The terms and conditions of such Severance Agreement are incorporated herein by reference. - Page 1 - 2 NOW, THEREFORE, for and in consideration of the mutual promises, covenants, and obligations contained herein, Company and Executive agree as follows: 1. Employment and Duties: 1.1. Because of the important nature of Executive's personal services with respect to the operation of Company's business, the creation and development of Company's products and services, and the marketing of Company's products and services, Company agrees to employ Executive, and Executive agrees to be employed by Company, beginning as of forty-eight hours after the Effective Time as defined below and continuing thereafter for a Term of three (3) years (the "Term"), subject to the terms and conditions of this Agreement. 1.2. Commencing as of forty-eight hours after the Effective Time, Company shall employ Executive in a senior executive or officer capacity with Company or one of its significant subsidiaries with duties consonant with senior executive status, but Company may assign Executive to different executive positions and modify Executive's duties and responsibilities. Company or AGC may also assign Executive to a position in which he performs services for other of American General Corporation's subsidiaries or affiliates. Moreover, Company may assign this Agreement to American General Corporation or any affiliates of American General Corporation (American General Corporation and any of its affiliates to which this Agreement is assigned or for whom Executive may provide services are cumulatively referred to herein as "AGC"). 1.3. Executive agrees to serve in the assigned position and to perform diligently and to the best of Executive's abilities the duties and services appertaining to such position as determined by Company, as well as such additional or different duties and services appropriate to such position which Executive from time to time may be reasonably directed to perform by Company. Executive shall at all times comply with and be subject to such policies and procedures as Company or AGC may establish from time to time. Executive shall, during the period of Executive's employment by Company, devote Executive's full business time, attention, energy, and best efforts to the business and affairs of Company. For purposes of this Agreement, full business time shall mean the normal work week for individuals in comparable executive positions with Company. Executive may not engage, directly or indirectly, in any other business, investment, or activity that interferes with Executive's performance of Executive's duties hereunder, is contrary to the interests of Company or AGC, or requires any significant portion of Executive's business time. 1.4. Executive acknowledges and agrees that at all times during the employment relationship Executive owes fiduciary duties to Company and AGC, including but not limited to the fiduciary duties of the highest loyalty, fidelity and allegiance to act at all times in the best interests of Company and AGC, to make full disclosure to Company of all information that pertains to Company's or AGC's business and interests, to do no act which would injure Company's or AGC's business, its interests, or its reputation, and to refrain from using for Executive's own benefit or for the benefit of others any information or opportunities pertaining to Company's or AGC's business or interests that are entrusted to Executive or that he learned while employed by Company or AGC. Executive acknowledges and agrees that upon termination of the employment relationship, Executive - Page 2 - 3 shall continue to refrain from using for his own benefit or the benefit of others any information or opportunities pertaining to Company's or AGC's business or interests that were entrusted to Executive during the employment relationship or that he learned while employed by Company or AGC. Executive agrees that while employed by Company or AGC and thereafter he shall not knowingly take any action which interferes with the external relationships between Company or AGC and third parties. 1.5. It is agreed that any direct or indirect interest in, connection with, or benefit from any outside activities, particularly commercial activities, which interest might in any way adversely affect Company or AGC, or any of their affiliates, involves a possible conflict of interest. In keeping with Executive's fiduciary duties to Company and AGC, Executive agrees that during the employment relationship Executive shall not knowingly become involved in a conflict of interest with Company or AGC or their affiliates, or upon discovery thereof, allow such a conflict to continue. Moreover, Executive agrees that Executive shall disclose to Company's or AGC's President any facts which might involve such a conflict of interest that has not been approved by Company's or AGC's President. Company and Executive recognize that it is impossible to provide an exhaustive list of actions or interests which constitute a "conflict of interest." Moreover, Company and Executive recognize there are many borderline situations. In some instances, full disclosure of facts by Executive to Company's or AGC's President may be all that is necessary to enable Company or AGC or their affiliates to protect its interests. In others, if no improper motivation appears to exist and the interests of Company or AGC or their affiliates have not suffered, prompt elimination of the outside interest will suffice. In still others, it may be necessary for Company to terminate the employment relationship. Company and Executive agree that Company's determination as to whether a conflict of interest exists shall be conclusive. Company reserves the right to take such action as, in its judgment, will end the conflict. 2. Compensation and Benefits: 2.1. As compensation for services rendered under this Agreement, Executive shall receive a base salary of Three Hundred Thousand ($300,000) per year ("Base Annual Salary"), payable in semi-monthly installments in accordance with Company's or AGC's standard payroll practice for its salaried employees. Executive's Base Annual Salary may be increased from time to time based upon his performance. The amounts of any such salary increases shall be approved by the Personnel Committee of the Board of Directors of American General Corporation. 2.2. The parties recognize that Company will pay Executive his performance bonus for the calendar year 1997 prior to the consummation of the Merger. In addition to Base Annual Salary, Executive shall receive for the calendar years 1998, 1999 and 2000, an annual performance bonus in such amount as may be determined by the Personnel Committee of the Board of Directors of American General Corporation in its sole discretion for each year during the Term of this Agreement. Such annual bonus shall be paid in the March/April time frame of the following year with the first such payment in the March/April time frame of 1999 for the calendar year 1998. It is understood and agreed that the amount of any such bonus shall be determined based upon a consideration of both (i) the progress and success of the Company as a whole, and (ii) the personal - Page 3 - 4 performance and contributions made to the success of the Company by Executive. Finally, it is understood and agreed that there may be years in which the Personnel Committee determines that no bonus shall be paid. 2.3. In the event that, in connection with the Merger, the acceleration of the vesting of Executive's stock options or restricted stock in Company, or any payment, award or distribution under the February 8, 1994 Employment Agreement, or any payment, award or distribution under this Agreement to or for the benefit of Executive (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by Company and Executive) within ten days of the receipt of such claim. Company shall notify Executive in writing at least ten days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If Company decides to contest such claim, Executive shall cooperate fully with Company in such action; provided, however, Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of Company's action. If, as a result of Company's action with respect to a claim, Executive receives a refund of any amount paid by Company with respect to such claim, Executive shall promptly pay such refund to Company. If Company fails to timely notify Executive whether it will contest such claim or Company determines not to contest such claim, then Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 2.4. While employed by Company, Executive shall be allowed to participate, on the same basis generally as other executives of Company, in all general executive benefit plans and programs, including improvements or modifications of the same, which on the effective date or thereafter are made available by Company to other of Company's comparable executives. Such benefits plans, and programs may include, without limitation, medical, health, and dental care, life insurance, disability protection, and pension plans. Nothing in this Agreement is to be construed or interpreted to provide greater rights, participation, coverage, or benefits under such benefit plans or programs than provided to similarly situated executives pursuant to the terms and conditions of such benefit plans and programs. - Page 4 - 5 2.5. Company shall not by reason of this Article 2 be obligated to institute, maintain, or refrain from changing, amending, or discontinuing, any of its medical, health, dental, insurance, disability or other benefit plans or programs, so long as such actions are similarly applicable to covered employees generally. Unless specifically provided for in a written plan document adopted by the Board of Directors of either Company or AGC, none of the benefits or arrangements described in this Article 2 shall be secured or funded in any way, and each shall instead constitute an unfunded and unsecured promise to pay money in the future exclusively from the general assets of Company or AGC. 2.6. Company may withhold from any compensation, benefits, or amounts payable under this Agreement all federal, state, city, or other taxes as may be required pursuant to any law or governmental regulation or ruling. 3. Termination of employment prior to expiration of Term and effects of such termination: 3.1. [A] Notwithstanding any other provisions of this Agreement, Company or AGC shall have the right to terminate Executive's employment under this Agreement at any time prior to the expiration of the Term for cause upon the determination by Company's Board of Directors or American General Corporation's Executive Termination Review Committee that cause exists for the termination of the employment relationship. As used in this Section 3.1, the term cause shall mean [1] misuse, misappropriation or embezzlement by Executive of funds or property belonging to Company or AGC, or his use of alcohol or drugs which interferes with the performance of his duties hereunder or which compromises the integrity and reputation of Company or AGC, their employees, or their products or services; [2] Executive's conviction by a court of law, or admission that he is guilty, of a felony or other crime involving moral turpitude; [3] Executive's absence from his employment other than as a result of a disability as defined in Section 3.3 hereof, for whatever cause, for a period of more than one (1) month, without prior written consent from Company; [4] Executive becomes incompetent or is reasonably unable to undertake and discharge the duties and responsibilities of his position, other than as a result of a disability as defined in Section 3.3 hereof; or [5] Executive's breach of any provisions of this Agreement, or his gross negligence, willful malfeasance or fraud or dishonesty in performance of his services on behalf of Company or AGC pursuant to this Agreement. It is expressly acknowledged and agreed that the decision as to whether cause exists for termination of the employment relationship by Company or AGC is delegated to Company's Board of Directors or American General Corporation's Executive Termination Review Committee for determination, which decision shall be made in good faith. [B] Upon a termination of the employment relationship for cause by Company or AGC prior to expiration of the Term pursuant to this Section, Executive shall be entitled to receive as a full and final settlement of all obligations of Company and AGC hereunder his pro rata Base Annual Salary through the date of such termination, but any and all other compensation to which Executive is entitled under this Agreement and any and all future benefits for which Executive is eligible under this Agreement shall cease and terminate, including but not limited to, Executive shall not be entitled to any bonuses or other incentive compensation, if any, not yet paid to Executive at the date of such - Page 5 - 6 termination. Executive shall not be entitled to any severance payment. Executive's rights under this Section are Executive's sole and exclusive rights against Company and AGC, and Company's or AGC's sole and exclusive liability to Executive under this Agreement, in contract, tort, or otherwise, for any termination for cause of the employment relationship by Company or AGC. Executive covenants not to lodge any claim, demand, or cause of action against Company or AGC based on termination for cause of the employment relationship for any monies allegedly due under this Agreement other than those specified in this Section. If Executive breaches this covenant, Company or AGC shall be entitled to recover from Executive all sums expended by Company or AGC (including costs and attorneys fees) in connection with such suit, claim, demand, or cause of action. 3.2. The employment relationship under this Agreement shall terminate automatically upon Executive's death. Upon a termination of the employment relationship prior to expiration of the Term because of Executive's death, Executive's administrators, heirs or legatees shall be entitled to receive Executive's then-current Base Annual Salary as if Executive's employment (which shall cease on the date of such death) had continued for the full Term of this Agreement. Company may, at its option, pay such Base Annual Salary in semi- monthly installments or in a lump sum discounted to present value at the discount rate then available to Company through its lenders. Executive's administrators, heirs or legatees shall also be entitled to any individual bonuses or any individual incentive compensation awarded but not yet paid to Executive at the date of such termination but Executive's administrators, heirs or legatees shall not be entitled to any future individual bonuses or any individual incentive compensation payments not yet awarded (whether or not allegedly accrued) as of the date of such termination. 3.3. The employment relationship under this Agreement shall terminate automatically upon Executive becoming permanently and totally unable to perform Executive's duties for Company or AGC as a result of any medically determinable physical or mental impairment as supported by a written medical opinion to the foregoing effect by a physician selected by Company or AGC. Upon such termination of the employment relationship, Executive shall be paid his pro rata Base Annual Salary through the date of such termination and Executive shall thereafter be paid sixty (60%) of his then-current Base Annual Salary on a semi-monthly basis through the Term of this Agreement as if the employment relationship had not terminated, reduced by any disability benefits he may receive under Company's or AGC's disability benefit plans. Executive shall also be entitled to any individual bonuses or any individual incentive compensation awarded but not yet paid to Executive at the date of such termination but Executive shall not be entitled to any future individual bonuses or any individual incentive compensation payments not yet awarded (whether or not allegedly accrued) as of the date of such termination. For purposes of this Section, disability shall not include disabilities arising from (a) chronic use of intoxicants, drugs or narcotics, (b) intentionally self-inflicted injury or intentionally self-induced sickness, or (c) a proven unlawful act or enterprise on the part of Executive. 3.4. [A] Notwithstanding any other provisions of this Agreement, Company or AGC shall have the right to terminate 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 Company's Board of Directors or American General Corporation's Executive - Page 6 - 7 Termination Review Committee. Any termination of the employment relationship by Company or AGC prior to the expiration of the Term other than a termination under Section 3.1 for cause shall be deemed to be a termination without cause pursuant to this Section 3.4. [B] If Company terminates the employment relationship without cause pursuant to this Section 3.4, Executive's post-employment non-competition obligation specified in Section 6.1(i) shall extend only to the date upon which the Term of this Agreement would have otherwise expired. [C] Upon termination of the employment relationship by Company or AGC prior to expiration of the Term pursuant to this Section 3.4, Executive shall be entitled, in consideration of Executive's continuing obligations hereunder after such termination (including, without limitation, Executive's non-competition obligations), to receive his then-current Base Annual Salary as if Executive's employment (which shall cease on the date of such termination) had continued for the full Term of this Agreement. Company may, at its option, pay such Base Annual Salary in semi-monthly installments or in a lump sum discounted to present value at the discount rate then available to Company through its lenders. Provided that Executive complies with his continuing obligations hereunder after such termination, Executive shall also be entitled to performance bonuses for each of the calendar years 1998, 1999 and 2000 as follows: As to the bonus for calendar year 1998, if such termination of employment occurs before the Personnel Committee awards a bonus for calendar year 1998, the bonus for calendar year 1998 shall be equal to the bonus paid by Company to Executive for the calendar year 1997. As to the bonus for calendar year 1999, if such termination of employment occurs before the Personnel Committee awards a bonus for calendar year 1999, the bonus for calendar year 1999 shall be equal to the average of the bonuses paid by Company to Executive for calendar years 1997 and 1998. As to the bonus for calendar year 2000, if such termination of the employment relationship occurs at any time prior to the end of the Term, the bonus for calendar year 2000 shall be equal to the average of the bonuses paid by Company to Executive for the calendar years 1997, 1998 and 1999. [D] Executive shall not be under any duty or obligation to seek or accept other employment following such termination of the employment relationship and, subject to Executive complying with his continuing obligations (including non-competition obligations), the amounts due Executive hereunder shall not be reduced or suspended if Executive accepts subsequent employment. Executive's rights under this Section 3.4 are Executive's sole and exclusive rights against Company or AGC, and Company's and AGC's sole and exclusive liability to Executive under this Agreement, in contract, tort, or otherwise, for such termination of the employment relationship by Company or AGC. Executive covenants not to lodge any claim, demand, or cause of action against Company or AGC based on such termination of the employment relationship by Company or AGC for any monies allegedly due under this Agreement other than those specified in this Section 3.4. If Executive breaches this covenant, Company or AGC shall be entitled to recover from Executive all sums expended by Company or AGC (including costs and attorneys fees) in connection with such suit, claim, demand, or cause of action. - Page 7 - 8 3.5. [A] Executive shall have the right to terminate the employment relationship during its Term only for cause, which shall consist only of a material breach by Company (or AGC if this Agreement is assigned to AGC) of any material provision of this Agreement which remains uncorrected for thirty (30) days following written notice of such breach by Executive to Company (or AGC if this Agreement is assigned to AGC). [B] If Executive terminates the employment relationship for cause pursuant to this Section 3.5, Executive's post-employment non-competition obligation specified in Article 6.1(i) shall extend only to date upon which the Term of this Agreement would have otherwise expired. [C] Upon termination of the employment relationship by Executive for cause prior to expiration of the Term pursuant to this Section 3.5, Executive shall be entitled, in consideration of Executive's continuing obligations hereunder after such termination (including, without limitation, Executive's non-competition obligations) to receive his Base Annual Salary as if Executive's employment (which shall cease on the date of such termination) had continued for the full Term of this Agreement. Company may, at its option, pay such Base Annual Salary in semi-monthly installments or in a lump sum discounted to present value at the discount rate then available to Company through its lenders. Executive shall be entitled to bonuses or other incentive compensation, if any, awarded but not yet paid as of the date of such termination. Provided that Executive complies with his continuing obligations hereunder after such termination, Executive shall also be entitled to performance bonuses for each of the calendar years 1998, 1999 and 2000, even if no such bonus had been awarded as of the date of such termination, as follows: As to the bonus for calendar year 1998, if such termination of employment occurs before the Personnel Committee awards a bonus for calendar year 1998, the bonus for calendar year 1998 shall be equal to the bonus paid by Company to Executive for the calendar year 1997. As to the bonus for calendar year 1999, if such termination of employment occurs before the Personnel Committee awards a bonus for calendar year 1999, the bonus for calendar year 1999 shall be equal to the average of the bonuses paid by Company to Executive for calendar years 1997 and 1998. As to the bonus for calendar year 2000, if such termination of the employment relationship occurs at any time prior to the end of the Term, the bonus for calendar year 2000 shall be equal to the average of the bonuses paid by Company to Executive for the calendar years 1997, 1998 and 1999. [D] Executive shall not be under any duty or obligation to seek or accept other employment following such termination of the employment relationship and, subject to Executive complying with his continuing obligations (including non-competition obligations), the amounts due Executive hereunder shall not be reduced or suspended if Executive accepts subsequent employment. Executive's rights under this Section 3.5 are Executive's sole and exclusive rights against Company or AGC, and Company's and AGC's sole and exclusive liability to Executive under this Agreement, in contract, tort, or otherwise, for any actions or inactions giving rise to such termination of the employment relationship for cause by Executive. Executive covenants not to lodge any claim, demand, or cause of action against Company or AGC based on such termination of the employment relationship for cause by Executive for any monies allegedly due under this Agreement other than those specified in this Section 3.5. If Executive breaches this covenant, Company or AGC shall be - Page 8 - 9 entitled to recover from Executive all sums expended by Company or AGC (including costs and attorneys fees) in connection with such suit, claim, demand, or cause of action. 3.6. Termination of the employment relationship shall not terminate those obligations imposed by this Agreement which are continuing in nature, including, without limitation, Executive's continuing obligations of confidence, Executive's continuing obligations with respect to business opportunities that had been entrusted to Executive by Company or AGC during the employment relationship, and Executive's obligations under Articles 5 and 6. 4. Continuation of Employment beyond Term; Termination and Effects of Termination: 4.1. Should Executive remain employed by Company or AGC beyond the expiration of the Term, such employment shall automatically convert to an at-will relationship terminable at any time by either Company or AGC or Executive for any reason whatsoever, with or without cause. Upon such termination of the employment relationship by either Company or AGC or Executive for any reason whatsoever, all future compensation to which Executive is entitled and all future benefits for which Executive is eligible shall cease and terminate. Executive shall be entitled to pro rata salary through the date of such termination. Executive shall also be entitled to bonuses or other incentive compensation, if any, awarded but not yet paid as of the date of such termination, but Executive shall not be entitled to any future individual bonuses or any individual incentive compensation payments not yet awarded (whether or not allegedly accrued) as of the date of such termination. 5. Ownership and Protection of Information; Copyrights: 5.1. All information, ideas, concepts, improvements, discoveries, and inventions, whether patentable or not, and all expressions of ideas, which are created, conceived, made, developed or acquired by Executive, individually or in conjunction with others, during Executive's employment by Company or AGC (whether during business hours or otherwise and whether on Company's or AGC's premises or otherwise), whether tangible or intangible, which relate to Company's or AGC's business, products or services (including, without limitation, all such information relating to corporate opportunities, insurance or annuity products, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of customers or their requirements, the identity of key contacts within the customer's organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names, and marks) shall be disclosed to Company or AGC. Executive acknowledges that he has heretofore disclosed all such information, ideas, concepts, improvements, discoveries, and inventions, as well as all expressions of ideas, to Company. 5.2. All such information, ideas, concepts, improvements, discoveries, and inventions identified in Section 5.1 are and shall be the sole and exclusive property of Company or AGC if this Agreement has been assigned to AGC. Moreover, if, during Executive's employment by Company or AGC, Executive creates any work of authorship fixed in any tangible medium of expression which - Page 9 - 10 is the subject matter of copyright (such as videotapes, written presentations, or acquisitions, computer programs, E-mail, voicemail, electronic databases, drawings, maps, architectural renditions, models, manuals, brochures, or the like) relating to Company's or AGC's business, products, or services, whether such work is created solely by Executive or jointly with others (whether during business hours or otherwise and whether on Company's or AGC's premises or otherwise), Company or AGC, if this Agreement has been assigned to AGC, shall be deemed the author of such work if the work is prepared by Executive in the scope of Executive's employment; or, if the work is not prepared by Executive within the scope of Executive's employment but is specially ordered by Company or AGC as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, or as an instructional text, then the work shall be considered to be work made for hire and Company or AGC, as the case may be, shall be the author of the work. If such work relating to Company's or AGC's business, products, or services is neither prepared by Executive within the scope of Executive's employment nor a work specially ordered that is deemed to be a work made for hire, then Executive hereby agrees to assign, and by these presents does assign, to Company or AGC, as the case may be, all of Executive's worldwide right, title, and interest in and to such work and all rights of copyright therein. Additionally, all documents drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, E-mail, voice mail, electronic databases, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries, inventions and/or copyrightable expressions are and shall be the sole and exclusive property of Company or AGC. Executive acknowledges that Company is the owner of all such information, ideas, concepts, improvements, discoveries, inventions and/or copyrightable expressions that he heretofore created, conceived, made, developed or acquired while employed by Company. 5.3. Executive will not, at any time during or after Executive's employment by Company or AGC, make any unauthorized disclosure of any confidential business information or trade secrets of Company or AGC, or make any use thereof, except in the carrying out of Executive's employment responsibilities hereunder. As a result of Executive's employment by Company or AGC, Executive shall also from time to time have access to, or knowledge of, confidential business information or trade secrets of third parties, such as customers, suppliers, partners, joint venturers, and the like, of Company or AGC. Executive also agrees to preserve and protect the confidentiality of such third party confidential information and trade secrets to the same extent, and on the same basis, as Company's confidential business information and trade secrets. Upon termination of the employment relationship for any reason, Executive promptly shall deliver to Company or AGC all documents and things containing Company or AGC's trade secrets or confidential information. Executive may disclose those aspects of Company's or AGC's confidential information as Executive has received the written advice of counsel that such disclosure thereof is necessary under applicable federal, state, local, or foreign law or other regulations applicable to Executive (including, without limitation, any confidential information that Executive is legally compelled to disclose as a result of depositions, interrogatories, request for documents, subpoenas, civil investigative demands, or similar processes), provided, however, that Executive has first provided Company or AGC with prompt prior written notice of such requirement so that Company or AGC may seek a protective order or other appropriate remedy and/or waive compliance with the terms of this Agreement. In the - Page 10 - 11 event that such protective order or other remedy is not obtained, or that Company or AGC does not waive compliance with the provisions hereof, Executive agrees to furnish only that portion of Company's or AGC's confidential information which Executive is advised in writing by his counsel is legally required to be disclosed and to exercise all reasonable efforts to obtain assurance that confidential treatment will be accorded such confidential information. 5.4. Both during the period of Executive's employment by Company or AGC and thereafter, Executive shall assist Company or AGC and their nominees, at any time, in the protection of Company's and AGC'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 AGC or their 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. 5.5. Executive acknowledges that money damages would not be sufficient remedy for any breach of this Article 5 by Executive, and Company or AGC shall be entitled to enforce the provisions of this Article 5 by terminating any payments then owing to Executive under this Agreement and/or to specific performance and injunctive relief as remedies for such breach or any threatened breach. Such remedies shall not be deemed the exclusive remedies for a breach of this Article 5, but shall be in addition to all remedies available at law or in equity to Company or AGC, including the recovery of damages from Executive and his agents involved in such breach. 6. Non-Competition and Non-Solicitation Obligations: 6.1. As part of the consideration for the compensation and benefits to be paid to Executive hereunder; to protect the trade secrets and confidential information of Company or AGC or their subsidiaries or affiliates that have been and will in the future be disclosed or entrusted to Executive, the business good will of Company or AGC or their subsidiaries or affiliates that has been and will in the future be developed in Executive, or the business opportunities that have been and will in the future be disclosed or entrusted to Executive by Company or AGC or their subsidiaries or affiliates; and as an additional incentive for Company and AGC to enter into this Agreement, Executive agrees to the non-competition obligations hereunder: Executive shall not, anywhere in the United States or any other country in which Company (or the AGC company for whom Executive may be working at the time of the termination of the employment relationship) is offering financial services as of the date of the termination of the employment relationship, directly or indirectly for himself or for others, (i) in any manner compete with Company or any subsidiary or affiliate of AGC by whom Executive was employed at any time during the twelve months preceding the termination of the employment relationship, (ii) solicit or attempt to convert to other financial service companies providing the same or similar products or services provided by Company or AGC, any customers or policyholders of Company or AGC; or (iii) solicit for employment or employ any employee of Company or AGC. Except as provided in Article 8, these obligations owed by Executive to Company and AGC shall extend throughout the Term of this Agreement and, except as otherwise provided in Sections 3.4 or 3.5, for a period of two (2) years following termination of the employment relationship for whatever reason. - Page 11 - 12 6.2. Executive understands that the foregoing restrictions may limit Executive's ability to engage in certain businesses in the areas specified above during the period provided for above, but acknowledges that Executive will receive sufficiently high remuneration and other benefits under this Agreement to justify such restriction. Executive acknowledges that money damages would not be sufficient remedy for any breach of this Article 6 by Executive, and Company or AGC shall be entitled to enforce the provisions of this Article 6 by terminating any payments then owing to Executive under this Agreement and/or to specific performance and injunctive relief as remedies for such breach or any threatened breach. Such remedies shall not be deemed the exclusive remedies for a breach of this Article 6, but shall be in addition to all remedies available at law or in equity to Company or AGC, including, without limitation, the recovery of damages from Executive and Executive's agents involved in such breach. 6.3. It is expressly understood and agreed that Company and Executive consider the restrictions contained in this Article 6 to be reasonable and necessary to protect the trade secrets and confidential information of Company or AGC or their subsidiaries or affiliates, the business good will of Company or AGC or their subsidiaries or affiliates developed in Executive, and/or the business opportunities disclosed or entrusted to Executive by Company or AGC or their subsidiaries or affiliates. Nevertheless, if any of the aforesaid restrictions are found to be unreasonable, or overly broad as to geographic area or time, or otherwise unenforceable, the parties intend for the restrictions therein set forth to be modified so as to be reasonable and enforceable and, as so modified, to be fully enforced. 6.4. These duties and obligations of Executive specified in this Article 6 are not exclusive. Executive owes Company and AGC the duties and obligations agreed to elsewhere in this Agreement and as are imposed by the law, e.g., the duty to refrain from tortiously interfering with Company's and AGC's contractual and business relationships with others. 7. Condition Subsequent, Effective Time, and Termination of February 8, 1994 Employment Agreement with Company: 7.1. Notwithstanding any provision in this Agreement to the contrary, it is a condition subsequent to the execution and delivery of this Agreement that the Merger, as such term is defined in the Merger Agreement, must be consummated. If the Merger Agreement is terminated without consummation of the Merger, then this Agreement shall be of no further force and effect and shall be void ab initio. 7.2. This Agreement shall be effective as of forty-eight (48) hours after the Effective Time of the Merger, which term shall have the same meaning as assigned to such term in the Merger Agreement. 7.3. Executive waives any claim he may have against Company under the February 8, 1994 Employment Agreement, including but not limited to claims for future salary, control termination payments, severance allowance, or bonuses. As of forty-eight hours after the Effective Time, any and all prior or existing employment agreements between Executive and Company shall - Page 12 - 13 be canceled and terminated, including the February 8, 1994 Employment Agreement, and are replaced and superseded by this Agreement and the accompanying Severance Agreement. 8. Conversion of employment relationship to at-will and release of certain duties and obligations upon a Change of Control as specified in Severance Agreement: 8.1. Upon the occurrence of a Change of Control as specified in the Severance Agreement, the employment relationship under this Agreement shall immediately automatically convert to an at-will relationship terminable by either Company or AGC or Executive at any time for any reason whatsoever, with or without cause, and Executive is released from his post-employment obligations specified in Article 6. The economic effect of any subsequent termination of the employment relationship by Company or AGC without cause shall be governed by Section 4.1. The economic effect of a subsequent termination of the employment relationship by virtue of Executive's death or disability shall continue to be governed by Sections 3.2 or 3.3, respectively, through the remainder of what was the Term of the Agreement. The economic effect of a subsequent termination of the employment relationship for cause by Company or AGC shall continue to be governed by Section 3.1. The economic effect of any subsequent termination of the employment relationship by Executive for any reason shall be governed by Section 4.1. In all cases, Executive shall also be entitled to the benefits of the Severance Agreement, if applicable; however, in no event is it intended that a termination of the employment relationship following a Change of Control will result in Executive receiving both post-employment payments under this Agreement and under the severance Agreement. If at the time of a Change of Control of American General Corporation it owns none of the stock of Company and this Agreement has not been assigned to American General Corporation, this Section 8.1 shall have no application. 9. Miscellaneous: 9.1. For purposes of this Agreement the terms "affiliates" or "affiliated" means an entity who directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with AGC or Company. 9.2. American General Corporation shall be a third party beneficiary of Executive's obligations under this Agreement and is delegated certain authority under this Agreement. Prior to this Agreement taking effect as specified in Section 7.2, Company and Executive shall not amend this Agreement without the express, prior written consent of American General Corporation. 9.3. For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: - Page 13 - 14 If to Company, to: Western National Corporation 5555 San Felipe, Suite 900 Houston, Texas 77098 Attention: Chief Executive Officer With a copy to: American General Corporation 2929 Allen Parkway Houston, Texas 77019 Attention: Corporate Secretary If to Executive, to John A. Graf 6340 Brompton Houston, Texas 77005 Either Company or AGC or Executive may furnish a change of address to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 9.4. No failure by either party hereto at any time to give notice of any breach by the other party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9.5. (a) Except for equitable relief as specified in Section 9.6, 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 Executive, Company, AGC 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. (b) 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. 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 - Page 14 - 15 hereby waiving their right, if any, to recover treble, exemplary, or punitive damages in connection with any such claims. If any party to this Agreement institutes arbitration to enforce the terms of this Agreement, the party who prevails in such arbitration, whether plaintiff or defendant, in addition to the remedy or relief obtained in such arbitration proceeding shall be entitled to recover its, his, or her expenses incurred in connection with such arbitration proceeding, including, without limitation, arbitrators and attorneys fees, and the arbitrators are authorized to so award such costs and fees. (c) The arbitration may be initiated by any party by providing to the other parties a written notice of arbitration specifying the claims. Within 30 days of the notice of initiation of the arbitration procedure, (1) Executive shall denominate one arbitrator and (2) Company (together with AGC, if appropriate) shall denominate one arbitrator. The two arbitrators shall select a third arbitrator failing agreement on which within 60 days of the original notice, either Executive or Company (or AGC, or both Company and AGC, as applicable) 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. (d) 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. 9.6. In the event of a breach or threatened breach by Executive of any of the covenants set forth in Sections 5 and 6 hereof, Company or AGC 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. With respect to any such action, Executive hereby irrevocably submits to the non-exclusive jurisdiction of any Federal or State court sitting in the City of Houston, Texas, and agrees that process in any such action shall be valid and effective for all purposes if served upon in accordance with the notice provisions of Section 9.3 hereof. 9.7. This Agreement shall be binding upon and inure to the benefit of Company and any other person, association, or entity which may hereafter acquire or succeed to all or substantially all of the business or assets of Company by any means whether direct or indirect, by purchase, merger, - Page 15 - 16 consolidation, or otherwise. Executive's rights and obligations under this Agreement are personal and such rights, benefits, and obligations of Executive shall not be voluntarily or involuntarily assigned, alienated, or transferred, whether by operation of law or otherwise, without the prior written consent of Company. 9.8. It is a desire and intent of the parties that the terms, provisions, covenants and remedies contained in this Agreement shall be enforceable to the fullest extent permitted by law. If any such term, provision, covenant, or remedy of this Agreement or the application thereof to any person, association, or entity or circumstances shall, to any extent, be construed to be invalid or unenforceable in whole or in part, then such term, provision, covenant, or remedy shall be construed in a manner so as to permit its enforceability under the applicable law to the fullest extent permitted by law. In any case, the remaining provisions of this Agreement or the application thereof to any person, association, or entity or circumstances other than those to which they have been held invalid or unenforceable, shall remain in full force and effect. 9.9. Each party to this Agreement acknowledges that no representation, inducement, promise, or agreement, oral or written, has been made by either party with respect to such subject matters, which is not embodied herein, and that no agreement, statement, or promise relating to the employment of Executive by Company or AGC that is not contained in this Agreement shall be valid or binding. Except as provided in written company policies promulgated by Company or AGC dealing with issues such as securities trading, business ethics, governmental affairs and political contributions, consulting fees, commissions or other payments, compliance with law, investments and outside business interests as officers and executives, reporting responsibilities, and administrative compliance, and the written benefits, plans, and programs, if any, applicable to Executive, this Agreement and the accompanying Severance Agreement constitute the entire agreement of the parties with regard to such subject matters, and contains all of the covenants, promises, representations, warranties, and agreements between the parties with respect to Executive's employment relationship with Company or AGC and the term and termination of such relationship, and replaces and merges previous agreements and discussions pertaining to the employment relationship between Company or AGC and Executive. Any modification of this Agreement will be effective only if it is in writing and signed by each party whose rights hereunder are affected thereby. - Page 16 - 17 IN WITNESS WHEREOF, Company and Executive have duly executed this Agreement in multiple originals to be effective as provided herein. WESTERN NATIONAL CORPORATION By: /S/ RICHARD W. SCOTT Name: Richard W. Scott Title: Vice Chairman This 11th day of September, 1997 /S/ JOHN A . GRAF JOHN A. GRAF This 11th day of September, 1997 - Page 17 - EX-10.26 11 EMPLOYMENT AGREEMENT - RICHARD W. SCOTT 1 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into between American General Corporation, a Delaware corporation ("Company") and Richard W. Scott ("Executive"), to be effective as of the Effective Time as hereinafter defined. WHEREAS, Western National Corporation ("Western") and Executive have entered into an Employment Agreement dated February 8, 1994, an Amendment to Employment Agreement dated December 2, 1994, and a further Amendment to Employment Agreement dated May 14, 1997 (the "February 8, 1994 Employment Agreement"). WHEREAS, contemporaneously herewith, Company, which presently owns certain of the stock of Western, and a subsidiary of Company, have entered into an Agreement and Plan of Merger ("Merger Agreement") with Western pursuant to which Company shall acquire all or substantially all of the stock of Western through merger (the "Merger"). WHEREAS, it is an important element of Company's decision to acquire the stock of Western through such Merger that Executive become employed by Company and remain employed by Company and provide his personal services to Company in connection with the operation of Company's and Western's business, the creation and development of Company's and Western's products and services, and the marketing of Company's and Western's products and services for at least three years from the date of such acquisition. WHEREAS, during the three year Term of this Agreement, Company shall disclose to Executive, or place Executive in a position to have access to or develop, trade secrets or confidential information of Company or Western or other of Company's subsidiaries or affiliates or their customers or clients; and/or shall entrust Executive with business opportunities of Company or Western or other of Company's subsidiaries or affiliates; and/or shall place Executive in a position to develop business good will on behalf of Company or Western or other of Company's subsidiaries or affiliates, and there is a need and desire on the part of Company and Executive to specify the parties' rights and obligations with respect to the ownership and protection of such information, opportunities and goodwill. WHEREAS, Company is desirous of employing Executive pursuant to the terms and conditions and for the consideration set forth in this Agreement, and Executive is desirous of continuing in the employ of Company pursuant to such terms and conditions and for such consideration, subject to the condition subsequent that the contemplated Merger shall be consummated. WHEREAS, contemporaneously herewith, Company and Executive shall also enter into a Severance Agreement ("Severance Agreement"). The terms and conditions of such Severance Agreement are incorporated herein by reference. - Page 1 - 2 NOW, THEREFORE, for and in consideration of the mutual promises, covenants, and obligations contained herein, Company and Executive agree as follows: 1. Employment and Duties: 1.1. Because of the important nature of Executive's personal services with respect to the operation of Company's business, the creation and development of Company's products and services, and the marketing of Company's products and services, Company agrees to employ Executive, and Executive agrees to be employed by Company, beginning as of forty eight hours after the Effective Time as defined below and continuing thereafter for a Term of three (3) years (the "Term"), subject to the terms and conditions of this Agreement. 1.2. Commencing as of forty-eight hours after the Effective Time, Company shall employ Executive in a senior executive or officer capacity with Company or one of its significant subsidiaries with duties consonant with senior executive status, but Company may assign Executive to different executive positions and modify Executive's duties and responsibilities. Company may also assign Executive to a position in which he performs services for other of Company's subsidiaries or affiliates. 1.3. Executive agrees to serve in the assigned position and to perform diligently and to the best of Executive's abilities the duties and services appertaining to such position as determined by Company, as well as such additional or different duties and services appropriate to such position which Executive from time to time may be reasonably directed to perform by Company. Executive shall at all times comply with and be subject to such policies and procedures as Company may establish from time to time. Executive shall, during the period of Executive's employment by Company, devote Executive's full business time, attention, energy, and best efforts to the business and affairs of Company. For purposes of this Agreement, full business time shall mean the normal work week for individuals in comparable executive positions with Company. Executive may not engage, directly or indirectly, in any other business, investment, or activity that interferes with Executive's performance of Executive's duties hereunder, is contrary to the interests of Company, or requires any significant portion of Executive's business time. 1.4. Executive acknowledges and agrees that at all times during the employment relationship Executive owes fiduciary duties to Company, including but not limited to the fiduciary duties of the highest loyalty, fidelity and allegiance to act at all times in the best interests of Company, to make full disclosure to Company of all information that pertains to Company's business and interests, to do no act which would injure Company's business, its interests, or its reputation, and to refrain from using for Executive's own benefit or for the benefit of others any information or opportunities pertaining to Company's business or interests that are entrusted to Executive or that he learned while employed by Company. Executive acknowledges and agrees that upon termination of the employment relationship, Executive shall continue to refrain from using for his own benefit or the benefit of others any information or opportunities pertaining to Company's business or interests that were entrusted to Executive during the employment relationship or that he learned while employed by Company. Executive agrees that while employed by Company and thereafter he - Page 2 - 3 shall not knowingly take any action which interferes with the external relationships between Company and third parties. 1.5. It is agreed that any direct or indirect interest in, connection with, or benefit from any outside activities, particularly commercial activities, which interest might in any way adversely affect Company, or any of its affiliates, involves a possible conflict of interest. In keeping with Executive's fiduciary duties to Company, Executive agrees that during the employment relationship Executive shall not knowingly become involved in a conflict of interest with Company or its affiliates, or upon discovery thereof, allow such a conflict to continue. Moreover, Executive agrees that Executive shall disclose to Company's President any facts which might involve such a conflict of interest that has not been approved by Company's President. Company and Executive recognize that it is impossible to provide an exhaustive list of actions or interests which constitute a "conflict of interest." Moreover, Company and Executive recognize there are many borderline situations. In some instances, full disclosure of facts by Executive to Company's President may be all that is necessary to enable Company or its affiliates to protect their interests. In others, if no improper motivation appears to exist and the interests of Company or their affiliates have not suffered, prompt elimination of the outside interest will suffice. In still others, it may be necessary for Company to terminate the employment relationship. Company and Executive agree that Company's determination as to whether a conflict of interest exists shall be conclusive. Company reserves the right to take such action as, in its judgment, will end the conflict. 2. Compensation and Benefits: 2.1. As compensation for services rendered under this Agreement, Executive shall receive a base salary of Three Hundred Thousand ($300,000) per year ("Base Annual Salary"), payable in semi-monthly installments in accordance with Company's standard payroll practice for its salaried employees. Executive's Base Annual Salary may be increased from time to time based upon his performance. The amounts of any such salary increases shall be approved by the Personnel Committee of Company's Board of Directors. 2.2. The parties recognize that Western will pay Executive his performance bonus for the calendar year 1997 prior to the consummation of the Merger. In addition to Base Annual Salary, Executive shall receive for the calendar years 1998, 1999 and 2000, an annual performance bonus in such amount as may be determined by the Personnel Committee of Company's Board of Directors in its sole discretion for each year during the Term of this Agreement. Such annual bonus shall be paid in the March/April time frame of the following year, with the first such payment in the March/April time frame of 1999 for the calendar year 1998. It is understood and agreed that the amount of any such bonus shall be determined based upon a consideration of both (i) the progress and success of the Company as a whole, and (ii) the personal performance and contributions made to the success of the Company by Executive. Finally, it is understood and agreed that there may be years in which the Personnel Committee determines that no bonus shall be paid. - Page 3 - 4 2.3. In the event that, in connection with the Merger, the acceleration of the vesting of Executive's stock options or restricted stock in Western, or any payment, award or distribution under the February 8, 1994 Employment Agreement, or any payment, award or distribution under this Agreement to or for the benefit of Executive (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by Company and Executive) within ten days of the receipt of such claim. Company shall notify Executive in writing at least ten days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If Company decides to contest such claim, Executive shall cooperate fully with Company in such action; provided, however, Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by Company with respect to such claim, Executive shall promptly pay such refund to Company. If Company fails to timely notify Executive whether it will contest such claim or Company determines not to contest such claim, then Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 2.4. While employed by Company, Executive shall be allowed to participate, on the same basis generally as other executives of Company, in all general executive benefit plans and programs, including improvements or modifications of the same, which as of the Effective Time or thereafter are made available by Company to other of Company's comparable executives. Such benefits plans, and programs may include, without limitation, medical, health, and dental care, life insurance, disability protection, and pension plans. Nothing in this Agreement is to be construed or interpreted to provide greater rights, participation, coverage, or benefits under such benefit plans or programs than provided to similarly situated executives pursuant to the terms and conditions of such benefit plans and programs. 2.5. Company shall not by reason of this Article 2 be obligated to institute, maintain, or refrain from changing, amending, or discontinuing, any of its medical, health, dental, insurance, disability or other benefit plans or programs, so long as such actions are similarly applicable to covered employees generally. Unless specifically provided for in a written plan document adopted by the Board of Directors of Company, none of the benefits or arrangements described in this Article - Page 4 - 5 2 shall be secured or funded in any way, and each shall instead constitute an unfunded and unsecured promise to pay money in the future exclusively from the general assets of Company. 2.6. Company may withhold from any compensation, benefits, or amounts payable under this Agreement all federal, state, city, or other taxes as may be required pursuant to any law or governmental regulation or ruling. 3. Termination of employment prior to expiration of Term and effects of such termination: 3.1. [A] Notwithstanding any other provisions of this Agreement, Company shall have the right to terminate Executive's employment under this Agreement at any time prior to the expiration of the Term for cause upon the determination by Company's Board of Directors or Company's Executive Termination Review Committee that cause exists for the termination of the employment relationship. As used in this Section 3.1, the term cause shall mean [1] misuse, misappropriation or embezzlement by Executive of funds or property belonging to Company, or his use of alcohol or drugs which interferes with the performance of his duties hereunder or which compromises the integrity and reputation of Company, its employees, or its products or services; [2] Executive's conviction by a court of law, or admission that he is guilty, of a felony or other crime involving moral turpitude; [3] Executive's absence from his employment other than as a result of a disability as defined in Section 3.3 hereof, for whatever cause, for a period of more than one (1) month, without prior written consent from Company; [4] Executive becomes incompetent or is reasonably unable to undertake and discharge the duties and responsibilities of his position, other than as a result of a disability as defined in Section 3.3 hereof; or [5] Executive's breach of any provisions of this Agreement, or his gross negligence, willful malfeasance or fraud or dishonesty in performance of his services on behalf of Company pursuant to this Agreement. It is expressly acknowledged and agreed that the decision as to whether cause exists for termination of the employment relationship by Company is delegated to Company's Board of Directors or Company's Executive Termination Review Committee for determination, which decision shall be made in good faith. [B] Upon a termination of the employment relationship for cause by Company prior to expiration of the Term pursuant to this Section, Executive shall be entitled to receive as a full and final settlement of all obligations of Company hereunder his pro rata Base Annual Salary through the date of such termination, but any and all other compensation to which Executive is entitled under this Agreement and any and all future benefits for which Executive is eligible under this Agreement shall cease and terminate, including but not limited to, Executive shall not be entitled to any bonuses or other incentive compensation, if any, not yet paid to Executive at the date of such termination. Executive shall not be entitled to any severance payment. Executive's rights under this Section are Executive's sole and exclusive rights against Company or its affiliates, and Company's sole and exclusive liability to Executive under this Agreement, in contract, tort, or otherwise, for any termination for cause of the employment relationship by Company. Executive covenants not to lodge any claim, demand, or cause of action against Company based on termination for cause of the employment relationship for any monies allegedly due under this Agreement other than those specified in this Section. If Executive breaches this covenant, Company shall be entitled to recover - Page 5 - 6 from Executive all sums expended by Company (including costs and attorneys fees) in connection with such suit, claim, demand, or cause of action. 3.2. The employment relationship under this Agreement shall terminate automatically upon Executive's death. Upon a termination of the employment relationship prior to expiration of the Term because of Executive's death, Executive's administrators, heirs or legatees shall be entitled to receive Executive's then-current Base Annual Salary as if Executive's employment (which shall cease on the date of such death) had continued for the full Term of this Agreement. Company may, at its option, pay such Base Annual Salary in semi- monthly installments or in a lump sum discounted to present value at the discount rate then available to Company through its lenders. Executive's administrators, heirs or legatees shall also be entitled to any individual bonuses or any individual incentive compensation awarded but not yet paid to Executive at the date of such termination but Executive's administrators, heirs or legatees shall not be entitled to any future individual bonuses or any individual incentive compensation payments not yet awarded (whether or not allegedly accrued) as of the date of such termination. 3.3. The employment relationship under this Agreement shall terminate automatically upon Executive becoming permanently and totally unable to perform Executive's duties for Company as a result of any medically determinable physical or mental impairment as supported by a written medical opinion to the foregoing effect by a physician selected by Company. Upon such termination of the employment relationship, Executive shall be paid his pro rata Base Annual Salary through the date of such termination and Executive shall thereafter be paid sixty (60%) of his then-current Base Annual Salary on a semi-monthly basis through the Term of this Agreement as if the employment relationship had not terminated, reduced by any benefits he may receive under Company's disability benefit plans. Executive shall also be entitled to any individual bonuses or any individual incentive compensation awarded but not yet paid to Executive at the date of such termination but Executive shall not be entitled to any future individual bonuses or any individual incentive compensation payments not yet awarded (whether or not allegedly accrued) as of the date of such termination. For purposes of this Section, disability shall not include disabilities arising from (a) chronic use of intoxicants, drugs or narcotics, (b) intentionally self-inflicted injury or intentionally self-induced sickness, or (c) a proven unlawful act or enterprise on the part of Executive. 3.4. [A] Notwithstanding any other provisions of this Agreement, Company shall have the right to terminate 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 Company's Board of Directors or Company's Executive Termination Review Committee. Any termination of the employment relationship by Company prior to the expiration of the Term other than a termination under Section 3.1 for cause shall be deemed to be a termination without cause pursuant to this Section 3.4. - Page 6 - 7 [B] If Company terminates the employment relationship without cause pursuant to this Section 3.4, Executive's post-employment non-competition obligation specified in Section 6.1(i) shall extend only to the date upon which the Term of this Agreement would have otherwise expired. [C] Upon termination of the employment relationship by Company prior to expiration of the Term pursuant to this Section 3.4, Executive shall be entitled, in consideration of Executive's continuing obligations hereunder after such termination (including, without limitation, Executive's non-competition obligations), to receive his then-current Base Annual Salary as if Executive's employment (which shall cease on the date of such termination) had continued for the full Term of this Agreement. Company may, at its option, pay such Base Annual Salary in semi-monthly installments or in a lump sum discounted to present value at the discount rate then available to Company through its lenders. Provided that Executive complies with his continuing obligations hereunder after such termination, Executive shall also be entitled to performance bonuses for each of the calendar years 1998, 1999 and 2000 as follows: As to the bonus for calendar year 1998, if such termination of employment occurs before Company's Personnel Committee awards a bonus for calendar year 1998, the bonus for calendar year 1998 shall be equal to the bonus paid by Company (or Western) to Executive for the calendar year 1997. As to the bonus for calendar year 1999, if such termination of employment occurs before Company's Personnel Committee awards a bonus for calendar year 1999, the bonus for calendar year 1999 shall be equal to the average of the bonuses paid by Company (or Western) to Executive for calendar years 1997 and 1998. As to the bonus for calendar year 2000, if such termination of the employment relationship occurs at any time prior to the end of the Term, the bonus for calendar year 2000 shall be equal to the average of the bonuses paid by Company (or Western) to Executive for the calendar years 1997, 1998 and 1999. [D] Executive shall not be under any duty or obligation to seek or accept other employment following such termination of the employment relationship and, subject to Executive complying with his continuing obligations (including non-competition obligations), the amounts due Executive hereunder shall not be reduced or suspended if Executive accepts subsequent employment. Executive's rights under this Section 3.4 are Executive's sole and exclusive rights against Company, and Company's sole and exclusive liability to Executive under this Agreement, in contract, tort, or otherwise, for such termination of the employment relationship by Company. Executive covenants not to lodge any claim, demand, or cause of action against Company based on such termination of the employment relationship by Company for any monies allegedly due under this Agreement other than those specified in this Section 3.4. If Executive breaches this covenant, Company shall be entitled to recover from Executive all sums expended by Company (including costs and attorneys fees) in connection with such suit, claim, demand, or cause of action. 3.5. [A] Executive shall have the right to terminate the employment relationship during its Term only for cause, which shall consist only of a material breach by Company of any material provision of this Agreement which remains uncorrected for thirty (30) days following written notice of such breach by Executive to Company. [B] If Executive terminates the employment relationship for cause pursuant to this Section 3.5, Executive's post-employment non-competition obligation specified in Section 6.1(i) shall extend only to the date upon which the Term of this Agreement would have otherwise expired. - Page 7 - 8 [C] Upon termination of the employment relationship by Executive for cause prior to expiration of the Term pursuant to this Section 3.5, Executive shall be entitled, in consideration of Executive's continuing obligations hereunder after such termination (including, without limitation, Executive's non-competition obligations), to receive his Base Annual Salary as if Executive's employment (which shall cease on the date of such termination) had continued for the full Term of this Agreement. Company may, at its option, pay such Base Annual Salary in semi-monthly installments or in a lump sum discounted to present value at the discount rate then available to Company through its lenders. Executive shall be entitled to bonuses or other incentive compensation, if any, awarded but not yet paid as of the date of such termination. Provided that Executive complies with his continuing obligations hereunder after such termination, Executive shall also be entitled to performance bonuses for each of the calendar years 1998, 1999 and 2000, even if no such bonus had been awarded as of the date of such termination, as follows: As to the bonus for calendar year 1998, if such termination of employment occurs before Company's Personnel Committee awards a bonus for calendar year 1998, the bonus for calendar year 1998 shall be equal to the bonus paid by Company (or Western) to Executive for the calendar year 1997. As to the bonus for calendar year 1999, if such termination of employment occurs before Company's Personnel Committee awards a bonus for calendar year 1999, the bonus for calendar year 1999 shall be equal to the average of the bonuses paid by Company (or Western) to Executive for calendar years 1997 and 1998. As to the bonus for calendar year 2000, if such termination of the employment relationship occurs at any time prior to the end of the Term, the bonus for calendar year 2000 shall be equal to the average of the bonuses paid by Company (or Western) to Executive for the calendar years 1997, 1998 and 1999. [D] Executive shall not be under any duty or obligation to seek or accept other employment following such termination of the employment relationship and, subject to Executive complying with his continuing obligations (including non-competition obligations), the amounts due Executive hereunder shall not be reduced or suspended if Executive accepts subsequent employment. Executive's rights under this Section 3.5 are Executive's sole and exclusive rights against Company, and Company's sole and exclusive liability to Executive under this Agreement, in contract, tort, or otherwise, for any actions or inactions giving rise to such termination of the employment relationship for cause by Executive. Executive covenants not to lodge any claim, demand, or cause of action against Company based on such termination of the employment relationship for cause by Executive for any monies allegedly due under this Agreement other than those specified in this Section 3.5. If Executive breaches this covenant, Company shall be entitled to recover from Executive all sums expended by Company (including costs and attorneys fees) in connection with such suit, claim, demand, or cause of action. 3.6. Termination of the employment relationship shall not terminate those obligations imposed by this Agreement which are continuing in nature, including, without limitation, Executive's continuing obligations of confidence, Executive's continuing obligations with respect to business opportunities that had been entrusted to Executive by Company during the employment relationship, and Executive's obligations under Articles 5 and 6. - Page 8 - 9 4. Continuation of Employment beyond Term; Termination and Effects of Termination: 4.1. Should Executive remain employed by Company beyond the expiration of the Term, such employment shall automatically convert to an at-will relationship terminable at any time by either Company or Executive for any reason whatsoever, with or without cause. Upon such termination of the employment relationship by either Company or Executive for any reason whatsoever, all future compensation to which Executive is entitled and all future benefits for which Executive is eligible shall cease and terminate. Executive shall be entitled to pro rata salary through the date of such termination. Executive shall also be entitled to bonuses or other incentive compensation, if any, awarded but not yet paid as of the date of such termination, but Executive shall not be entitled to any future individual bonuses or any individual incentive compensation payments not yet awarded (whether or not allegedly accrued) as of the date of such termination. 5. Ownership and Protection of Information; Copyrights: 5.1. All information, ideas, concepts, improvements, discoveries, and inventions, whether patentable or not, and all expressions of ideas, which are created, conceived, made, developed or acquired by Executive, individually or in conjunction with others, during Executive's employment by Company (whether during business hours or otherwise and whether on Company's premises or otherwise), whether tangible or intangible, which relate to Company's business, products or services (including, without limitation, all such information relating to corporate opportunities, insurance or annuity products, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of customers or their requirements, the identity of key contacts within the customer's organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names, and marks) shall be disclosed to Company. Executive acknowledges that he has heretofore disclosed all such information, ideas, concepts, improvements, discoveries, and inventions, as well as all expressions of ideas, to Company. 5.2. All such information, ideas, concepts, improvements, discoveries, and inventions identified in Section 5.1 are and shall be the sole and exclusive property of Company. Moreover, if, during Executive's employment by Company, Executive creates any work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as videotapes, written presentations, or acquisitions, computer programs, E-mail, voicemail, electronic databases, drawings, maps, architectural renditions, models, manuals, brochures, or the like) relating to Company's business, products, or services, whether such work is created solely by Executive or jointly with others (whether during business hours or otherwise and whether on Company's premises or otherwise), Company, shall be deemed the author of such work if the work is prepared by Executive in the scope of Executive's employment; or, if the work is not prepared by Executive within the scope of Executive's employment but is specially ordered by Company as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, or as an instructional text, then the work shall be considered to be work made for hire and Company, shall be the author of the work. If such work relating to Company's business, products, or services is neither prepared by Executive within the scope of - Page 9 - 10 Executive's employment nor a work specially ordered that is deemed to be a work made for hire, then Executive hereby agrees to assign, and by these presents does assign, to Company all of Executive's worldwide right, title, and interest in and to such work and all rights of copyright therein. Additionally, all documents drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, E-mail, voice mail, electronic databases, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries, inventions and/or copyrightable expressions are and shall be the sole and exclusive property of Company. Executive acknowledges that Company is the owner of all such information, ideas, concepts, improvements, discoveries, inventions and/or copyrightable expressions that he heretofore created, conceived, made, developed or acquired while employed by Company. 5.3. Executive will not, at any time during or after Executive's employment by Company, make any unauthorized disclosure of any confidential business information or trade secrets of Company, or make any use thereof, except in the carrying out of Executive's employment responsibilities hereunder. As a result of Executive's employment by Company, Executive shall also from time to time have access to, or knowledge of, confidential business information or trade secrets of third parties, such as customers, suppliers, partners, joint venturers, and the like, of Company, Executive also agrees to preserve and protect the confidentiality of such third party confidential information and trade secrets to the same extent, and on the same basis, as Company's confidential business information and trade secrets. Upon termination of the employment relationship for any reason, Executive promptly shall deliver to Company all documents and things containing Company trade secrets or confidential information. Executive may disclose those aspects of Company's confidential information as Executive has received the written advice of counsel that such disclosure thereof is necessary under applicable federal, state, local, or foreign law or other regulations applicable to Executive (including, without limitation, any confidential information that Executive is legally compelled to disclose as a result of depositions, interrogatories, request for documents, subpoenas, civil investigative demands, or similar processes), provided, however, that Executive has first provided Company with prompt prior written notice of such requirement so that Company may seek a protective order or other appropriate remedy and/or waive compliance with the terms of this Agreement. In the event that such protective order or other remedy is not obtained, or that Company does not waive compliance with the provisions hereof, Executive agrees to furnish only that portion of Company's confidential information which Executive is advised in writing by his counsel is legally required to be disclosed and to exercise all reasonable efforts to obtain assurance that confidential treatment will be accorded such confidential information. 5.4. Both during the period of Executive's employment by Company and thereafter, Executive shall assist Company or its nominees, at any time, in the protection of 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. - Page 10 - 11 5.5. Executive acknowledges that money damages would not be sufficient remedy for any breach of this Article 5 by Executive, and Company shall be entitled to enforce the provisions of this Article 5 by terminating any payments then owing to Executive under this Agreement and/or to specific performance and injunctive relief as remedies for such breach or any threatened breach. Such remedies shall not be deemed the exclusive remedies for a breach of this Article 5, but shall be in addition to all remedies available at law or in equity to Company, including the recovery of damages from Executive and his agents involved in such breach. 6. Non-Competition and Non-Solicitation Obligations: 6.1. As part of the consideration for the compensation and benefits to be paid to Executive hereunder; to protect the trade secrets and confidential information of Company or its subsidiaries or affiliates or their customers or clients that have been and will in the future be disclosed or entrusted to Executive, the business good will of Company or its subsidiaries or affiliates that has been and will in the future be developed in Executive, or the business opportunities that have been and will in the future be disclosed or entrusted to Executive by Company or its subsidiaries or affiliates; and as an additional incentive for Company to enter into this Agreement, Executive agrees to the non-competition obligations hereunder: Executive shall not, anywhere in the United States or any other country in which Company is offering financial services as of the date of the termination of the employment relationship, directly or indirectly for himself or for others, (i) in any manner compete with Company or any subsidiary or affiliate of Company by whom Executive was employed at any time during the twelve months preceding the termination of the employment relationship, (ii) solicit or attempt to convert to other financial service companies providing the same or similar products or services provided by Company, any customers or policyholders of Company or its subsidiaries or affiliates; or (iii) solicit for employment or employ any employee of Company. Except as provided in Article 8, these obligations owed by Executive to Company shall extend throughout the Term of this Agreement and, except as otherwise provided in Sections 3.4 or 3.5, for a period of two (2) years following termination of the employment relationship for whatever reason. 6.2. Executive understands that the foregoing restrictions may limit Executive's ability to engage in certain businesses in the areas specified above during the period provided for above, but acknowledges that Executive will receive sufficiently high remuneration and other benefits under this Agreement to justify such restriction. Executive acknowledges that money damages would not be sufficient remedy for any breach of this Article 6 by Executive, and Company shall be entitled to enforce the provisions of this Article 6 by terminating any payments then owing to Executive under this Agreement and/or to specific performance and injunctive relief as remedies for such breach or any threatened breach. Such remedies shall not be deemed the exclusive remedies for a breach of this Article 6, but shall be in addition to all remedies available at law or in equity to Company, including, without limitation, the recovery of damages from Executive and Executive's agents involved in such breach. 6.3. It is expressly understood and agreed that Company and Executive consider the restrictions contained in this Article 6 to be reasonable and necessary to protect the trade secrets and confidential information of Company or its subsidiaries or affiliates, the business good will of - Page 11 - 12 Company or its subsidiaries or affiliates developed in Executive, and/or the business opportunities disclosed or entrusted to Executive by Company or its subsidiaries or affiliates. Nevertheless, if any of the aforesaid restrictions are found to be unreasonable, or overly broad as to geographic area or time, or otherwise unenforceable, the parties intend for the restrictions therein set forth to be modified so as to be reasonable and enforceable and, as so modified to be fully enforced. 6.4. These duties and obligations of Executive specified in this Article 6 are not exclusive. Executive owes Company the duties and obligations agreed to elsewhere in this Agreement and as are imposed by the law, e.g., the duty to refrain from tortiously interfering with Company's contractual and business relationships with others. 7. Condition Subsequent, Effective Time, and Termination of February 8, 1994 Employment Agreement with Western: 7.1. Notwithstanding any provision in this Agreement to the contrary, it is a condition subsequent to the execution and delivery of this Agreement that the Merger, as such term is defined in the Merger Agreement, must be consummated. If the Merger Agreement is terminated without consummation of the Merger, then this Agreement shall be of no further force and effect and shall be void ab initio. 7.2. This Agreement shall be effective as of forty-eight (48) hours after the Effective Time of the Merger, which term shall have the same meaning as assigned to such term in the Merger Agreement. 7.3. Executive waives any claim he may have against Western under the February 8, 1994 Employment Agreement, including but not limited to claims for future salary, control termination payments, severance allowance, or bonuses. As of forty eight hours after the Effective Time, any and all prior or existing employment agreements between Executive and Western shall be canceled and terminated, including the February 8, 1994 Employment Agreement, and are replaced and superseded by this Agreement and the accompanying Severance Agreement. 8. Conversion of employment relationship to at-will and release of certain duties and obligations upon a Change of Control as specified in Severance Agreement: 8.1. Upon the occurrence of a Change of Control as specified in the Severance Agreement, the employment relationship under this Agreement shall immediately automatically convert to an at-will relationship terminable by either Company or Executive at any time for any reason whatsoever, with or without cause, and Executive is released from his post- employment obligations specified in Article 6. The economic effect of any subsequent termination of the employment relationship by Company without cause shall be governed by Section 4.1. The economic effect of a subsequent termination of the employment relationship by virtue of Executive's death or disability shall continue to be governed by Sections 3.2 or 3.3, respectively, through the remainder of what was the Term of the Agreement. The economic effect of a subsequent termination of the employment relationship for cause by Company shall continue to be governed by Section 3.1. The economic effect of any subsequent termination of the employment relationship by Executive for any reason - Page 12 - 13 shall be governed by Section 4.1. In all cases, Executive shall also be entitled to the benefits of the Severance Agreement, if applicable; however, in no event is it intended that a termination of the employment relationship following a Change of Control will result in Executive receiving both post-employment payments under this Agreement and under the severance Agreement. 9. Miscellaneous: 9.1. For purposes of this Agreement the terms "affiliates" or "affiliated" means an entity who directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with Company. 9.2. Western is a third party beneficiary of this Agreement with respect to certain agreements specified herein that affect the February 8, 1994 Employment Agreement. 9.3. For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to Company: American General Corporation 2929 Allen Parkway Houston, Texas 77019 Attention: Corporate Secretary If to Executive, to Richard W. Scott 122 Paul Revere Houston, Texas 77024 Either Company or Executive may furnish a change of address to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 9.4. No failure by either party hereto at any time to give notice of any breach by the other party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9.5. (a) Except for equitable relief as specified in Section 9.6, 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 Executive, 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 - Page 13 - 14 proceeding shall be conducted in Houston, Texas. This agreement to arbitrate shall be enforceable in either federal or state court. (b) 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. 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. If any party to this Agreement institutes arbitration to enforce the terms of this Agreement, the party who prevails in such arbitration, whether plaintiff or defendant, in addition to the remedy or relief obtained in such arbitration proceeding shall be entitled to recover its, his, or her expenses incurred in connection with such arbitration proceeding, including, without limitation, arbitrators and attorneys fees, and the arbitrators are authorized to so award such costs and fees. (c) The arbitration may be initiated by any party by providing to the other parties a written notice of arbitration specifying the claims. Within 30 days of the notice of initiation of the arbitration procedure, (1) Executive shall denominate one arbitrator and (2) Company shall denominate one arbitrator. The two arbitrators shall select a third arbitrator failing agreement on which within 60 days of the original notice, either Executive or 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. (d) 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. - Page 14 - 15 9.6. In the event of a breach or threatened breach by Executive of any of the covenants set forth in Sections 5 and 6 hereof, 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. With respect to any such action, Executive hereby irrevocably submits to the non-exclusive jurisdiction of any Federal or State court sitting in the City of Houston, Texas, and agrees that process in any such action shall be valid and effective for all purposes if served upon in accordance with the notice provisions of Section 9.3 hereof. 9.7. This Agreement shall be binding upon and inure to the benefit of Company and any other person, association, or entity which may hereafter acquire or succeed to all or substantially all of the business or assets of Company by any means whether direct or indirect, by purchase, merger, consolidation, or otherwise. Executive's rights and obligations under this Agreement are personal and such rights, benefits, and obligations of Executive shall not be voluntarily or involuntarily assigned, alienated, or transferred, whether by operation of law or otherwise, without the prior written consent of Company. 9.8. It is a desire and intent of the parties that the terms, provisions, covenants and remedies contained in this Agreement shall be enforceable to the fullest extent permitted by law. If any such term, provision, covenant, or remedy of this Agreement or the application thereof to any person, association, or entity or circumstances shall, to any extent, be construed to be invalid or unenforceable in whole or in part, then such term, provision, covenant, or remedy shall be construed in a manner so as to permit its enforceability under the applicable law to the fullest extent permitted by law. In any case, the remaining provisions of this Agreement or the application thereof to any person, association, or entity or circumstances other than those to which they have been held invalid or unenforceable, shall remain in full force and effect. 9.9. Each party to this Agreement acknowledges that no representation, inducement, promise, or agreement, oral or written, has been made by either party with respect to such subject matters, which is not embodied herein, and that no agreement, statement, or promise relating to the employment of Executive by Company that is not contained in this Agreement shall be valid or binding. Except as provided in written company policies promulgated by Company dealing with issues such as securities trading, business ethics, governmental affairs and political contributions, consulting fees, commissions or other payments, compliance with law, investments and outside business interests as officers and executives, reporting responsibilities, and administrative compliance, and the written benefits, plans, and programs, if any, applicable to Executive, this Agreement and the accompanying Severance Agreement constitute the entire agreement of the parties with regard to such subject matters, and contains all of the covenants, promises, representations, warranties, and agreements between the parties with respect to Executive's employment relationship with Company and the term and termination of such relationship, and replaces and merges previous agreements and discussions pertaining to the employment relationship between Company and Executive. Any modification of this Agreement will be effective only if it is in writing and signed by each party whose rights hereunder are affected thereby. - Page 15 - 16 IN WITNESS WHEREOF, Company and Executive have duly executed this Agreement in multiple originals to be effective as provided herein. AMERICAN GENERAL CORPORATION By: /S/ ROBERT M. DEVLIN Name: Robert M. Devlin Title: Chairman and Chief Executive Officer This 11th day of September, 1997 /S/ RICHARD W. SCOTT RICHARD W. SCOTT This 11th day of September, 1997 - Page 16 - EX-10.32 12 FORM OF CHANGE IN CONTROL SEVERANCE AGREEMENT 1 (Form with Gross-Up) CHANGE IN CONTROL SEVERANCE AGREEMENT THIS Change in Control Severance Agreement ("Agreement") is made effective as of the 1st day of April, 2000 (the "Effective Date"), between American General Corporation, a Texas corporation having its principal place of business in Houston, Texas (the "Company" as hereinafter defined) and _________________ ("the Executive"). WHEREAS, the Company considers it essential to the best interests of its shareholders to foster the continued employment of key management personnel that are employed by the Company and/or its Affiliates; and WHEREAS, the Company's Board of Directors recognize that, as is the case of many publicly held corporations, the possibility of a change in control exists and that such possibility, and the uncertainty that it may engender among management, may result in the departure or distraction of management personnel to the detriment of the Company and its Affiliates and the Company's shareholders; and WHEREAS, the Company's Board of Directors has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's and its Affiliates' management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control. NOW, THEREFORE, for and in consideration of the premises and the respective covenants and obligations specified herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Executive agree as follows: 1. Defined terms: 1.1. "Additional Payment" shall have the meaning set forth in Section 4.7. 1.2. "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended from time to time. 2 1.3. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Securities Exchange Act of 1934, as amended from time to time. 1.4. "Board" means the Company's Board of Directors. 1.5. "Cause" for purposes of this Agreement means only the following actions or inactions: [i] a willful material misrepresentation by the Executive pertaining to the business or property of the Company or its Affiliates, [ii] misappropriation by the Executive of a material aspect of the business or property of the Company or its Affiliates, [iii] the Executive willfully causes material damage to the property or business of the Company or its Affiliates, [iv] willful gross neglect by the Executive to substantially perform the Executive's duties with the Company or its Affiliates (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 5.1), [v] the engaging by the Executive in willful gross misconduct resulting in demonstrable and material economic harm to the Company or its Affiliates, or [vi] the Executive's conviction of a felony that either involves moral turpitude or involves some aspect of the business or property of the Company or its Affiliates. 1.6. "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: [A] 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 C below; or [B] The following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: 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) 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 [C] 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 [D] 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 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. 3 4 1.7. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. 1.8. "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. 1.9. "Company" means American General Corporation, a Texas corporation, and, except in determining under Section 1.6 hereof whether any Change in Control has occurred, shall include any successor to American General Corporation's business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise. 1.10. "Date of Termination" shall have the meaning specified in Section 5.1. 1.11. "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 the 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 to the Company or its Affiliates, (iii) the Company shall have given the Executive a Notice of Termination based on 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. 1.12. "Good Reason" for termination of the Executive's employment by the Executive means the occurrence of any one or more of the following, without the Executive's express written consent, on or after any Change in Control, or during an 4 5 applicable Period of Anticipated Change in Control, but, in either case, only as specified below in Section 4.4: 1.12.1. A material reduction in the nature or scope of the Executive's authorities or duties from the Executive's authorities and duties either [i] immediately prior to the date on which a Change in Control occurs or [ii] immediately prior to a Period of Anticipated Change in Control during which a material reduction in the nature or scope of the Executive's authorities or duties occurs at the request of the Person causing the Company to be in such Period of Anticipated Change in Control, as the case may be. 1.12.2. A reduction in the Executive's annual base salary as in effect either [i] immediately prior to the date on which a Change in Control occurs or [ii] immediately prior to a Period of Anticipated Change in Control during which the Executive's annual base salary is reduced at the request of the Person causing the Company to be in such Period of Anticipated Change in Control, as the case may be. 1.12.3. A diminution in the Executive's eligibility to participate or level of participation in bonus, stock option, incentive award and other compensation plans which provide opportunities to receive compensation, from the greater of: (a) the opportunities provided by the Company (including its Affiliates) for other executives with the Company (including its Affiliates) with comparable duties or (b) the opportunities under any such plans under which the Executive was participating either [i] immediately prior to the date on which a Change in Control occurs or [ii] immediately prior to a Period of Anticipated Change in Control during which the Executive's eligibility or level of participation is diminished at the request of the Person causing the Company to be in such Period of Anticipated Change in Control, as the case may be. 1.12.4. A diminution in the Executive's benefits (including but not limited to pension, thrift, medical, dental, life insurance, long-term disability plans) and perquisites applicable to Executive, from the greater of: (a) the employee benefits and perquisites provided by the Company (including its Affiliates) to other executives with comparable duties with the Company (including its Affiliates) or (b) the employee benefits and perquisites to which the Executive was entitled either [i] immediately prior to the date on which a Change in Control occurs or [ii] immediately prior to a Period of Anticipated Change in Control during which the Executive's benefits are reduced at the request of 5 6 the Person causing the Company to be in such Period of Anticipated Change in Control, as the case may be. 1.12.5. A change in the location of the Executive's principal place of employment by the Company (or its Affiliates) by more than fifty (50) miles from the location where the Executive was principally employed either [i] immediately prior to the date on which a Change in Control occurs or [ii] immediately prior to a Period of Anticipated Change in Control during which there occurs the Executive's change of location at the request of the Person causing the Company to be in such Period of Anticipated Change in Control, as the case may be. 1.12.6. A determination by the Board that as a result of a Change in Control or the occurrence of an event that commences a Period of Anticipated Change in Control and a change in circumstances thereafter significantly affecting the Executive's position, the Executive is or shall be unable to exercise the authorities or duties attached to the Executive's position as in effect immediately prior to the date on which the Change in Control occurs or will occur. 1.13. "Notice of Termination" has the meaning specified in Section 5.1. 1.14. "Period of Anticipated Change in Control" shall have the following meaning for the purposes of this Agreement: the Company shall be deemed to be in a Period of Anticipated Change in Control during the time which commences when either [a] a Person has submitted a written offer to the Company which, if accepted by the Company, would result in an agreement the consummation of which would constitute a Change in Control and/or [b] the Company has entered into a written signed agreement with a Person the consummation of which would constitute a Change in Control. The Period of Anticipated Change in Control ends when the Company either rejects such written offer or terminates, cancels or consummates such agreement. There may be more than one period of time in which the Company is in a Period of Anticipated Change in Control. 1.15. "Person" has the meaning specified in Section 3(a)(9) of the Securities Exchange Act of 1934 (as amended from time to time) 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 6 7 owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. 2. This Agreement is not a contract of employment and does not modify the at-will nature of the Executive's employment relationship: 2.1. This Agreement is not an employment agreement. This Agreement shall not be construed as creating an express or implied contract of employment and does not modify the nature of the Executive's employment relationship with the Company or its Affiliates, as the case may be. Except as otherwise agreed in writing between the Executive and the Company or an Affiliate, the employment relationship between the Executive and the Company or its Affiliates is at-will, i.e., the employment relationship may be terminated at any time at the will of either the Company or the Executive for any reason or no reason at all. 2.2. Notwithstanding any provision herein to the contrary, except as provided in Section 4.7, no payments shall be due or payable pursuant to this Agreement unless [i] the Executive has remained in the employ of the Company or one of its Affiliates until there occurs, during the Term of this Agreement, a Change in Control, or there occurs an event that commences a Period of Anticipated Change in Control, and then [ii] the Executive's employment by the Company or one of its Affiliates is terminated during the Term of this Agreement either by the Company or the Executive as specified in Section 4.4. 2.3. If the Executive is employed not by the Company itself but by one of the Company's Affiliates, then if, during the Term of this Agreement but prior to a Change in Control and prior to a Period of Anticipated Change in Control during which the Person seeking to acquire the Company requests that such Affiliate be sold or disposed of, the Company sells or otherwise disposes of such Affiliate whereby the Company no longer owns or controls, directly or indirectly, at least a majority of the stock having the right to vote for directors or of the equity interest of such Affiliate, this Agreement shall automatically terminate thirty days thereafter if the Executive does not within such thirty day period of time following the sale or other disposition become an employee of the Company or one of its remaining majority-owned Affiliates. 3. Term and termination of this Agreement: 3.1. The Term of this Agreement shall commence on the date hereof and end on December 31, 2002, unless further extended as hereinafter provided. 7 8 Commencing on January 1, 2002 and each January 1 thereafter, the Term shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend the Term; provided, however, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than thirty-six (36) months beyond the month in which such Change in Control occurred. Moreover, if no Change in Control shall have occurred during the Term, but the final day of the Term (as it may have been extended pursuant to the immediately preceding sentence) falls within a Period of Anticipated Change in Control, the Term of this Agreement shall be automatically extended until either [i] the Period of Anticipated Change in Control ceases without resulting in a Change in Control or [ii] if such Period of Anticipated Change in Control results in a Change in Control, for thirty- six (36) complete calendar months commencing with the month immediately following the month in which such Change in Control occurs. Upon expiration of the Term of this Agreement, this Agreement shall automatically terminate. The termination of this Agreement under this Section 3.1 shall not under any circumstances constitute an event which obligates the Company to make payments or to extend benefits to the Executive pursuant to this Agreement. 3.2. This Agreement cannot be terminated by the Company prior to the expiration of its Term except as provided in Section 3.1 or upon either [a] the death of the Executive or [b] the Company terminating the Executive's employment based on Disability in accordance with Section 1.11. Upon either event, this Agreement shall automatically terminate. The termination of this Agreement because of the death or Disability of the Executive shall not under any circumstances constitute an event which obligates the Company to make payments or to extend benefits to the Executive pursuant to this Agreement. However, in the event that the Executive dies or incurs a Disability after the Company has become obligated to make payments or extend benefits to the Executive under Section 4.4 hereof, the death or Disability of the Executive shall not affect the Executive's right, or the rights of the Executive's heirs, legatees, executors or administrators, to receive such payments or benefits (if such benefits are applicable after death or Disability). 4. Company's obligations to Executive upon Change in Control or during a Period of Anticipated Change in Control: 4.1. After a Change in Control or during a Period of Anticipated Change in Control, which, in either case, occurs during the Term of this Agreement, if there occurs any period during which the Executive fails to perform the Executive's full-time duties with the Company or its Affiliates, as the case may be, as a result of 8 9 incapacity due to physical or mental illness, the Company shall pay, or if the Executive is employed by an Affiliate, cause the Affiliate to pay, the Executive's full base 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 or its Affiliate for Disability or death; 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 its Affiliates or under the Social Security disability insurance program, which amounts were not previously applied to reduce any such salary payment. 4.2. During the Term of this Agreement, if the Executive's employment shall be terminated for any reason other than Disability or death following a Change in Control, or if the Executive's employment shall be terminated during a Period of Anticipated Change in Control at the request of the Person seeking to acquire the Company, the Company shall pay, or if the Executive is employed by an Affiliate, cause the Affiliate to pay, the Executive's full 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. 4.3. In addition, but not in duplication of the benefits provided in Sections 4.5 and 4.6, the Company shall pay, or cause to be paid, to the Executive the Executive's 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 compensation and benefit plans as in effect immediately prior to the Date of Termination or, in the case of a termination of the Executive's employment by the Executive for Good Reason and if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason that is specified in the Executive's Notice of Termination; provided, however, that the Company shall have the right at any time, even after a Change in Control, to effect amendments, changes, or modifications to 9 10 any and all compensation and benefit plans, programs or arrangements that are not substantial and material. 4.4. [A] If, during the Term of this Agreement, the Executive's employment is terminated on or after a Change in Control other than: (a) by the Company or an Affiliate for Cause, (b) by reason of the Executive's Disability or death, or (c) by the Executive without Good Reason; then, in addition to the Company's obligations specified above in Sections 4.1 through 4.3, the Company shall pay, or if the Executive is employed by an Affiliate, cause the Affiliate to pay, the Executive the amounts and provide the Executive the benefits described in Sections 4.5 through 4.11. [B] During the Term of this Agreement and notwithstanding any provisions of Subsection [A] above to the contrary, the Executive's employment shall be considered to have been terminated under Subparagraph [A] under circumstances that obligate the Company to pay the Executive the amounts and provide the Executive the benefits described in Sections 4.5 through 4.11 if the Executive's employment is terminated by the Company or its Affiliate during a Period of Anticipated Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request of a Person who either [i] had entered into the written signed agreement with the Company the consummation of which would constitute a Change in Control or [ii] had submitted a written offer to the Company which, if accepted by the Company, would result in an agreement the consummation of which would constitute a Change in Control. [C] During the Term of this Agreement and notwithstanding any provisions of Subsection [A] above to the contrary, the Executive's employment shall be considered to have been terminated under Subparagraph [A] under circumstances that obligate the Company to pay the Executive the amounts and provide the Executive the benefits described in Sections 4.5 through 4.11, if: (i) an event that constitutes Good Reason occurs during a Period of Anticipated Change in Control; (ii) such event occurs at the request of a Person who either [a] had entered into the written signed agreement with the Company the consummation of which would constitute a Change in Control or [b] had submitted a written offer to the Company which, if accepted by the Company, would result in an agreement the consummation of which would constitute a Change in Control; (iii) the Executive notifies the Company in writing as promptly as possible, and no later than three (3) months after the first event which constitutes Good Reason, of the Executive's position that an event which constitutes Good Reason occurred at the request of such Person; (iv) the Period of Anticipated Change in Control in fact culminates in a Change in Control; and (v) the Executive refrains from providing a Notice of Termination and continues 10 11 to perform the Executive's duties and responsibilities until at least sixty (60) days after a Change in Control occurs as a result of the Person having entered into the written signed agreement with the Company or having submitted the written offer to the Company. [D] The right of the Executive to terminate employment for Good Reason under Section [C] hereof is based solely on an event or events constituting Good Reason that occur during a Period of Anticipated Change in Control. The right of the Executive to terminate employment for Good Reason under Section [A] hereof is in addition to the Executive's right to terminate employment for Good Reason under Section [C] but is based solely on an event or events constituting Good Reason that occur on or after a Change in Control. The Executive may give a Notice of Termination under Section [A] immediately the occurrence of the event or events constituting Good Reason [i.e., there is no requirement under Section [A] that the Executive refrain from providing a Notice of Termination and continue to perform the Executive's duties and responsibilities until at least sixty (60) days after the Change in Control occurs]. 4.5. If a termination of the Executive's employment described in Section 4.4 hereof shall have occurred, in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefits otherwise payable to the Executive, the Company shall pay, or if the Executive is employed by an Affiliate, cause the Affiliate to pay, to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of [i] the Executive's annual base salary as in effect immediately prior to the Date of Termination or, in the case of a termination of the Executive's employment by the Executive for Good Reason and if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason that is specified in the Executive's Notice of Termination, and [ii] the average annual bonus earned by the Executive pursuant to any annual bonus or annual incentive plan maintained by the Company or an Affiliate in which the Executive participated in respect of the three fiscal years ending immediately prior to the fiscal year in which occurs the Date of Termination or, in the case of a termination of the Executive's employment by the Executive for Good Reason and if more favorable to the Executive, the three fiscal years ending immediately prior to the fiscal year in which occurs the first event or circumstance constituting Good Reason that is specified in the Executive's Notice of Termination; provided, however, that if there are fewer than three such bonuses earned by the Executive in the applicable three-year period, the average annual bonus shall be calculated by dividing the total amount of the annual bonuses paid by the number of annual bonuses paid; and provided further that if the 11 12 Executive has been so recently hired by the Company or an Affiliate that he has not earned any annual bonus which can be used to calculate an average bonus pursuant to this provision, he shall be deemed to have earned an average annual bonus determined by multiplying his applicable base salary by a fraction, the numerator of which is the total of the average annual bonuses of all employees of the Company and its Affiliates who have change in control severance agreements with the Company immediately prior to the Executive's Date of Termination and the denominator of which is the total of the applicable base salaries of such employees (as such terms are defined in their respective change in control severance agreements and determined as if such employees had been terminated without Cause as of the Executive's Date of Termination). 4.6. If a termination of the Executive's employment described in Section 4.4 hereof shall have occurred, for the thirty-six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and the Executive's dependents with life, accident, medical, and dental insurance benefits substantially similar to those provided to the Executive and to the Executive's dependents immediately prior to the Date of Termination or, in the case of a termination of the Executive's employment by the Executive for Good Reason and if more favorable to the Executive, as in effect immediately prior to the occurrence of the first 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 that is specified in the Executive's Notice of Termination; provided, however, that the Company shall have the right to effect amendments, changes, or modifications to any and all benefit plans, programs or arrangements that are not substantial and material and such amendments, changes or modifications shall apply to the Executive's benefits. Benefits otherwise receivable by the Executive pursuant to this Section 4.6 may 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 reasonable and necessary cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, in the case of a termination of the Executive's employment by the Executive for Good Reason and if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason that is specified in the Executive's Notice of Termination. As provided in Section 6.2, the Company may withhold from any payments made or benefits provided pursuant to 12 13 this Agreement all federal, State, city, or other taxes as may be required pursuant to any law or governmental regulation or ruling. 4.7. [A] Regardless whether or not a termination of the Executive's employment described in Section 4.4 shall have occurred, to the extent that any of the payments or benefits (excluding payments to be made pursuant to this Section 4.7) received or to be received by the Executive (the "Total Payments") in connection with a Change in Control or the Executive's termination of employment (whether or not such payments or benefits are provided pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, with any Persons whose actions result in a Change in Control, or with any Person affiliated with the Company or such Person) will be subject to the excise tax imposed by Section 4999 of the Code, or any successor provision of the Code (any such excise tax is referred to in this Section as the "Excise Tax"), then the benefit or payment shall be increased by an amount (referred to in this Section as the "Additional Payment") such that the net amount received by the Executive, after paying any applicable Excise Tax and any federal, State or local income or FICA taxes on such Additional Payment, shall be equal to the amount that the Executive would have received if such Excise Tax were not applicable 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 [as the term "base amount" is defined in Section 280G(b)(3) of the Code] 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 Additional 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 Additional Payment is to be 13 14 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 on the date on which the Additional Payment is calculated for purposes of this Section 4.7), 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 Additional Payment, the Executive shall repay to the Company, within ten business days immediately following the date that the amount of such reduction in the Excise Tax is finally determined, the portion of the Additional 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 Additional 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 Additional Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Additional Payment), the Company shall make another Additional Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within the ten (10) 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. 4.8 If a termination of the Executive's employment described in Section 4.4 hereof shall have occurred, the Company shall promptly reimburse to the Executive all reasonable attorneys fees and expenses necessarily incurred by the Executive in disputing in good faith any issue with the Company or its Affiliates pursuant to this Agreement or lodging in good faith any claim, demand or cause of action against the Company or its Affiliates pursuant to this Agreement; provided, however, that the Company shall have no obligation to reimburse the Executive for such attorneys fees and expenses unless the Executive is the prevailing party as to such dispute, claim, demand or cause of action. 4.9 If a termination of the Executive's employment described in Section 4.4 hereof shall have occurred, the Company shall provide the Executive with 14 15 outplacement services suitable to the Executive's position for a period of nine months after the Date of Termination or, if earlier, until the first acceptance by the Executive of an offer of employment. 4.10 If (i) the Executive is or has been granted stock options, restricted stock, or other similar equity-based awards, whether before or after the Effective Date, pursuant to plans, programs or arrangements which provide that the Executive shall become fully vested upon a Change in Control and (ii) the definition of change in control in such plans, programs or arrangements does not provide for vesting upon the occurrence of an event creating a Period of Anticipated Change in Control, then the following shall apply: The requisite change in control for purposes of vesting under such plans, programs or arrangements shall be deemed to have occurred immediately prior to a termination described in subparagraphs (1) or (2) of this Section 4.10 if either -- (1) The Executive's employment is terminated by the Company or an Affiliate without Cause (and not for Disability or death) during a Period of Anticipated Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request of a Person who either [i] had entered into the written signed agreement with the Company the consummation of which would constitute a Change in Control or [ii] had submitted a written offer to the Company which, if accepted by the Company, would result in an agreement the consummation of which would constitute a Change in Control; or (2) During the Term of this Agreement, the Executive's employment is terminated as follows: (i) an event that constitutes Good Reason occurs during a Period of Anticipated Change in Control; (ii) such event occurs at the request of a Person who either [a] had entered into the written signed agreement with the Company the consummation of which would constitute a Change in Control or [b] had submitted a written offer to the Company which, if accepted by the Company, would result in an agreement the consummation of which would constitute a Change in Control; (iii) the Executive notifies the Company in writing as promptly as possible, and no later than three (3) months after the first event which constitutes Good Reason, of the Executive's position that an event which constitutes Good Reason occurred at the request of such Person; (iv) the Period of Anticipated Change in Control in fact culminates in a Change in Control; and (v) the Executive shall refrain from providing a Notice of Termination and shall 15 16 continue to perform the Executive's duties and responsibilities until at least sixty (60) days after a Change in Control occurs as a result of the Person having entered into the written signed agreement with the Company or having submitted the written offer to the Company. 4.11 The payments provided to the Executive or for the Executive's benefit in Sections 4.5 and 4.7[A] shall be made not later than the tenth (10) business day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such date, the Company shall pay to the Executive on such day an estimate of the payments under Section 4.5, as determined in good faith by the Executive and the Company, and an estimate of the payments under Section 4.7[A], as determined in accordance with Section 4.7[A] 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 sixty (60) days after the Date of Termination. In the event that the amount of the estimated payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the tenth (10) business day after demand by the Company. At the time the 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. 5. Termination procedures; resolution of disputes; arbitration; and no duty to mitigate: 5.1 After a Change in Control or during a Period of Anticipated Change in Control, and in either case, during the Term of this Agreement, any purported termination of the Executive's employment (other than the death of the Executive) shall be communicated by a written notice of termination from one party to the other in accordance with Section 6.6 (the "Notice of Termination"). The Notice of Termination shall specify the 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 pursuant to this Agreement. The date of termination ("Date of Termination") of the Executive's employment 16 17 pursuant to this Agreement shall be [i] if the Executive's employment is terminated for Disability, thirty (30) days after the Notice of Termination is given, and [ii] if the Executive's employment is terminated pursuant to this Agreement for any other reason, the date specified in the Notice of Termination [which, in the case of termination by the Company or an Affiliate shall not be less than thirty (30) days, except in the case of termination for Cause, which may be immediate, and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, from the date such Notice of Termination is given]. 5.2 All claims by the Executive for payments or benefits under this Agreement shall be in writing, shall set forth the specific reasons for the basis of the Executive's claim and the specific provisions of this Agreement relied upon, shall be submitted to the Committee, and shall be decided by the Committee. Any denial by the Committee of a claim for payments or 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 file with the Committee, within sixty (60) days after notification by the Committee that the Executive's claim has been denied, a request that the Committee re-consider its decision. Upon receipt of such a request, the Committee shall reconsider its decision and notify the Executive of the Committee's decision on reconsideration. 5.3 [A] Any further dispute or controversy arising under or in connection with this Agreement and 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, its Affiliates, 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. [B] 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., 17 18 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. 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 arbitrators are authorized to award attorneys and fees and expenses as authorized in this Agreement. [C] The arbitration may be initiated by any party by providing to the other party a written notice of arbitration specifying the claims. Within 30 days of the notice of initiation of the arbitration procedure, the Executive shall denominate one arbitrator and the Company shall denominate one arbitrator. The two arbitrators shall select a third arbitrator failing agreement on which within 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. [D] 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. 18 19 5.4 If during the Term of this Agreement the Executive's employment terminates under conditions that require the Company to make payments or extend benefits pursuant to Section 4.4, the Executive is not required to seek other employment or to attempt in any way to reduce the amounts payable to the Executive under Section 4.4 (other than an obligation to incur no more than reasonable and necessary attorneys fees). Further, the amount of any payment or benefit required pursuant to this Agreement (other than pursuant to Section 4.6) shall not be reduced or offset by any compensation or benefit that may be earned by the Executive as a result of employment by another employer after termination of the Executive's employment hereunder by the Company or its Affiliates, by retirement benefits, or against any amount claimed to be owed by the Executive to the Company unless such amount is evidenced by a promissory note or contract signed by the Executive. 6. Miscellaneous: 6.1 The applicable law and the forum for resolution of any disputes arising out of this Agreement are specified in the agreement to arbitrate contained in Section 5.3. 6.2 The Company may withhold from any payments made or benefits provided pursuant to this Agreement all federal, State, city, or other taxes as may be required pursuant to any law or governmental regulation or ruling. 6.3 Except as provided in Sections 4.4[C] and 4.10(2) no failure by either party hereto at any time to give notice of any breach by the other party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 6.4 This Agreement shall be binding upon and inure to the benefit of the Company and any other person, association, or entity which may hereafter acquire or succeed to all or substantially all of the business or assets of the Company by any means whether direct or indirect, by purchase, merger, consolidation, or otherwise. In addition to the obligations imposed by law upon any successor to the Company, the Company shall 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 19 20 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 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. 6.5 The Executive's rights and obligations pursuant to this Agreement are personal to the Executive and such rights, benefits, and obligations of the Executive shall not be voluntarily or involuntarily assigned, alienated, or transferred, whether by operation of law or otherwise, without the prior written consent of the Company, except through a transfer by testament or by the laws of descent or distribution upon the death of the Executive. In the event of any attempted assignment or transfer contrary to this Section 6.5, the Company shall have no liability to pay any amount so attempted to be assigned or transferred. This Agreement shall be enforceable against the Executive and the Executive's personal and legal representatives, heirs, legatees, executors and administrators. 6.6 For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: American General Corporation 2929 Allen Parkway Houston, Texas 77019 Attention: General Counsel If to the Executive, to the Executive's last known address on the records of the Company. Either the Company or the Executive may furnish a change of address to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 6.7 It is a desire and intent of the parties that the terms, provisions, covenants and remedies contained in this Agreement shall be enforceable to the fullest extent permitted by law. If any such term, provision, covenant, or remedy of this Agreement or the application thereof to any person, association, or entity or 20 21 circumstances shall, to any extent, be construed to be invalid or unenforceable in whole or in part, then such term, provision, covenant, or remedy shall be construed in a manner so as to permit its enforceability under the applicable law to the fullest extent permitted by law. In any case, the remaining provisions of this Agreement or the application thereof to any person, association, or entity or circumstances other than those to which they have been held invalid or unenforceable, shall remain in full force and effect. 6.8 Each of the Company and the Executive acknowledges that no represen- tation, inducement, promise, or agreement, oral or written, express or implied, has been made by the other with respect to the subject matters of this Agreement which are not expressed in this Agreement. Except for benefit and compensation plans and grant documents thereunder that contain express change in control provisions, this Agreement constitutes the entire agreement of the parties with regard to the Company's Change in Control obligations to the Executive; terminates any prior severance agreements, including the existing Severance Agreement between the Company and the Executive; and replaces and merges previous agreements and discussions pertaining to the Company's Change in Control obligations to Executive. No modification or amendment of this Agreement will be effective unless such modification or amendment is in writing and signed by the party whose rights are affected thereby. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement to be effective as of the Effective Date stated above. AMERICAN GENERAL CORPORATION By: --------------------------- EXECUTIVE By: --------------------------- 21 EX-12 13 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 PART IV (Continued) 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 In millions, except ratios
For the Years Ended December 31, -------------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------------------------- Consolidated operations: Income before income tax expense, net dividends on preferred securities of subsidiaries, and minority interest $1,887 $1,323 $1,073 Undistributed income of equity investee - - (49) Fixed charges deducted from income Interest expense 771 693 643 Implicit interest in rents 24 19 20 - --------------------------------------------------------------------------------------------------------- Total fixed charges deducted from income 795 712 663 - --------------------------------------------------------------------------------------------------------- Earnings available for fixed charges $2,682 $2,035 $1,687 - --------------------------------------------------------------------------------------------------------- Fixed charges per above $ 795 $ 712 $ 663 Capitalized interest related to real estate operations - - 5 - --------------------------------------------------------------------------------------------------------- Total fixed charges 795 712 668 Dividends on preferred stock and securities 151 146 138 - --------------------------------------------------------------------------------------------------------- Combined fixed charges and preferred stock dividends $ 946 $ 858 $ 806 - --------------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges 3.37 2.86 2.52 - --------------------------------------------------------------------------------------------------------- Ratio of earnings to combined fixed charges and preferred stock dividends 2.83 2.37 2.09 - --------------------------------------------------------------------------------------------------------- Consolidated operations, corporate fixed charges and preferred stock dividends only: Income before income tax expense, net dividends on preferred securities of subsidiaries, and minority interest $1,887 $1,323 $1,073 Undistributed income of equity investee - - (49) Corporate fixed charges deducted from income - corporate interest expense 228 211 183 - --------------------------------------------------------------------------------------------------------- Earnings available for fixed charges $2,115 $1,534 $1,207 - --------------------------------------------------------------------------------------------------------- Corporate fixed charges per above $ 228 $ 211 $ 183 Capitalized interest related to real estate operations - - 5 - --------------------------------------------------------------------------------------------------------- Total corporate fixed charges 228 211 188 Dividends on preferred stock and securities 151 146 138 - --------------------------------------------------------------------------------------------------------- Combined corporate fixed charges and preferred stock dividends $ 379 $ 357 $ 326 - --------------------------------------------------------------------------------------------------------- Ratio of earnings to corporate fixed charges 9.27 7.28 6.41 - --------------------------------------------------------------------------------------------------------- Ratio of earnings to combined corporate fixed charges and preferred stock dividends 5.57 4.30 3.70 - --------------------------------------------------------------------------------------------------------- American General Finance, Inc.: Income before income tax expense $ 283 $ 296 $ 204 Fixed charges deducted from income Interest expense 574 512 484 Implicit interest in rents 15 12 11 - --------------------------------------------------------------------------------------------------------- Total fixed charges deducted from income 589 524 495 - --------------------------------------------------------------------------------------------------------- Earnings available for fixed charges $ 872 $ 820 $ 699 - --------------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges 1.48 1.57 1.41 - ---------------------------------------------------------------------------------------------------------
AMERICAN GENERAL 21 EX-13 14 PORTIONS OF 1999 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS For the three years ended December 31, 1999 In millions Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and related Notes beginning on page 36. Operations in Profile SUMMARY INCOME STATEMENT
1999 1998 1997 ------- ------ ------- Retirement Services $ 564 $ 466 $ 246 Life Insurance 721 674 589 Consumer Finance 226 201 165 ------- ------ ------- Business division earnings 1,511 1,341 1,000 Corporate capital costs (228) (216) (191) Corporate income (expense) (56) (32) 83 Goodwill amortization (48) (45) (24) ------- ------ ------- OPERATING EARNINGS 1,179 1,048 868 Realized investment gains (12) 4 27 Non-recurring items* (36) (288) (353) ------- ------ ------- Net income $ 1,131 $ 764 $ 542 ======= ====== =======
* Includes litigation settlements, merger-related costs, loss on sale of non-strategic assets, and certain Y2K costs. [Bar Graph] OPERATING EARNINGS PER SHARE
Year $ per share ---- ----------- 1997 3.49 1998 4.05 1999 4.59
[Bar Graph] ASSETS*
Year $ in billions ---- ------------- 1997 78.8 1998 102.7 1999 116.9
* Excludes fair value adjustment. [Pie Chart] BUSINESS DIVISION EARNINGS Retirement Services 37% Consumer Finance 15% Life Insurance 48%
[Pie Chart] BUSINESS DIVISION ASSETS Retirement Services 57% Consumer Finance 11% Life Insurance 32%
Overview. American General Corporation (American General) and its subsidiaries (collectively, the company or we) is a diversified financial services organization with assets in excess of $115 billion and market capitalization of $19.6 billion at December 31, 1999. We are a leading provider of retirement services, life insurance, consumer loans, and investments to 12 million customers. We have grown through both internal expansion and acquisitions. During the last five years, we acquired eight companies with assets of $34 billion for total consideration of nearly $6 billion. Our financial highlights for the three years ended December 31, 1999 were as follows:
1999 1998 1997 ---- ---- ---- Revenues and deposits $ 21,022 $ 18,461 $13,973 Earnings Operating earnings 1,179 1,048 868 Net income 1,131 764 542 Earnings per share Operating earnings 4.59 4.05 3.49 Net income 4.40 2.96 2.19 Assets* 116,873 102,671 78,838 Shareholders' equity* Total 7,724 7,296 6,429 Per share 30.86 28.71 26.30 Operating return on equity* 16.0% 15.4% 13.6%
*Excludes fair value adjustment under SFAS 115. Reporting Structure. We manage our business operations through three divisions - retirement services, life insurance, and consumer finance - based on products and services offered. Results of each business division include earnings from its business operations and earnings on the amount of equity we consider necessary to support its business. Corporate operations include corporate capital costs and other income or expenses not allocated to the business divisions. Corporate capital costs consist of aftertax interest on corporate debt and dividends on preferred securities. Corporate income (expense) includes corporate management costs, advertising costs for our national branding program started in late 1998, and earnings on assets not allocated to the business divisions. Goodwill amortization, net realized investment gains, and non-recurring items are also excluded from division results, consistent with the manner in which we review and evaluate the divisions. 21 2 Management's Discussion and Analysis In millions RETIREMENT SERVICES Retirement Services Highlights SUMMARY INCOME STATEMENT
1999 1998 1997 ------- ------ ----- Fixed margin $ 993 $ 812 $ 420 Variable margin 221 161 113 ------- ------ ----- Total margin 1,214 973 533 Operating expenses 332 247 160 Other, net* 27 27 (2) ------- ------ ----- Pretax earnings 855 699 375 Income taxes 291 233 129 ------- ------ ----- Division earnings $ 564 $ 466 $ 246 ------- ------ -----
* Primarily commissions and change in DPAC/CIP. [Bar Graph] EARNINGS
Year $ in millions ---- ------------- 1997 246 1998 466 1999 564
[Bar Graph] ASSETS*
$ in billions General Separate Year account account ---- ------- ------- 1997 23.9 10.6 1998 40.9 14.8 1999 44.1 21.6
* Excludes fair value adjustment. [Bar Graph] TOTAL MARGIN
$ in millions Year Fixed Variable ---- ----- -------- 1997 420 113 1998 812 161 1999 993 221
[Bar Graph] DEPOSITS
$ in billions Year Fixed Variable ---- ----- -------- 1997 1.6 1.8 1998 3.9 2.5 1999 5.0 3.0
Our retirement services division is a leading provider of retirement products and services, and ranks as the nation's third-largest writer of annuities. We market our products through two major distribution systems. Our 1,560 financial advisors sell tax-qualified annuities and mutual funds to employees of educational, health care, and government entities, and other not-for-profit organizations. We also market non-qualified annuities through 30,000 representatives at 250 banks and other financial institutions. We classify our annuity receipts as fixed or variable depending on the investment option selected by the customer. When a fixed option is selected, the deposits we receive are invested in our general account investment portfolio and a liability representing our commitment to the policyholder is established. We earn investment income on these invested assets and credit interest to the policyholder liability accounts. The difference between the income earned and the interest credited is our fixed margin. A key feature of variable annuities is that the investment risk lies predominantly with the policyholder, rather than with the company. When a variable investment option is selected, deposits are invested in a related mutual fund in accordance with the policyholder's instructions and recorded as separate account assets. To reflect the policyholder's right to these assets, an equivalent separate account liability is established. Separate account amounts fluctuate as a result of policyholder deposits, surrenders and withdrawals, and changes in the market value of the underlying investments. Our earnings from separate accounts, resulting from mortality and expense charges and asset management fees, is our variable margin. Acquisitions. In 1998, we completed the acquisition of Western National (subsequently renamed American General Annuity) and acquired a block of individual annuity business. These acquisitions increased invested assets by $14 billion. Earnings. Retirement services earnings are a function of the level of our managed assets, fixed and variable margin, and operating expenses. Division earnings increased 21% to $564 million in 1999. The increase resulted from growth in managed assets and higher margins, which more than offset higher operating expenses. The 1998 earnings increase of 90% reflects both internal growth and the acquisition of American General Annuity. Assets and Deposits. Investments and separate account assets, excluding the 1998 acquisitions, grew 19% in 1999 and 17% in 1998, contributing to an increase in our fixed and variable margins. Assets and deposits were as follows:
1999 1998 1997 -------- -------- ------- Assets Investments* $ 40,930 $ 37,887 $22,563 Separate accounts 21,594 14,794 10,564 Deposits Fixed 5,024 3,909 1,592 Variable 2,969 2,451 1,795 Surrender ratios Fixed 7.85% 7.15% 7.62% Variable 4.55 4.20 3.68
* Excludes fair value adjustment under SFAS 115. Customer deposits reached $8.0 billion in 1999, compared to $6.4 billion in 1998 and $3.4 billion in 1997. The 29% growth in fixed deposits in 1999 resulted from exceptionally strong sales of fixed annuities through banks. This growth reflects new and strengthened relationships with banks and our unique proprietary annuity strategy, through which we customize our annuity products to meet the specific needs of each bank. The 21% growth of variable deposits in 1999 and the 37% growth in 1998 was due to the popularity of variable investment options resulting from strong stock market performance. Changes in the surrender ratios reflect increased competition and lower interest crediting rates during the last two years. Fixed Margin. Fixed margin, the difference between net investment income on general account investments and interest credited to policyholders' fixed accounts, increased 22% in 1999. Fixed investment spread measures this difference in terms of interest rates. Net investment income and the components of fixed investment spread were as follows:
1999 1998 1997 --------- --------- --------- Net investment income $ 2,972 $ 2,753 $ 1,706 --------- --------- --------- Investment yield 7.72% 7.96% 7.91% Average crediting rate 5.35 5.87 6.16 --------- --------- --------- Fixed investment spread 2.37% 2.09% 1.75% --------- --------- ---------
The $181 million increase in 1999 fixed margin was the result of the $219 million increase in net investment income, which more than offset higher interest credited 22 3 to policyholders. Net investment income increased 8% due to the 11% growth in average invested assets, partially offset by the decrease in investment yield. The significant increase in 1998 net investment income and fixed margin resulted from growth in invested assets and the American General Annuity acquisition. The 24 basis point decrease in 1999 investment yield was due to new investments yielding less than the average portfolio rate and lower income on investments called or tendered before their maturity. Although the 1999 yield declined, the fixed investment spread increased by 28 basis points. We have been able to more than offset declines in the investment yield by reducing crediting rates on policyholder liabilities. Variable Margin. Our variable margin increased 37% in 1999 and 42% in 1998 due to the growth of our separate account assets. Market appreciation, variable deposit growth, and transfers from fixed to variable investment options contributed to the increase in separate account assets of 46% in 1999 and 40% in 1998. Despite competitive pressures, our average variable fee rate of 1.21% in 1999 has remained relatively stable and is beginning to benefit from increases in fees from our mutual fund partners. Operating Expenses. Our investments in new marketing, customer service, and technology initiatives, designed to position ourselves for future growth and to strengthen our competitive advantage, increased our operating expenses in 1999. The operating expense ratio increased to .55% of average assets in 1999 from .47% in 1998 and .49% in 1997 as a result of these expenditures. The 1998 operating expenses increased primarily due to the acquisition of American General Annuity. Outlook. Although recent increases in interest rates may put pressure on the fixed investment spread, we expect accelerating growth in variable annuities and mutual fund deposits to contribute to continued earnings growth. As demographics change and more Americans approach retirement, we anticipate a growing demand for our integrated retirement solutions. We are leveraging our strong individual customer and group relationships to offer more comprehensive financial planning services and products in the tax-qualified market. In addition, we are positioning ourselves to be the chosen provider in the government market as individuals shift from defined benefit to defined contribution plans. We are also expanding our proprietary annuity strategy to offer variable annuities and life insurance customized to meet the needs of our bank partners and their customers. 23 4 Management's Discussion and Analysis In millions LIFE INSURANCE Life Insurance Highlights SUMMARY INCOME STATEMENT
1999 1998 1997 ------ ------ ------ Premiums and other considerations $3,022 $3,113 $3,066 Net investment income 2,199 2,240 2,099 Other income 173 153 149 ------ ------ ------ Total revenues 5,394 5,506 5,314 ------ ------ ------ Insurance and annuity benefits 2,846 2,959 2,949 Operating expenses 705 720 730 Other expenses* 740 806 729 ------ ------ ------ Total expenses 4,291 4,485 4,408 ------ ------ ------ Pretax earnings 1,103 1,021 906 Income taxes 382 347 317 ------ ------ ------ Division earnings $ 721 $ 674 $ 589 ------ ------ ------
* Primarily commissions and change in DPAC/CIP. [Bar Graph] EARNINGS
Year $ in millions ---- ------------- 1997 589 1998 674 1999 721
[Bar Graph] ASSETS*
$ in billions Year Life Annuity ---- ---- ------- 1997 24.2 9.1 1998 24.9 9.4 1999 26.4 10.0
* Excludes fair value adjustment. [Bar Graph] SALES
$ in billions Year Life Annuity ---- ---- ------- 1997 .5 .4 1998 .6 .5 1999 .9 .7
[Bar Graph] PREMIUMS AND DEPOSITS
$ in billions Year Life Annuity ---- ---- ------- 1997 3.1 .6 1998 3.2 .6 1999 3.6 .7
Our life insurance division provides traditional, interest-sensitive, and variable life insurance and annuities to 8 million customers through multiple distribution channels. We reach our customers through over 34,000 independent and career agents, as well as banks, broker dealers, and financial planners. Life insurance in force totaled $364 billion at December 31, 1999. The division's primary focus is the sale of life insurance and annuity products to individuals. When interest-sensitive life insurance and annuities are sold, the premiums and deposits we receive are invested in our general account investment portfolio and a liability representing our commitment to the policyholder is established. We manage investment spread by seeking to maximize the return on these invested assets, consistent with our asset/liability management and credit quality needs. When appropriate, we periodically reset the interest rates credited to policyholder liabilities. Deposits received on variable products, principally variable universal life insurance and variable annuities, are held in separate accounts. Revenues from these policies consist of mortality and expense charges and asset management fees. Earnings. The division's profitability is driven by asset growth, investment spread, mortality, and operating expenses. Division earnings increased 7% to $721 million in 1999, compared to a 14% increase in 1998. The 1999 increase was due to growth in the business, while the 1998 increase related to higher investment income and the acquisition of Home Beneficial Life. Operating efficiencies also contributed to increased earnings in each year. Sales, Deposits, and Premiums. Sales represent annualized premium for new products issued, while deposits represent funds we receive for interest-sensitive insurance and annuities. Sales and deposits of individual life insurance and annuities were as follows:
1999 1998 1997 ------- ------ ------ Individual life insurance Sales $ 919 $ 612 $ 521 Deposits 1,661 1,268 1,154 Annuities Sales 659 523 429 Deposits 689 582 505
Individual life sales increased 50% and deposits increased 31% in 1999. We launched 12 new products, which contributed to strong variable life sales, particularly in the corporate executive insurance market. In 1998, individual life insurance sales and deposits increased 17% and 10%, respectively. These increases reflected our introduction of new products and our entry into corporate executive insurance markets. Annuity sales increased 26% in 1999 and 22% in 1998, while deposits increased 18% and 15%, respectively. The increases in both years were due to our strong sales of variable annuities. We significantly increased sales of variable annuities through financial institutions in 1999. Premiums declined slightly in 1999, as expected, due to our planned de-emphasis of certain non-strategic lines of business and our shift in emphasis to variable products. Investment Spread. Investment results and interest crediting rates were as follows:
1999 1998 1997 ---- ---- ---- Investment yield 8.21% 8.50% 8.14% Average crediting rate 5.90 5.96 6.05 ---- ---- ---- Investment spread 2.31% 2.54% 2.09% ---- ---- ----
Overall, the investment spread decreased in 1999 and increased in 1998, primarily due to changes in the investment yield. Net investment income and the investment yield decreased in 1999 due to lower income from securities called before their maturity dates and lower market rates on new and reinvested funds. The 1998 increases in investment income and investment yield were due to higher income on investments called or tendered before their maturity dates. We decreased the rates credited to policyholders in 1999 and 1998 in response to changes in market conditions. We had the ability, subject to certain minimum rate guarantees, to adjust interest crediting rates on approximately 58% of our insurance and annuity liabilities at December 31, 1999. Our insurance and annuity liabilities, classified by our ability to adjust interest credited, were as follows:
1999 1998 1997 -------- ------- -------- Adjustable crediting rates Interest-sensitive life $ 7,329 $ 6,787 $ 6,250 Participating life 3,485 3,515 3,541 Annuities 4,325 4,453 5,047 -------- ------- -------- Total adjustable 15,139 14,755 14,838 -------- ------- -------- Fixed crediting rates Traditional life 6,737 6,575 6,571 Other 4,424 4,350 3,874 -------- ------- -------- Total fixed 11,161 10,925 10,445 -------- ------- -------- Total insurance and annuity liabilities $ 26,300 $25,680 $ 25,283 -------- ------- --------
24 5 Mortality and Persistency. Death claims and premium termination rates were as follows:
1999 1998 1997 ------- ------ ------ Death claims $ 998 $ 991 $ 912 Death claims per $1,000 in force 3.66 3.60 3.36 Premium termination rate 12.71% 12.58% 13.55%
Overall, mortality and persistency experience reflected normal fluctuations and remained within our pricing assumptions. Death claims increased due to aging and growth of the in force business and our 1997 acquisition of Home Beneficial Life. In 1998, we discontinued sales of ancillary products with higher termination rates, resulting in an improved premium termination rate for that year. Operating Expenses. Although our life insurance business continues to grow, we reduced operating expenses in each of the last two years. We benefited from efficiency gains derived from centralization of the division's administrative functions and lower pension and employee benefit-related expenses, offset by higher technology costs, costs associated with terminating certain reinsurance arrangements, and costs of new initiatives to market variable and corporate executive insurance products. The ratio of operating expenses to direct premiums and deposits was 14.3%, 16.1%, and 17.0% in 1999, 1998, and 1997, respectively. Outlook. Although higher interest rates may put pressure on investment spread, we expect steady earnings growth to result from our increasing in force base. In 2000, we expect to continue to increase sales and deposits through our multiple distribution channels while continuing to build and emphasize the American General brand name. We are well positioned to take advantage of shifts in consumer demand between fixed and variable products. In addition, we expect to continue to capitalize on the operating efficiencies created by the centralization and standardization of our administrative functions and on our strong presence in the marketplace. This foundation will allow us to successfully develop our products and distribution channels to their full potential. 25 6 Management's Discussion and Analysis In millions CONSUMER FINANCE Consumer Finance Highlights SUMMARY INCOME STATEMENT
1999 1998 1997 ------- ------ ------ Finance margin $ 881 $ 842 $ 804 Other income, net* 160 147 151 ------- ------ ------ Net revenues 1,041 989 955 Operating expenses 483 465 452 Provision for loan losses 207 212 248 ------- ------ ------ Pretax earnings 351 312 255 Income taxes 125 111 90 ------- ------ ------ Division earnings $ 226 $ 201 $ 165 ------- ------ ------
* Primarily income from earnings on credit-related insurance products. [Bar Graph] EARNINGS
Year $ in millions ---- ------------- 1997 165 1998 201 1999 226
[Bar Graph] FINANCE RECEIVABLES
$ in billions Year Real Estate Other ---- ----------- ----- 1997 4.2 3.9 1998 5.8 3.9 1999 7.1 3.9
[Bar Graph] FINANCE RECEIVABLES VOLUME
$ in billions Year Originated Purchased ---- ---------- --------- 1997 5.5 0.6 1998 5.8 1.9 1999 6.2 1.7
[Bar Graph] CHARGE-OFF RATIO
% of finance Year receivables ---- ------------ 1997 3.6 1998 2.6 1999 2.1
In our consumer finance division, we provide a wide variety of consumer finance products, including mortgages, consumer loans, retail sales financing, and credit-related insurance. We market these products through a nationwide network of 1,350 branch offices. In addition to originating loans through our branch offices, we acquire real estate loans through bulk purchases. We fund finance receivables primarily by issuing fixed-rate debt and floating-rate commercial paper. Different types of loans have different degrees of risk, which are reflected in the finance charges we earn. For example, loans secured by real estate are considered to have less risk and generally carry lower interest rates. Over the past five years, we have actively increased the percentage of real estate loans in our portfolio and improved our credit risk management systems as part of our strategy to improve our credit quality. Earnings. Division earnings are a function of the amount and mix of finance receivables, interest spread, credit quality, and operating expenses. Earnings increased 12% to $226 million in 1999 and 22% in 1998 due to growth in our receivables portfolio, improved credit quality, lower borrowing costs, and operating efficiencies. The lower percentage increase in 1999 was due to lower yields on finance receivables, reflecting the higher percentage of real estate loans. Finance Receivables. The mix of finance receivables at December 31 was as follows:
1999 1998 1997 -------- ------ ------ Real estate loans $ 7,104 $5,757 $4,155 Non-real estate loans 2,576 2,560 2,556 Retail sales finance 1,350 1,340 1,301 -------- ------ ------ Total finance receivables 11,030 9,657 8,012 Allowance for losses (396) (382) (373) -------- ------ ------ Finance receivables, net $ 10,634 $9,275 $7,639 -------- ------ ------ Average finance receivables $ 10,009 $8,519 $7,523 -------- ------ ------
We increased our finance receivables portfolio by $1.4 billion in 1999 and by $1.6 billion in 1998. Average finance receivables increased 17% in 1999. We generated $6.2 billion of loans in our branch offices and purchased $1.7 billion of real estate loans, while $6.5 billion of loans were repaid. We increased the percentage of real estate loans in the portfolio to 64% at December 31, 1999, compared to 60% in 1998 and 52% in 1997. Finance Margin. Finance margin is the difference between the finance charges we charge our customers and interest expense on the debt required to fund finance receivables. Interest spread measures this difference in terms of interest rates. Finance margin and the components of interest spread were as follows:
1999 1998 1997 ------- ------ ------ Finance charges $ 1,455 $1,354 $1,265 Interest expense 574 512 461 ------- ------ ------ Finance margin $ 881 $ 842 $ 804 ------- ------ ------ Yield on finance receivables 14.54% 15.90% 16.81% Borrowing cost 6.23 6.55 6.80 ------- ------ ------ Interest spread 8.31% 9.35% 10.01% ------- ------ ------
In both 1999 and 1998, finance charges increased 7% due to the increases in our average finance receivables, offset by declines in yield. Interest expense increased due to increases in average debt, offset by declines in borrowing cost in 1999 and 1998. We refinanced debt at lower rates than the debt being replaced and issued new debt at rates lower than the average rates on existing debt. Interest spread decreased in 1999 and 1998 because finance receivable yields declined more than our borrowing cost. The declines in yield reflected the increased proportion of real estate loans in our portfolio. Credit Quality. The credit quality of our portfolio has significantly improved during the past three years due to our strategy to increase the percentage of lower-risk real estate loans and to improve credit risk management systems. In 1996, we initiated a fundamental change in our credit risk management focus, shifting to a more proactive process. We developed statistically-based risk scoring and prediction tools, implemented more extensive and ongoing analysis of performance data, and instituted early warning systems. As a result, we have improved our underwriting skills and our ability to identify problem loans and take effective corrective action. Credit quality information was as follows:
1999 1998 1997 ------- ------ ------ Charge offs $ 207 $ 220 $ 270 Delinquencies 399 384 310 Allowance for losses 396 382 373 ------- ------ ------ Ratios Charge-off 2.08% 2.60% 3.60% Delinquency 3.46 3.75 3.60 Allowance 3.59 3.96 4.65 Charge-off coverage 1.91x 1.74x 1.38x ------- ------ ------ Risk-adjusted yield 12.46% 13.30% 13.21% ------- ------ ------
26 7 Charge offs decreased in both 1999 and 1998, while average finance receivables increased. The charge-off ratio as a percentage of average receivables also decreased. While delinquencies increased due to growth in finance receivables and as a natural function of the aging of our acquired portfolios, the 1999 delinquency ratio decreased. These improvements were the result of our improved credit quality. The allowance for finance receivable losses is maintained at an amount we believe is adequate to absorb anticipated credit losses in our existing portfolio. The allowance as a percentage of finance receivables declined to reflect the improved credit quality and portfolio mix. In first quarter 2000, we expect to sell approximately $25 million of fully-reserved receivables. Our allowance ratio would have been 3.37% had this sale occurred at year-end 1999. The charge-off coverage ratio, which compares the allowance for finance receivable losses to charge offs, improved in both 1999 and 1998. Risk-adjusted yield represents the yield on finance receivables less the charge-off ratio. Although risk-adjusted yield declined, the decrease is less than the decline in yield on finance receivables due to the improvement in the charge-off ratio. Operating Expenses. While our average finance receivables grew 17% in 1999 and 13% in 1998, we limited operating expense increases to 4% and 3% in these years. Operating expenses as a percentage of average finance receivables improved to 4.8% in 1999 from 5.5% in 1998 and 6.0% in 1997 due to the increase in average receivables and branch productivity improvements in the past two years. Net receivables per employee improved 17% to $1.4 million in 1999 from $1.2 million in 1998. Outlook. In 2000, we anticipate that our receivables portfolio will grow internally from increased marketing initiatives, supplemented by portfolio acquisitions. In addition, we will continue our focus on credit quality. The recent increases in market interest rates may put pressure on our interest spread; however, new loan originations and bulk purchases should reflect the higher rates. In addition, real estate repayments should decrease due to fewer refinancings. We expect continued growth in our receivables base, combined with our risk management systems and our ongoing expense management activities, to generate continued earnings growth. 27 8 Management's Discussion and Analysis In millions INVESTMENTS Investments Highlights
1999 1998 1997 -------- ------- ------- Average invested assets* $ 68,738 $64,848 $50,708 Net investment income 5,232 5,095 4,020 Investment yield* 7.85% 8.16% 8.16%
* Excludes fair value adjustment under SFAS 115. [Bar Graph] INVESTED ASSETS*
Year $in billions ---- ------------ 1997 51.2 1998 66.3 1999 70.1
* Excludes fair value adjustment. [Bar Graph] NET INVESTMENT INCOME
Net Investment Year Income $in billions ---- ------------------- 1997 4.0 1998 5.1 1999 5.2
[Pie Chart] 1999 INVESTED ASSETS Mortgage-backed securities 19% Private investment grade bonds 16% Below investment grade bonds 5% Public investment grade bonds 49% Mortgage loans 5% Other 6%
[Pie Chart] 1999 FIXED MATURITY SECURITIES BY RATING Deposits - -------- A 33% BBB 26% AA 10% AAA 25% Below Investment Grade 6%
Investment activities, managed by American General Investment Management, are an integral part of our retirement services and life insurance operations. Our strategy is twofold: (1) maintain a predominantly investment-grade fixed-income portfolio that provides adequate liquidity and cash flow to meet liability requirements and (2) optimize investment return through active investment management. We had $68.3 billion of investments supporting insurance and annuity liabilities at year-end 1999. Fixed maturity securities accounted for approximately 90% of these investments. Interest rates increased in 1999 after a decline in 1998. The ten-year treasury bond yield rose by nearly 180 basis points to 6.44% at year-end 1999, compared to a 100 basis point decline in 1998. As measured by the Salomon Brothers Broad Investment Grade Bond Index, the 1999 increase in yield resulted in average bond prices declining approximately 7% during the year, in contrast to a 2% increase in 1998. Fair Value of Securities We report our fixed maturity and equity securities at fair value in accordance with Statement of Financial Accounting Standards 115. Accounting rules do not permit us to report the insurance and annuity liabilities supported by these securities at fair value. As a result, changes in interest rates create volatility in shareholders' equity since only unrealized gains (losses) on fixed maturity and equity securities are reported on the balance sheet. The components of the fair value adjustment at December 31 were as follows:
1999 1998 1997 ------- ------- ------- Fair value adjustment to fixed maturity securities $(1,750) $ 3,519 $ 2,786 Related increase (decrease) in DPAC/CIP 347 (1,073) (1,052) Related decrease (increase) in deferred income taxes 495 (863) (610) Valuation allowance on deferred tax asset (381) -- -- ------- ------- ------- Net unrealized gains (losses) Fixed maturity securities (1,289) 1,583 1,124 Other, net 11 16 45 ------- ------- ------- Net unrealized gains (losses) on securities $(1,278) $ 1,599 $ 1,169 ------- ------- -------
The increase in interest rates and resulting decreases in bond values in 1999 caused a $5.3 billion decrease in the fair value adjustment to fixed maturity securities and a related $2.9 billion decrease in shareholders' equity. Decreases in interest rates during 1998 resulted in a $733 million increase in the fair value adjustment to fixed maturity securities and a $459 million increase in shareholders' equity. We established a valuation allowance on the deferred tax asset related to the unrealized losses on fixed maturity securities at December 31, 1999 because a portion of the deferred tax asset may not be realized. This valuation allowance had no impact on earnings. Investment Results Net investment income increased 3% and 27% in 1999 and 1998, while average invested assets increased by 6% and 28% for the same periods. Lower yields on new investment purchases in 1999 and 1998 caused investment yield to decrease by 31 basis points in 1999. The 1998 investment yield was flat due to higher income on investments called or tendered before their maturity dates, which more than offset declining yields on new investments. Fixed Maturity Securities At year-end 1999, fixed maturity securities included $45.6 billion of corporate bonds and $12.9 billion of mortgage-backed securities. The average credit rating of our fixed maturity securities was A+ at the end of each of the last three years. Average ratings by category at December 31, 1999 were as follows:
Average 1999 Rating ---- ------ Investment grade $ 44,412 73% A Mortgage-backed 12,893 21 AAA Below investment grade 3,320 6 BB- -------- --- ------ Total fixed maturity securities $ 60,625 100% A+
We have a well diversified portfolio, with no investment exceeding 0.7% of total invested assets. The mix of our fixed maturity securities portfolio at December 31 was as follows:
1999 1998 1997 ---- ---- ---- Corporates Industrial 41% 40% 43% Financial services 22 21 19 Utilities 13 13 13 ---- ---- ---- Total corporates 76 74 75 Mortgage-backed 21 21 20 Governments 3 5 5 ---- ---- ---- Total portfolio 100% 100% 100% ---- ---- ----
28 9 Mortgage-Backed Securities. We invest in mortgage-backed securities (MBSs) to diversify our portfolio risk characteristics from primarily corporate credit risk to a mix of credit and cash flow risk. The majority of our MBSs have relatively low cash flow variability. In addition, virtually all of our MBSs have minimal credit risk because the underlying collateral is guaranteed by Federal agencies. These MBSs are highly liquid and offer higher yields than corporate debt securities of similar credit quality and expected average lives. Our MBSs at December 31 were as follows:
1999 1998 1997 -------- ------- -------- Collateralized mortgage obligations (CMOs) Planned amortization class $ 3,765 $ 4,622 $ 4,520 Sequential 2,851 3,948 2,685 Other 1,087 828 1,149 -------- ------- -------- Total CMOs 7,703 9,398 8,354 Pass-through securities 3,955 3,013 673 Commercial MBSs 1,235 608 401 -------- ------- -------- Total MBSs $ 12,893 $13,019 $ 9,428 -------- ------- --------
The principal risks inherent in holding MBSs are prepayment and extension risks arising from changes in market interest rates. In rising interest rate environments, underlying mortgages are prepaid at a slower rate, causing MBS principal payments to be extended. In declining interest rate environments, the mortgages underlying MBSs are prepaid more rapidly, causing early repayment of MBSs. Although early MBS repayments may result in acceleration of income from recognition of any unamortized discount, we typically have to reinvest the proceeds at lower current yields, resulting in a net reduction of future investment income. We manage these prepayment and extension risks by investing primarily in collateralized mortgage obligation (CMO) tranches that provide for greater stability of cash flows. The planned amortization class tranche is structured to give the investor more certain cash flows; therefore, this tranche is subject to less prepayment and extension risk than other CMO tranches. Sequentials allocate all principal payments to tranches based on maturity, retiring the shortest maturity tranches first. Beginning in 1998, we increased our holdings of pass-through securities to facilitate dollar roll agreements. We had no dollar roll agreements outstanding at December 31, 1999 or 1998. Below Investment Grade Securities. We invest in below investment grade securities to enhance the overall yield of our portfolio. Below investment grade securities have credit ratings below BBB- and represented 5% or less of invested assets at each year end. We minimize the 29 10 Management's Discussion and Analysis In millions risks associated with below investment grade securities by limiting our exposure to any one issuer and by closely monitoring the creditworthiness of such issuers. Below investment grade bond issuers are generally more sensitive to changes in their competitive positions and to general economic conditions than more highly-rated issuers and, therefore, are more likely to experience defaults. While market default rates increased significantly in 1999, such defaults had no significant impact on the company in the past three years. Investment income from below investment grade securities was $371 million (10.4% yield) in 1999, $287 million (9.8% yield) in 1998, and $178 million (10.4% yield) in 1997. Realized investment gains (losses) on below investment grade securities were immaterial. Non-performing bonds were less than 0.1% of total fixed maturity securities at each year end. We classify bonds as non-performing when the payment of interest is sufficiently uncertain as to preclude the accrual of interest. MORTGAGE LOANS Mortgage loans on real estate, consisting primarily of loans on office and retail properties, represented 5% of our invested assets at year-end 1999. Mortgage loan statistics at December 31 were as follows:
1999 1998 1997 ------- ------- ------ Mortgage loans $ 3,712 $ 3,402 $3,326 Allowance for losses (26) (34) (54) ------- ------- ------ Mortgage loans, net $ 3,686 $ 3,368 $3,272 ------- ------- ------ Yield on total mortgage loans 8.3% 8.6% 8.8% Yield on restructured loans 7.8 7.9 8.6 Percentage of mortgage loans Restructured 1.7 2.1 3.5 Delinquent (60+ days) .6 .6 .6 Watch list loans .9 2.4 3.8 Allowance for losses .7 1.0 1.6 ------- ------- ------
ASSET/LIABILITY MANAGEMENT We manage our exposure to fluctuations in interest rates through an asset/liability management program which is designed to achieve our liquidity and profitability objectives by maintaining a reasonable balance in the durations of assets and liabilities. We perform asset/liability management on an ongoing basis for corporate operations and each operating company, as well as on an aggregate basis. CORPORATE OPERATIONS The primary assets of our parent company are long-term investments in its subsidiaries. These assets are supported by our corporate capital structure consisting of corporate debt, redeemable equity, and shareholders' equity, which by its nature is very long term. The average lives of our long-term corporate debt and redeemable equity are 10 and 35 years, respectively. To reduce the earnings impact of a change in interest rates, we limit floating-rate debt to 10% to 12% of our target capital. Floating-rate debt was 12% of total capital at December 31, 1999 and 10% at December 31, 1998. These percentages included the effect of interest rate swap agreements that converted floating-rate debt to a fixed rate. RETIREMENT SERVICES AND LIFE INSURANCE The earnings of our retirement services and life insurance divisions are largely driven by the spread between the yields on our investments and the rates credited to policyholders. We respond to fluctuations in interest rates through pricing of new products and periodic adjustment of interest crediting rates on existing products, where possible. We have been able to manage the investment spread to maintain overall margins on interest-sensitive products while market interest rates increased in 1999 and decreased in 1998 and 1997. Our ability to manage interest crediting rates and durations is largely due to the nature of our insurance and annuity products. We had the ability, subject to certain minimum rate guarantees, to adjust interest crediting rates on approximately 83% of our insurance and annuity liabilities at December 31, 1999. Additionally, we use swaptions (options to enter into swap agreements) to limit our exposure to reduced spreads between interest crediting rates and investment yields during prolonged periods of significant increases or decreases in market interest rates. We manage our investment portfolio by purchasing investments that are aligned with our specific portfolio 30 11 objectives and, to a lesser extent, by restructuring the portfolio. We also use derivative financial instruments on a very limited and selective basis. We establish investment portfolio objectives that maximize investment returns consistent with the duration and cash flow characteristics of the insurance and annuity liabilities being supported. The most recent estimated duration of the company's insurance and annuity liabilities was in the range of 5.1 to 6.1 years, while the estimated duration of the assets supporting these liabilities was 5.5 years. We perform simulations of the cash flows generated by our businesses under various interest rate scenarios to manage the gap between our interest rate-sensitive assets and liabilities. Our cash flow testing performed as of December 31, 1999 indicated that our insurance companies would have sufficient cash flows to meet their insurance obligations under the broad range of selected scenarios. CONSUMER FINANCE The primary products offered by our consumer finance division are real estate loans, which typically have expected lives of 3 years (although this can increase as interest rates increase); consumer loans, which typically have terms of 1.5 years; and retail sales financing contracts, which typically have terms of 9 months. We fund these receivables with equity (typically 12%) and a combination of fixed-rate and floating-rate debt. We use interest-rate swap agreements to convert a portion of floating-rate debt to a fixed rate. The weighted-average years to maturity for our fixed-rate debt was 2.8 years at December 31, 1999. We determine the mix of fixed-rate and floating-rate debt based in part on the nature of the receivables being supported. Generally, floating-rate assets are funded with floating-rate debt, while fixed-rate assets are funded with 20% to 30% floating-rate debt and the remainder is funded with fixed-rate debt. SENSITIVITY ANALYSIS The fair values of certain of our assets and liabilities are sensitive to changes in market interest rates. The impact of changes in interest rates would be reduced by the fact that increases (decreases) in fair values of assets would be partially offset by corresponding changes in fair values of liabilities. In aggregate, the estimated impact of an immediate and sustained 100 basis point increase or decrease in interest rates on the fair values of our interest rate-sensitive financial instruments would not be material to our financial position. The estimated increases (decreases) in fair values of interest rate-sensitive financial instruments at December 31, 1999 were as follows:
1999 +100 bp -100 bp -------- -------- Assets Fixed maturity securities $ (3,224) $ 3,450 Mortgage loans (165) 166 Policy loans (101) 117 Finance receivables (331) 362 Liabilities Insurance investment contracts (1,619) 1,801 Long-term debt Corporate (72) 80 Consumer finance (157) 165 Redeemable equity (161) 198
These estimated changes in fair values are not materially different from those we estimated at December 31, 1998. At each year end, we derived the changes in fair values by modeling estimated cash flows of certain of the company's assets and liabilities. The assumptions we used adjusted cash flows to reflect changes in prepayments, calls, surrenders, and interest crediting rates in response to the changes in interest rates, as well as the effects of derivative financial instruments used as hedges. These cash flows did not consider new investment purchases, loan originations, product sales, or debt issuances. Readers should exercise care in drawing conclusions based on the above analysis. While these changes in fair values provide a measure of interest rate sensitivity, they do not represent our expectations about the impact of interest rate changes. A meaningful assessment of our net interest rate exposure cannot be made without a revaluation of our other insurance and annuity liabilities, which are not considered to be interest rate-sensitive financial instruments under current accounting standards. This analysis was also based on our exposure at a particular point in time and incorporated numerous assumptions and estimates. It also assumed an immediate change in interest rates, without regard to the impact of certain business decisions or initiatives that we would likely undertake to mitigate or eliminate some or all of the adverse effects of the modeled scenarios. Additionally, this analysis did not reflect the impact of fair value fluctuations on deferred income taxes, deferred policy acquisition costs, or cost of insurance purchased. Adjustments to these accounts would partially offset the changes to the fair values of interest rate-sensitive financial instruments. 31 12 Management's Discussion and Analysis In millions CAPITAL RESOURCES CORPORATE CAPITAL The level of our corporate capital is determined primarily by the required equity of our business divisions. The mix of corporate capital between debt and equity is influenced by our overall corporate strategy and structure. Our target capital structure consists of 25% corporate debt, 15% redeemable equity, and 60% shareholders' equity. The amount and mix of our corporate capital at December 31 were as follows:
1999 1998 1997 -------- ------- -------- Corporate capital* $ 12,768 $11,767 $ 10,071 -------- ------- -------- Corporate debt 24% 23% 19% Redeemable equity 15 15 17 Shareholders' equity 61 62 64 -------- ------- --------
* Excludes fair value adjustment under SFAS 115. Capital Costs. Corporate capital costs consist of interest on corporate debt and dividends on preferred securities. Corporate capital costs were as follows:
1999 1998 1997 -------- ------- -------- Interest on corporate debt $ 210 $ 196 $ 169 Dividends on preferred securities 142 137 129 Tax benefit (124) (117) (107) -------- ------- -------- Corporate capital costs $ 228 $ 216 $ 191 -------- ------- --------
The increases in corporate capital costs reflect the growth in corporate capital, partially offset by lower market rates on new issuances of debt and preferred securities. Corporate Debt. Our corporate debt ratings at December 31, 1999 were as follows:
Commercial Paper Long-term Debt ------------------- ------------------- Rating Description Rating Description ------ ----------- ------ ----------- Standard & Poor's A-1+ Highest AA- Very Strong Duff & Phelps D-1+ Highest AA- High Moody's P-1 Highest A2 Favorable
The weighted-average interest rates on corporate debt, including the effect of interest rate swap agreements, were as follows:
1999 1998 1997 ---- ---- ---- Floating-rate debt 6.03% 5.54% 6.12% Fixed-rate debt 7.62 7.77 7.92 Total corporate debt 6.63 6.46 7.38
Redeemable Equity. During the last three years, we issued preferred securities of subsidiaries totaling $700 million. These securities are recorded on our balance sheet as redeemable equity. We used the proceeds primarily to reduce short-term debt related to acquisitions or share repurchases. The weighted-average dividend rate on our redeemable equity was 7.9% in each of the last three years. At December 31, 1999, our redeemable equity was rated mid-single A by the three major rating agencies. During 2000, we expect to exercise our option to terminate the conversion rights associated with $250 million of convertible preferred securities. This will likely cause the holders to convert the preferred securities to common stock before the conversion rights are terminated. The preferred securities are each convertible into 1.2288 shares of our common stock, which is equivalent to a conversion price of $40.69 per share of common stock. Following conversion, we plan to issue additional preferred securities to maintain our target capital structure. Shareholders' Equity. During the last three years, we issued $1.0 billion of common stock in connection with our acquisitions. On January 26, 2000, we announced the redemption of all outstanding shares of our mandatorily convertible preferred stock, with a stated value of $85 million. As a result, on March 1, 2000, holders will receive .8264 share of our common stock for each share of preferred stock redeemed, for a total of 1.9 million common shares. Since 1987, American General has repurchased 122.6 million common shares for an aggregate cost of $3.2 billion. Our share repurchases for the past three years were as follows:
1999 1998 1997 ---- ---- ---- Shares repurchased 5.9 3.0 9.9 Cost of shares repurchased $425 $195 $ 466
We use share repurchases as a means of maintaining our target capital structure. Our future repurchase activity will be based on the company's corporate development activities, capital management strategy, and fluctuations in our common stock price. RETIREMENT SERVICES AND LIFE INSURANCE Risk-Based Capital. The amount of statutory equity required to support the business of our retirement services and life insurance companies is principally a 32 13 function of four factors: (1) the quality of assets invested to support insurance and annuity reserves, (2) mortality and other insurance-related risks, (3) interest-rate risk resulting from potential mismatching of asset and liability durations, and (4) general business risks. Each of these items is a key factor in the National Association of Insurance Commissioners' risk-based capital (RBC) formula, used to evaluate the adequacy of a life insurance company's statutory equity. We manage the statutory equity of our principal retirement services and life insurance companies to a target of 2.5 times the Company Action Level RBC (or 5.0 times the Authorized Control Level RBC). We adjust dividends from, or contributions to, these companies to maintain this target. At December 31, 1999, our principal retirement services and life insurance companies had statutory equity in a range of 2.00 to 3.30 times the Company Action Level RBC, with a weighted-average of 2.68 times. Financial Strength Ratings. Rating agencies use the RBC approach as a factor in assigning an insurance company its financial strength rating. This rating serves as an indicator of the insurance company's ability to meet its future obligations to policyholders. At December 31, 1999, our principal retirement services and life insurance companies were rated as follows:
Rating Description ------ ----------- Standard & Poor's AA+ Very strong Duff & Phelps AA+ Very high Moody's Aa2/Aa3 Excellent A.M. Best A+ Superior
CONSUMER FINANCE The capital of our consumer finance division varies directly with the level of its finance receivables. This capital, totaling $11.5 billion at year-end 1999, consisted of $1.3 billion of equity and $10.2 billion of consumer finance debt, which was not guaranteed by American General. The capital mix of consumer finance debt and equity is based upon maintaining leverage at a level that supports cost-effective funding. The consumer finance division's target ratio of debt to tangible net worth, a standard measure of financial risk in the consumer finance industry, is currently 7.5 to 1. At year-end 1999, the ratio was 7.6 to 1; the ratio was 7.5 to 1 at year-end 1998 and 1997. Consumer finance debt ratings at December 31, 1999 were as follows:
Commercial Paper Long-term Debt ------------------- ------------------- Rating Description Rating Description ------ ----------- ------ ----------- Standard & Poor's A-1 Strong A+ Strong Duff & Phelps D-1+ Highest A+ Average Moody's P-1 Highest A2 Favorable
LIQUIDITY Our overall liquidity is based on cash flows from the business divisions and our ability to borrow in both the long-term and short-term markets at competitive rates. We believe that our overall sources of liquidity will continue to be sufficient to satisfy our foreseeable financial obligations. CORPORATE OPERATIONS The primary sources of cash for corporate operations include net dividends from our business divisions and the proceeds from issuances of debt and redeemable equity. Our internal subsidiary capitalization targets are a major factor in our operating companies' ability to pay dividends. Additionally, state insurance regulations for insurance and annuity companies and long-term debt covenants for our consumer finance operations restrict the amount of dividends our business divisions may pay. These restrictions are not expected to affect American General's ability to meet its cash obligations in 2000. Corporate operations use cash to pay dividends to shareholders, to pay aftertax interest on corporate debt and dividends on preferred securities, to repurchase common stock, and to pay other corporate expenses. We expect to fund future acquisitions and maturities of debt and preferred securities through external sources, while maintaining our capital structure. 33 14 Management's Discussion and Analysis In millions Net dividends received from our business divisions were as follows:
1999 1998 1997 ------ ------ ------ Dividends received Retirement Services $ 124 $ 182 $ 129 Life Insurance 599 599 457 Consumer Finance 110 - 80 ------ ------ ------ Total received 833 781 666 ------ ------ ------ Contributions paid Retirement Services 119 281 - Life Insurance 230 - - Consumer Finance - 47 - ------ ------ ------ Total paid 349 328 - ------ ------ ------ Net dividends received $ 484 $ 453 $ 666 ------ ------ ------
The 1998 decrease in net dividends received resulted from contributions made in 1998 to support growth in the retirement services and consumer finance divisions. The 1999 net dividends included contributions million to fund the payment of market conduct litigation costs. RETIREMENT SERVICES Principal sources of cash for our retirement services division were as follows:
1999 1998 1997 ------ ------ ------ Cash from operating activities $1,570 $1,625 $1,058 Fixed policyholder account deposits, net of withdrawals 1,532 626 6 Variable account deposits, net of withdrawals 2,465 2,294 1,991
The 1999 increase in net fixed policyholder account deposits was due to growth in fixed annuities sold through financial institutions. The 1998 increase related to the acquisition of American General Annuity. The increases in net variable account deposits arose from policyholders continuing to seek higher returns in equity-based investments, including the company's separate accounts. Because the investment risk on variable accounts lies predominantly with the policyholder, deposits and withdrawals related to separate accounts are not included in the company's cash flow statement. The division's major use of cash was the net purchase of investments necessary to support increases in insurance and annuity liabilities. LIFE INSURANCE Principal sources of cash for our life insurance division were as follows:
1999 1998 1997 ---- ---- ---- Cash from operating activities $155 $361 $453 Fixed policyholder account deposits, net of withdrawals 394 57 89 Variable account deposits, net of withdrawals 643 356 103
Net cash provided by operating activities decreased in 1999 due to payment of $237 million of previously-accrued market conduct litigation costs. The increase in net fixed policyholder account deposits reflected the growth in lump sum fixed deposits that will be transferred to variable accounts over a one-year period, as well as higher withdrawals in 1998 for annuities that had reached the end of their surrender charge period. The increases in net variable account deposits were the result of growth in the corporate executive insurance business and policyholders seeking higher returns from equity-based investments. The division's 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. CONSUMER FINANCE Principal sources of cash for our consumer finance division were as follows:
1999 1998 1997 ---- ---- ---- Cash from operating activities $ 494 $ 439 $ 516 Increase (decrease) in debt 1,295 1,593 (366) Sale of non-strategic assets - - 733
Net cash provided by operating activities increased in 1999 due to an increase in finance charges from higher average net receivables. Cash generated by borrowings declined in 1999 due to lower growth in finance receivables. Cash provided by the sale of non-strategic assets resulted in a decrease in borrowings in 1997. The division's major use of cash was to fund finance receivables growth. Net cash used to fund finance receivables was $1.6 billion in 1999, down from $1.8 billion in 1998, and up from $793 million in 1997. 34 15 REGULATION AND OTHER REGULATION On November 12, 1999, the Financial Services Modernization Act became federal law, breaking down regulatory barriers between banks, insurance companies, and securities firms which had existed for over 60 years. We anticipate that the new law will hasten the pace of consolidation in the financial services industry, as well as provide new opportunities and increase competition among diversified financial services companies. However, we do not expect this law to have a significant impact on our corporate or capital strategy. Insurance regulators monitor capital adequacy and market conduct to protect policyholders. Market conduct includes sales and advertising practices, agent licensing and compensation, policyholder service, complaint handling, underwriting, and claims practices. As a result of increased regulatory scrutiny, market conduct compliance costs for our insurance subsidiaries have increased in recent years. Market conduct issues are also a concern for our consumer finance business. 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 As of March 10, 2000, all of our major technology systems, programs, and applications, including those which rely on third parties, are operating smoothly following our transition into 2000. We have experienced no interruptions to normal business operations, including the processing of customer account data and transactions. We will continue to monitor our technology systems, including critical third party dependencies, as necessary to maintain our Year 2000 readiness. We do not expect any future disruptions, if they occur, to have a material effect on the company's results of operations, liquidity, or financial condition. Through December 31, 1999, we incurred and expensed pretax costs of $98 million related to Year 2000 readiness, including $18 million in 1999 and $65 million in 1998. In 1999, Year 2000 readiness expenses were included in division earnings. The 1998 expenses were excluded from division earnings, consistent with the manner in which we reviewed division results. In addition, we accelerated the planned replacement of certain systems as part of our Year 2000 plans. The cost of these replacement systems was immaterial. We do not anticipate incurring any significant costs in the future to maintain Year 2000 readiness. MERGER-RELATED COSTS In 1997, we recorded an aftertax non-recurring charge of $247 million for costs related to the USLIFE acquisition. Included in this charge was $71 million ($46 million aftertax) of restructuring costs related to our plan to integrate USLIFE into our operations and the concurrent realignment of our life insurance division. To implement this plan, we eliminated positions in both USLIFE's corporate operations and our operating companies' administrative functions. We also closed redundant facilities and wrote off fixed assets and computer software that would no longer be used. During the realignment, we adjusted the plan in response to personnel voluntarily leaving the company before their anticipated termination date, our determination that certain data processing facilities would not be consolidated, and our discovery of additional software that was no longer being used at the centralized locations. These adjustments did not change the total liability we initially recorded. We have substantially completed the restructuring activities. The remaining liability of $14 million relates to personnel costs, most of which we expect to pay in 2000, and lease payments under long-term obligations, most of which will be paid by 2001. An analysis of the restructuring liability is included in Note 3.2 to our financial statements. LITIGATION We recorded litigation settlements in each of the last three years. These settlements, which were non-recurring and unrelated to each other, are discussed in Notes 3.1 and 18.2 to our financial statements. We are currently in arbitration to rescind a quota share reinsurance agreement covering workers' compensation claims, as discussed in Note 18.2 to our financial statements. We believe that our ultimate loss, if any, related to our workers' compensation business will not have a material adverse effect on our future results of operations and financial position. Forward-Looking Statements All statements, trend analyses, and other information contained herein relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. We have made these forward-looking statements based upon our current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those we anticipated. Actual results may differ materially from those included in the forward-looking statements. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: (1) changes in general economic conditions, including the performance of financial markets and interest rates; (2) customer responsiveness to both products and distribution channels; (3) competitive, regulatory, or tax changes that affect the cost of, or demand for, our products; (4) our ability to secure necessary regulatory approvals; and (5) adverse litigation results or resolution of litigation and arbitration. Investors are also directed to other risks and uncertainties discussed in documents we filed with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments, or otherwise. 35 16 CONSOLIDATED INCOME STATEMENT AMERICAN GENERAL CORPORATION
For the years ended December 31 In millions, except per share data 1999 1998 1997 -------- -------- -------- REVENUES Premiums and other considerations $ 3,772 $ 3,605 $ 3,362 Net investment income 5,232 5,095 4,020 Finance charges 1,455 1,354 1,265 Realized investment gains (losses) (19) 6 40 Other 239 191 240 -------- -------- -------- Total revenues 10,679 10,251 8,927 -------- -------- -------- BENEFITS AND Insurance and annuity benefits 5,313 5,159 4,332 EXPENSES Operating costs and expenses 1,643 1,591 1,423 Commissions 1,230 1,063 873 Change in deferred policy acquisition costs and cost of insurance purchased (477) (213) (100) Provision for finance receivable losses 207 212 248 Goodwill amortization 48 45 24 Interest expense Corporate 197 181 158 Consumer Finance 574 512 461 Other charges Litigation settlements 57 378 50 Merger-related costs - - 272 Loss on sale of non-strategic assets - - 113 -------- -------- -------- Total benefits and expenses 8,792 8,928 7,854 -------- -------- -------- EARNINGS Income before income tax expense 1,887 1,323 1,073 Income tax expense 664 459 447 -------- -------- -------- Income before net dividends on preferred securities of subsidiaries and minority interest 1,223 864 626 Net dividends on preferred securities of subsidiaries 92 89 84 Minority interest - 11 - -------- -------- -------- Net income $ 1,131 $ 764 $ 542 -------- -------- -------- SHARE DATA Net income per share Basic $ 4.52 $ 3.02 $ 2.21 Diluted 4.40 2.96 2.19 -------- -------- -------- See Notes to Financial Statements.
36 17 CONSOLIDATED BALANCE SHEET AMERICAN GENERAL CORPORATION
At December 31 In millions 1999 1998 1997 ---------- --------- -------- ASSETS Investments Fixed maturity securities (amortized cost: $62,375; $59,212; $44,961) $ 60,625 $ 62,731 $ 47,747 Mortgage loans on real estate 3,686 3,368 3,272 Equity securities (cost: $299; $288; $93) 339 325 116 Policy loans 2,375 2,329 2,156 Investment real estate 222 226 233 Other long-term investments 412 230 176 Short-term investments 676 654 306 ---------- --------- -------- Total investments 68,335 69,863 54,006 ---------- --------- -------- Cash 294 341 263 Assets held in separate accounts 24,097 16,158 11,482 Finance receivables, net 10,634 9,275 7,639 Deferred policy acquisition costs 4,980 3,253 2,718 Cost of insurance purchased 1,170 956 680 Goodwill 1,501 1,590 677 Other assets 4,436 3,671 3,155 ---------- --------- -------- Total assets $ 115,447 $ 105,107 $ 80,620 ---------- --------- -------- LIABILITIES Insurance and annuity liabilities $ 66,401 $ 62,844 $ 47,659 Liabilities related to separate accounts 24,097 16,158 11,482 Debt (short-term) Corporate ($1,932; $1,607; $575) 3,120 2,743 1,916 Consumer Finance ($4,489; $3,686; $3,255) 10,206 8,863 7,266 Income tax liabilities 833 1,543 1,380 Other liabilities 2,446 2,357 1,608 ---------- --------- -------- Total liabilities 107,103 94,508 71,311 ---------- --------- -------- REDEEMABLE Company-obligated mandatorily redeemable EQUITY preferred securities of subsidiaries holding solely company subordinated notes Non-convertible 1,675 1,480 1,479 Convertible 249 248 247 ---------- --------- -------- Total redeemable equity 1,924 1,728 1,726 ---------- --------- -------- SHAREHOLDERS' Convertible preferred stock EQUITY Shares issued and outstanding: 2.3 85 85 85 Common stock Shares issued: 269.3; 269.3; 259.1 Shares outstanding: 248.1; 251.8; 243.2 962 939 326 Retained earnings 7,732 7,007 6,624 Accumulated other comprehensive income (loss) (1,278) 1,599 1,169 Cost of treasury stock (1,081) (759) (621) ---------- --------- -------- Total shareholders' equity 6,420 8,871 7,583 ---------- --------- -------- Total liabilities and equity $ 115,447 $ 105,107 $ 80,620 ---------- --------- --------
See Notes to Financial Statements. 37 18 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AMERICAN GENERAL CORPORATION
For the years ended December 31 In millions, except per share data 1999 1998 1997 -------- ------- ------- CONVERTIBLE PREFERRED STOCK Balance at beginning and end of year $ 85 $ 85 $ 85 -------- ------- ------- COMMON Balance at beginning of year 939 326 572 STOCK Issuance of common shares for acquisition - 580 - Stock options issued for acquisition - 37 - Retirement of USLIFE treasury shares - - (346) Issuance of treasury shares for acquisitions and other 23 (4) 100 -------- ------- ------- Balance at end of year 962 939 326 -------- ------- ------- RETAINED Balance at beginning of year 7,007 6,624 6,420 EARNINGS Net income 1,131 764 542 Cash dividends (per share) Preferred ($2.57; $2.57; $2.57) (6) (6) (6) Common ($1.60; $1.50; $1.40) (400) (375) (329) Other - - (3) -------- ------- ------- Balance at end of year 7,732 7,007 6,624 -------- ------- ------- ACCUMULATED Balance at beginning of year 1,599 1,169 627 OTHER Change in net unrealized gains (losses) on securities (2,877) 430 542 COMPREHENSIVE -------- ------- ------- INCOME (LOSS) Balance at end of year (1,278) 1,599 1,169 -------- ------- ------- COST OF Balance at beginning of year (759) (621) (860) TREASURY Share repurchases (425) (195) (466) STOCK Issuance for acquisitions 43 - 304 Retirement of USLIFE treasury shares - - 346 Issuance under employee benefit plans and other 60 57 55 -------- ------- ------- Balance at end of year (1,081) (759) (621) -------- ------- ------- SHAREHOLDERS' EQUITY Balance at end of year $ 6,420 $ 8,871 $ 7,583 -------- ------- -------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
1999 1998 1997 -------- ------- ------- NET INCOME Net income $ 1,131 $ 764 $ 542 -------- ------- ------- OTHER Change in net unrealized gains (losses) on securities COMPREHENSIVE Fair value of fixed maturity securities (5,269) 733 1,298 INCOME Deferred policy acquisition costs and cost of insurance purchased 1,420 (21) (461) Deferred income taxes 977 (253) (290) -------- ------- ------- Change in fixed maturity securities (2,872) 459 547 Change in equity securities and other (5) (29) (5) -------- ------- ------- Total (2,877) 430 542 -------- ------- ------- COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) $ (1,746) $ 1,194 $ 1,084 -------- ------- -------
See Notes to Financial Statements. 38 19 CONSOLIDATED STATEMENT OF CASH FLOWS AMERICAN GENERAL CORPORATION
For the years ended December 31 In millions 1999 1998 1997 --------- -------- -------- OPERATING Net income $ 1,131 $ 764 $ 542 ACTIVITIES Reconciling adjustments Insurance and annuity liabilities 1,206 1,619 1,082 Deferred policy acquisition costs and cost of insurance purchased (477) (213) (100) Deferred income taxes 267 (30) (10) Provision for finance receivable losses 207 212 248 Loss on sale of non-strategic assets - - 113 Realized investment losses (gains) 19 (6) (40) Other, net (324) (135) (190) --------- -------- -------- Net cash provided by operating activities 2,029 2,211 1,645 --------- -------- -------- INVESTING Investment purchases (22,804) (14,504) (11,010) ACTIVITIES Investment dispositions and repayments 19,062 12,155 10,290 Finance receivable originations and purchases (6,654) (6,589) (5,136) Finance receivable principal payments received 5,102 4,775 4,343 Net (increase) decrease in short-term investments (14) 444 7 Acquisitions (29) (591) (283) Sale of non-strategic assets - - 1,047 Other, net (167) (252) (99) --------- -------- -------- Net cash used for investing activities (5,504) (4,562) (841) --------- -------- -------- FINANCING Retirement Services and Life Insurance ACTIVITIES Policyholder account deposits 6,648 4,981 3,068 Policyholder account withdrawals (4,722) (4,298) (2,973) --------- -------- -------- Total Retirement Services and Life Insurance 1,926 683 95 --------- -------- -------- Consumer Finance Net increase in short-term debt 758 431 124 Long-term debt issuances 1,108 2,028 731 Long-term debt redemptions (571) (866) (1,221) --------- -------- -------- Total Consumer Finance 1,295 1,593 (366) --------- -------- -------- Corporate Net increase (decrease) in short-term debt 325 937 (56) Long-term debt issuance 150 - - Long-term debt redemptions (100) (354) (133) Issuances of preferred securities of subsidiaries 194 - 498 Common stock repurchases (425) (195) (467) Dividends on common and preferred stock (406) (381) (335) Non-recourse obligation collateralized by bonds 483 - - Other, net (14) 146 47 --------- -------- -------- Total Corporate 207 153 (446) --------- -------- -------- Net cash provided by (used for) financing activities 3,428 2,429 (717) --------- -------- -------- NET CHANGE Net increase (decrease) in cash (47) 78 87 IN CASH Cash at beginning of year 341 263 176 --------- -------- -------- Cash at end of year $ 294 $ 341 $ 263 --------- -------- --------
See Notes to Financial Statements. 39 20 NOTES TO FINANCIAL STATEMENTS 1. 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 or we). All material intercompany transactions have been eliminated in consolidation. Management must make estimates and assumptions that affect amounts reported in the financial statements and in disclosures of contingent assets and liabilities. Ultimate results could differ from our estimates. 1.2 INVESTMENTS Fixed Maturity and Equity Securities. All fixed maturity and equity securities held at December 31, 1999, 1998, and 1997 were classified as available-for-sale and reported at fair value. We adjust related balance sheet accounts as if the unrealized gains (losses) had been realized, and record the net adjustment in accumulated other comprehensive income (loss) in shareholders' equity. If the fair value of a security classified as available-for-sale declines below its cost and we consider the decline to be other than temporary, we reduce the security's amortized cost to its fair value and recognize a realized loss. Beginning in 1998, we held trading securities at various times and reported them at fair value. We held no trading securities at December 31, 1999 or 1998. Realized gains (losses) related to trading securities are included in net investment income; however, trading securities did not have a material effect on net investment income in 1999 or 1998. Mortgage Loans. Mortgage loans are reported at amortized cost, net of an allowance for losses. The allowance covers estimated losses based on our assessment of risk factors such as potential non-payment or non-monetary default. The allowance is primarily based on a loan-specific review. We consider loans to be impaired when collection of all amounts due under the contractual terms is not probable. The company generally looks to the underlying collateral for repayment of these loans. Therefore, impaired loans 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. We classify investment real estate 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. Dollar Roll Agreements. Dollar rolls are agreements to sell mortgage-backed securities and to repurchase substantially the same securities at a specified price and date in the future. We account for dollar rolls as short-term collateralized financings and include the repurchase obligation in other liabilities. There were no dollar rolls outstanding at December 31, 1999, 1998, or 1997. Investment Income. Interest on fixed maturity securities and performing 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. We recognize income on mortgage-backed securities using a constant effective yield based on estimated prepayments of the underlying mortgages. If actual prepayments differ from estimated prepayments, we calculate a new effective yield and adjust the net investment in the security accordingly. The adjustment is recognized in net investment income. Realized Investment Gains (Losses). Realized investment gains (losses) are recognized using the specific identification method. 1.3 SEPARATE ACCOUNTS Separate accounts are assets and liabilities associated with certain contracts, principally annuities, for which the investment risk lies predominantly with the contract holder. The 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 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. 1.4 FINANCE RECEIVABLES Finance Charges. Finances charges are recognized as revenue using the interest method. We stop accruing revenue when contractual payments are not received for four consecutive months for loans, retail sales contracts, and revolving retail accounts, and for six months for private label receivables. Extension fees, late charges, and prepayment penalties are recognized as revenue when received. Direct costs of originating loans, net of non-refundable points and fees, are deferred and included in the carrying amount of the related loans. The amount deferred is 40 21 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 charged or credited to revenue. Losses on Finance Receivables.We charge off finance receivables, except real estate loans, when minimal or no collections have been made for six months. For real estate loans, we initiate foreclosure proceedings when four monthly installments are past due. The carrying amount of a loan in excess of the fair value of the underlying real estate is charged off at foreclosure. The allowance for finance receivable losses is maintained at a level that we consider adequate to absorb anticipated losses in the existing portfolio. We periodically evaluate the portfolio on a pooled basis and consider factors such as economic conditions, portfolio composition, and loss and delinquency experience in our evaluation of the allowance. 1.5 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 insurance contracts, insurance investment contracts, and participating life insurance contracts is charged to expense in relation to the estimated gross profits of those contracts. We adjust the DPAC balance and related expense when our estimate of future gross profits changes significantly. 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 accumulated other comprehensive income (loss) in shareholders' equity. We review the carrying amount of DPAC on at least an annual basis. We consider estimated future gross profits or future premiums, expected mortality, interest earned and credited rates, persistency, and expenses to determine whether the carrying amount is recoverable. Any amounts deemed unrecoverable are charged to expense. 1.6 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 4.0% to 8.3%. CIP is charged to expense and adjusted for the impact of net unrealized gains (losses) on securities in the same manner as DPAC. We review the carrying amount of CIP on at least an annual basis using the same methods used to evaluate DPAC. 1.7 GOODWILL Goodwill is charged to expense in equal amounts, generally over 40 years. We regularly review goodwill for indicators of impairment in value which we believe 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. If facts and circumstances suggest that a subsidiary's goodwill is impaired, we assess the fair value of the underlying business based on an independent appraisal and reduce goodwill to an amount that results in the book value of the subsidiary approximating fair value. 1.8 INSURANCE AND ANNUITY LIABILITIES Substantially all of the company's insurance and annuity liabilities relate to long-duration contracts. The company normally cannot change or cancel these contracts. 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 our estimates of the cost of future policy benefits, using the net level premium method. Interest assumptions used to compute reserves ranged from 2.0% to 13.5% at December 31, 1999. 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 premiums and other considerations in 1999, 1998, and 1997. The portion of earnings allocated to participating policyholders is excluded from net income and shareholders' equity. We determine annual dividends to be paid on participating life insurance contracts based on estimates of the contracts' earnings. Policyholder dividends were $84 million, $90 million, and $95 million in 1999, 1998, and 1997, respectively. 41 22 Notes to Financial Statements In millions 1.11 REINSURANCE The company limits its exposure to loss on any individual life to $2.5 million by ceding additional risks through reinsurance contracts with other insurers. We diversify our risk of reinsurance loss by ceding to a number of reinsurers that have strong financial strength ratings. If a reinsurer is not able to meet its obligations, the company remains liable. We consider the likelihood of a material reinsurance liability not being met by a reinsurer to be remote. The company records a receivable for the portion of benefits paid and insurance liabilities that have been reinsured. 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. 1.12 STOCK-BASED COMPENSATION The company's long-term incentive plans provide for the award of stock options, restricted stock awards, and performance awards to key employees and directors. Stock options constitute the majority of awards. We recognize no expense for stock options since the market price equals the exercise price at the grant date. For restricted stock and performance awards, the grant date market value is amortized to expense over the vesting period. We adjust the expense to reflect changes in market value of our stock and anticipated performance levels for those awards with performance criteria. 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, using the enacted tax rates expected to be in effect when the temporary differences reverse. State income taxes are included in income tax expense. We provide a valuation allowance for deferred tax assets if it is more likely than not that some portion of the deferred tax asset will not be realized. We include in income any 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. We include in accumulated other comprehensive income (loss) in shareholders' equity any changes in a valuation allowance related to fluctuations in fair value of available-for-sale securities. 1.14 DERIVATIVE FINANCIAL INSTRUMENTS Use of Derivatives. The company's use of derivative financial instruments is generally limited to reducing our exposure to interest rate and currency exchange risk. We use interest rate and currency swap agreements, treasury rate lock agreements, and options to enter into interest rate swap agreements. We account for these 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. Interest Rate and Currency Swap Agreements. Interest rate swap agreements convert specific investment securities from a floating-rate to a fixed-rate basis, or vice versa, and hedge against the risk of declining interest rates on anticipated security purchases. Interest rate swap agreements also convert a portion of floating-rate borrowings to a fixed rate and hedge against the risk of rising interest rates on anticipated debt issuances. Currency swap agreements convert cash flows from specific investment securities denominated in foreign currencies into U.S. dollars at specified exchange rates and hedge against currency rate fluctuations on anticipated security purchases. We record the difference between amounts paid and received on swap agreements as an adjustment to net investment income or interest expense, as appropriate, on an accrual basis over the periods covered by the agreements. The related amounts payable to, or receivable from, counterparties are included in other liabilities or other assets. The fair values of swap agreements are recognized in the balance sheet if they hedge investments carried at fair value or if they hedge anticipated purchases of such investments. Changes in the fair value of these swap agreements are reported in accumulated other comprehensive income (loss) 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 balance sheet. For swap agreements hedging anticipated investment purchases or debt issuances, we defer the net swap settlement amount or unrealized gain or loss and include it in the recorded amount of the anticipated transaction when it occurs. Swap agreements generally have terms of two to ten years. Gains or losses from early termination of a swap agreement are 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. Treasury Rate Lock Agreements. Treasury rate lock agreements 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. We account for treasury rate lock agreements in the same manner as interest rate swap agreements that hedge anticipated debt issuances. 42 23 Swaptions. Options to enter into interest rate swap agreements limit the company's exposure to reduced spreads between investment yields and interest rates credited to policyholders should interest rates decrease or increase significantly over prolonged periods. During prolonged periods of decreasing interest rates, the spread between investment yields and interest crediting rates may be reduced as a result of minimum rate guarantees on certain insurance and annuity contracts, which limit our ability to reduce interest crediting rates. Call swaptions, which allow the company to enter into interest rate swap agreements to receive fixed rates and pay lower floating rates, effectively maintain the spread between investment yields and interest crediting rates during such periods. During prolonged periods of increasing interest rates, the spread between investment yields and interest crediting rates may be reduced if the company decides to increase interest crediting rates to limit surrenders. Put swaptions, which allow the company to enter into interest rate swap agreements to pay fixed rates and receive higher floating rates, effectively maintain the spread between investment yields and interest crediting rates during such periods. Premiums paid to purchase swaptions are included in investments and are amortized to net investment income over the exercise period of the swaptions. If a swaption is terminated, any gain is deferred and amortized to insurance and annuity benefits over the expected life of the related contracts and any unamortized premium is charged to income. If a swaption ceases to be an effective hedge, we recognize any related gain or loss in income. 1.15 EARNINGS PER SHARE 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 of dilutive convertible preferred securities and the exercise of dilutive stock options. 1.16 FUTURE ACCOUNTING CHANGE In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivative instruments to be recognized at fair value in the balance sheet. Changes in the fair value of a derivative instrument will be reported as earnings or other comprehensive income, depending upon the intended use of the derivative instrument. We will adopt SFAS 133 on January 1, 2001. We do not expect adoption to have a material impact on the company's results of operations and financial position. 2. ACQUISITIONS 2.1 ACCOUNTING FOR ACQUISITIONS With the exception of USLIFE Corporation (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 our income statement from the acquisition date. We allocate the purchase price of each acquisition to specific assets and liabilities based on our best estimate of their fair values at the acquisition date. The difference between the aggregate purchase price and the net assets acquired is recorded as goodwill. The acquisition of USLIFE was accounted for using the pooling of interests method. Accordingly, our financial statements include the results of operations, financial position, and cash flows of USLIFE for all periods presented. 2.2 1999 ACQUISITIONS On November 12, 1999, we acquired North Central Life Insurance Company, a credit life insurance company. On May 31, 1999, we acquired Standard Pacific Savings, F.A., which we renamed American General Bank, FSB. The combined purchase price of these acquisitions was $95 million. 2.3 1998 ACQUISITIONS Western National. Prior to 1997, the company acquired a 46% investment in Western National Corporation (Western National), the holding company of Western National Life Insurance Company, for $400 million cash. This investment was recorded on an equity basis. On February 25, 1998, we acquired the remaining 54% equity interest for $1.2 billion. The purchase price consisted of $580 million cash and 10.2 million shares of our common stock. In addition, the company issued options to acquire 1.4 million shares of our common stock to replace outstanding options to acquire Western National common stock. The fair value of these options was $37 million, excluding options surrendered for $10 million cash. We consolidated Western National's assets, liabilities, and results of operations in our financial statements effective January 1, 1998. Earnings attributable to minority interests through February 25, 1998 were reflected as a charge against 1998 income. Effective May 1, 1998, we changed Western National Life Insurance Company's name to American General Annuity Insurance Company. Coinsurance Transaction. On May 21, 1998, we acquired a block of individual annuity business in a coinsurance transaction with Provident Companies, Inc. This transaction increased invested assets and annuity liabilities of our retirement services division by $2.4 billion. 43 24 Notes to Financial Statements In millions 2.4 1997 ACQUISITIONS USLIFE. On June 17, 1997, the company completed the acquisition of USLIFE in an all-stock merger transaction. We issued 39.0 million shares of common stock, with a market value of approximately $1.8 billion, in exchange for all USLIFE common shares. Home Beneficial Life. On April 16, 1997, we acquired Home Beneficial Life Insurance Company for $665 million. The purchase price consisted of $283 million cash and 9.5 million shares of our common stock. 2.5 NON-CASH ACTIVITIES Non-cash activities related to the above acquisitions that are not reflected in the cash flow statements were as follows:
1999 1998 1997 ----- ------- ------- Fair value of assets acquired $ 396* $ 9,732 $ 1,446 Liabilities assumed (301) (8,524) (781) Issuance of common stock (66) (580) (382) Issuance of stock options - (37) - ----- ------- ------- Net cash paid $ 29 $ 591 $ 283 ----- ------- -------
* Includes $55 million of cash equivalents. 3. OTHER CHARGES 3.1 LITIGATION SETTLEMENTS In fourth quarter 1999, we recorded a charge of $57 million ($36 million aftertax) for the proposed settlement of litigation associated with the financing of satellite dishes in the mid-1990s and other litigation. See Note 18.2 for further discussion of this litigation. In 1998, certain of our life insurance subsidiaries entered into agreements to resolve substantially all material pending market conduct class action lawsuits. Concurrently, we recorded a charge of $378 million ($246 million aftertax). The charge covered the cost of additional policyholder benefits and other anticipated expenses resulting from the proposed settlements, as well as other administrative and legal costs. In 1997, two of our real estate subsidiaries settled a lawsuit related to certain loans and joint venture contracts, resulting in a charge of $50 million ($33 million aftertax). 3.2 MERGER-RELATED COSTS The company recorded the following expenses in 1997 related to the merger with USLIFE:
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. Change in control costs covered primarily severance and supplemental retirement plan payments to USLIFE executives, payable under various USLIFE plans in effect prior to the merger. Substantially all change in control costs were paid as of December 31, 1998. Restructuring Costs. Restructuring costs related to the integration of USLIFE into the company's operations and the concurrent realignment of our life insurance division. Activity in the restructuring liability through 1999 was as follows:
Personnel Facilities Asset Costs Costs Write-off Total ----- ----- --------- ----- Original liability $34 $ 27 $ 10 $ 71 Charges (7) (2) - (9) --- ---- ---- ---- Balance at December 31, 1997 27 25 10 62 Adjustments (3) (9) 12 - Charges (9) (4) (19) (32) --- ---- ---- ---- Balance at December 31, 1998 15 12 3 30 Charges (10) (3) (3) (16) --- ---- ---- ---- Balance at December 31, 1999 $ 5 $ 9 $ - $ 14 --- ---- ---- ----
As of December 31, 1999, we had eliminated 687 positions and paid $26 million of personnel costs. The majority of the remaining liability for personnel costs is expected to be paid in 2000. The remaining liability for facilities costs consists of payments under long-term lease obligations, substantially all of which will be paid by 2001. Valuation Allowance. We recorded a valuation allowance for the deferred tax asset related to a portion of USLIFE's net operating loss carryforward since, as a result of the acquisition, it was more likely than not that some portion of the deferred tax asset would not be realized. 3.3 SALE OF NON-STRATEGIC ASSETS Losses recorded in 1997 related to the sale of non-strategic assets were as follows:
Pretax Aftertax ------ -------- Finance receivables $ 42 $ 27 Other non-strategic assets 71 46 ----- ----- Total $ 113 $ 73 ----- -----
Other non-strategic assets included the company's land development operations and a Canadian life insurance subsidiary. 44 25 4. INVESTMENTS 4.1 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 ------------------------- ------------------------- --------------------------- ------------------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Fixed maturity securities Corporate bonds Investment grade $43,644 $41,019 $31,926 $ 353 $ 2,809 $ 2,021 $(1,756) $ (137) $ (23) $42,241 $43,691 $33,924 Below investment grade 3,542 3,286 1,892 33 93 73 (281) (106) (7) 3,294 3,273 1,958 Mortgage-backed 13,013 12,422 8,919 117 605 514 (237) (8) (5) 12,893 13,019 9,428 States/political subdivisions 809 627 546 10 44 33 (23) -- -- 796 671 579 U.S. government 661 899 740 32 121 91 (8) (1) -- 685 1,019 831 Foreign governments 562 843 834 14 99 90 (7) (2) (4) 569 940 920 Redeemable preferred stocks 144 116 104 7 2 3 (4) -- -- 147 118 107 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total fixed maturity securities $62,375 $59,212 $44,961 $ 566 $ 3,773 $ 2,825 $(2,316) $ (254) $ (39) $60,625 $62,731 $47,747 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Equity securities $ 299 $ 288 $ 93 $ 47 $ 38 $ 24 $ (7) $ (1) $ (1) $ 339 $ 325 $ 116 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Unrealized Gains (Losses).Net unrealized gains (losses) on fixed maturity and equity securities included in accumulated other comprehensive income (loss) at December 31 were as follows:
1999 1998 1997 ------- ------- ------ Gross unrealized gains $ 613 $ 3,811 $2,849 Gross unrealized losses (2,323) (255) (40) DPAC and CIP fair value adjustments 347 (1,073) (1,052) Deferred income taxes 107 (874) (636) Other, net (22) (10) 48 ------- ------- ------ Net unrealized gains (losses) on securities $(1,278) $ 1,599 $1,169 ------- ------- ------
Maturities.The contractual maturities of fixed maturity securities at December 31, 1999 were as follows:
Amortized Fair Cost Value ---------- ----- Fixed maturity securities, excluding mortgage-backed securities, due In one year or less $ 1,386 $ 1,391 In years two through five 9,684 9,689 In years six through ten 18,591 17,900 After ten years 19,701 18,752 Mortgage-backed securities 13,013 12,893 -------- -------- Total fixed maturity securities $ 62,375 $ 60,625 -------- --------
Actual maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations. The company may sell investments before maturity to achieve corporate requirements and investment strategies. 4.2 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 our credit assessment of the borrower. At December 31, the mortgage loan portfolio was distributed as follows:
1999 1998 1997 ---- ---- ---- Geographic distribution Atlantic 46% 51% 48% Central 31 27 27 Pacific and Mountain 23 22 25 --- --- --- Total mortgage loans 100% 100% 100% --- --- --- Property type Retail 39% 39% 33% Office 34 32 34 Industrial 14 15 18 Apartments 8 9 11 Other 5 5 4 --- --- --- Total mortgage loans 100% 100% 100% --- --- ---
Allowance.Activity in the allowance for mortgage loan losses was as follows:
1999 1998 1997 ---- ---- ---- Balance at January 1 $ 34 $ 54 $ 84 Provision for mortgage loan losses (3) (15) (20) Deductions (5) (5) (10) ----- ---- ---- Balance at December 31 $ 26 $ 34 $ 54 ----- ---- ----
45 26 Notes to Financial Statements In millions Impaired Loans.Impaired mortgage loans were $24 million, $28 million, and $65 million at December 31, 1999, 1998, and 1997, respectively. Interest income related to impaired loans was $1 million in 1999, $3 million in 1998, and $4 million in 1997. 4.3 INVESTMENT INCOME Investment income was as follows:
1999 1998 1997 ------- ------ ------ Fixed maturity securities $ 4,676 $4,513 $3,523 Mortgage loans on real estate 293 326 319 Other 331 307 265 ------- ------ ------ Gross investment income 5,300 5,146 4,107 ------- ------ ------ Investment expense Real estate 32 31 58 Other 36 20 29 ------- ------ ------ Investment expense 68 51 87 ------- ------ ------ Net investment income $ 5,232 $5,095 $4,020 ------- ------ ------
The carrying amount of investments that produced no investment income during 1999 was less than 1% of total invested assets. The ultimate disposition of these investments is not expected to have a material effect on our results of operations and financial position. Derivative financial instruments related to investment securities did not have a material effect on net investment income in 1999, 1998, or 1997. 4.4 REALIZED INVESTMENT GAINS (LOSSES) Realized investment gains (losses) were as follows:
1999 1998 1997 ------- ------ ------ Fixed maturity securities Gross gains $ 251 $ 64 $ 57 Gross losses (267) (137) (70) ------- ------ ------ Total fixed maturity securities (16) (73) (13) ------- ------ ------ Equity securities Gross gains 7 8 5 Gross losses (1) - (1) ------- ------ ------ Total equity securities 6 8 4 ------- ------ ------ Mortgage loans on real estate 4 16 26 Investment real estate 1 10 14 Other long-term investments 3 73 19 DPAC/CIP amortization and investment expense (17) (28) (10) ------- ------ ------ Realized investment gains (losses) $ (19) $ 6 $ 40 ------- ------ ------
4.5 CASH FLOWS FROM INVESTING ACTIVITIES Uses of cash for investment purchases were as follows:
1999 1998 1997 ------- -------- ------- Fixed maturity securities $21,894 $ 13,809 $10,489 Other 910 695 521 ------- -------- ------- Total $22,804 $ 14,504 $11,010 ------- -------- ------- Sources of cash from investment dispositions and repayments were as follows:
1999 1998 1997 ------- -------- ------- Fixed maturity securities Sales $14,042 $ 7,535 $ 6,324 Maturities 1,875 613 1,038 Calls and tenders 1,335 1,808 1,290 Repayments of mortgage- backed securities 1,277 1,248 496 Mortgage loans 345 667 795 Equity securities 59 41 87 Other 129 243 260 ------- -------- ------- Total $19,062 $ 12,155 $10,290 ------- -------- -------
5. FINANCE RECEIVABLES 5.1 DETAIL OF FINANCE RECEIVABLES Finance receivables, which we report net of unearned finance charges, were as follows at December 31:
1999 1998 1997 ------- -------- ------- Real estate loans $ 7,104 $ 5,757 $ 4,155 Non-real estate loans 2,576 2,560 2,556 Retail sales finance 1,350 1,340 1,301 ------- -------- ------- Total finance receivables 11,030 9,657 8,012 Allowance for losses (396) (382) (373) ------- -------- ------- Finance receivables, net $10,634 $ 9,275 $ 7,639 ------- -------- -------
5.2 ALLOWANCE FOR FINANCE RECEIVABLE LOSSES Activity in the allowance for finance receivable losses was as follows:
1999 1998 1997 ------- -------- ------- Balance at January 1 $ 382 $ 373 $ 395 Provision for finance receivable losses 207 212 248 Charge offs, net of recoveries (207) (220) (270) Allowance related to acquired receivables 14 17 - ------- -------- ------- Balance at December 31 $ 396 $ 382 $ 373 ------- -------- -------
46 27 5.3 CONTRACTUAL MATURITIES Contractual maturities of finance receivables at December 31, 1999 were as follows:
After 2000 2001 2002 2003 2004 2004 ------- ------ ------- ----- ---- ------- Maturities $ 1,172 $1,409 $ 1,038 $ 619 $386 $ 6,406 ------- ------ ------- ----- ---- -------
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. 5.4 CASH COLLECTIONS Cash collections of principal were as follows:
1999 1998 1997 ------- ------ ------ Real estate loans Cash collections $ 1,886 $1,553 $1,322 % of average balances 30% 33% 36% Non-real estate loans Cash collections $ 1,519 $1,569 $1,537 % of average balances 61% 62% 60% Retail sales finance Cash collections $ 1,697 $1,653 $1,484 % of average balances 133% 127% 117%
5.5 GEOGRAPHIC CONCENTRATION The geographic concentration of finance receivables at December 31 was as follows:
1999 1998 1997 ---- ---- ---- California 14% 15% 11% North Carolina 7 8 9 Florida 6 6 6 Illinois 6 6 5 Ohio 6 6 6 Indiana 5 5 5 Other 56 54 58 --- --- --- Total finance receivables 100% 100% 100% --- --- ---
6. DEBT 6.1 SHORT-TERM DEBT AND CREDIT FACILITIES Short-term debt consists primarily of commercial paper. The weighted-average interest rates on short-term borrowings at December 31 were as follows:
1999 1998 1997 ---- ---- ---- Corporate 6.0% 5.3% 6.1% Consumer Finance 6.0 5.4 5.9
The company uses unsecured bank credit facilities to support commercial paper borrowings. At December 31, 1999, we maintained unsecured committed credit facilities of $5.6 billion with a total of 49 domestic and foreign banks. There were no borrowings under these facilities at December 31, 1999. Interest rates are based on a money market index, and annual commitment fees range from five to seven basis points. 6.2 LONG-TERM DEBT Long-term debt at December 31 was as follows:
1999 1998 1997 ------- ------ ------ Corporate 6.3% - 9.6%, through 2029 $ 1,188 $1,136 $1,341 Consumer Finance 5.4% - 9.0%, through 2009 $ 5,717 $5,177 $4,011 ------- ------ ------
6.3 LONG-TERM DEBT MATURITIES Scheduled maturities of long-term debt for each of the next five years at December 31, 1999 were as follows:
2000 2001 2002 2003 2004 ------ ------ ----- ------- ------- Corporate $ 350 $ - $ - $ 100 $ 149 Consumer Finance 1,289 1,264 1,079 1,039 276
6.4 INTEREST Interest paid was as follows:
1999 1998 1997 ------- ------ ------ Corporate $ 193 $ 186 $ 150 Consumer Finance 553 493 485
Derivative financial instruments related to debt securities did not have a material effect on reported interest expense or the weighted-average borrowing rate in 1999, 1998, or 1997. 7. INCOME TAXES 7.1 TAX EXPENSE Components of income tax expense were as follows:
1999 1998 1997 ------- ------ ------ Current Federal $ 379 $ 458 $ 393 State 9 14 16 ------- ------ ------ Total current 388 472 409 Deferred 276 (13) 38 ------- ------ ------ Income tax expense* $ 664 $ 459 $ 447 ------- ------ ------
* Excludes tax benefit of $50 million, $54 million, and $45 million, respectively, primarily related to preferred securities of subsidiaries. 47 28 Notes to Financial Statements In millions A reconciliation between the Federal income tax rate and the effective tax rate was as follows:
1999 1998 1997 ---- ---- ---- Federal income tax rate 35% 35% 35% Tax-exempt investment income (1) (2) (2) Goodwill 1 1 1 State taxes, net - 1 1 Merger-related costs - - 7 -- -- -- Effective tax rate 35% 35% 42% -- -- --
7.2 DEFERRED TAX LIABILITIES Components of deferred tax liabilities and assets, included in income tax liabilities on the balance sheet, at December 31 were as follows:
1999 1998 1997 ------- ------- ------- Deferred tax liabilities, applicable to Basis differential of investments $ - $ 1,303 $ 987 DPAC and CIP 1,701 1,025 795 Prepaid pension expense 112 96 87 Other 484 455 543 ------- ------- ------- Total deferred tax liabilities 2,297 2,879 2,412 ------- ------- ------- Deferred tax assets, applicable to Basis differential of investments (493) - - Policy reserves (943) (810) (612) Litigation settlements (66) (129) - Other (424) (418) (520) ------- ------- ------- Gross deferred tax assets (1,926) (1,357) (1,132) Valuation allowance 448 69 68 ------- ------- ------- Total deferred tax assets, net (1,478) (1,288) (1,064) ------- ------- ------- Net deferred tax liabilities $ 819 $ 1,591 $ 1,348 ------- ------- -------
The 1999 deferred tax asset applicable to basis differential of investments was due to unrealized losses on securities. Since a portion of this deferred tax asset may not be realized, a valuation allowance of $381 million was provided at December 31, 1999. This valuation allowance had no income statement impact. The remaining deferred tax asset valuation allowances at year-end 1999, 1998, and 1997 were related to Federal and state income tax operating loss carryovers that we do not expect to utilize. At December 31, 1999, the company had operating loss carryovers for Federal income tax purposes of $65 million, which are available to offset future taxable income through 2012. The operating loss carryovers are predominantly associated with recently acquired companies; therefore, they are subject to certain 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 $912 million at December 31, 1999. At current corporate income tax rates, the associated tax is $319 million. We have not recorded these deferred income taxes because we do not expect to make any distributions. 7.3 TAXES PAID Income taxes paid were as follows:
1999 1998 1997 ---- ---- ---- Federal $ 245 $361 $419 State 8 17 9
7.4 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 our tax returns through 1988. During 1999, the company and the IRS reached a settlement of all contested issues through 1988, which resulted in a change in the tax basis of assets acquired in a 1988 taxable purchase business combination. To reflect the new tax basis, we reduced deferred tax liabilities by $70 million and reduced goodwill by the same amount. The IRS is currently examining our tax returns for 1989 through 1996. Although the final outcome of any issues raised is uncertain, we believe that the ultimate liability, including interest, will not exceed amounts recorded in the financial statements. 8. BENEFIT PLANS 8.1 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. At December 31, 1999, the plans' assets were invested as follows: (1) 71% in equity mutual funds managed outside the company; (2) 26% in fixed income mutual funds managed by one of our subsidiaries; (3) 1% in our common stock; and (4) 1% in deposit administration insurance contracts issued by our subsidiaries. The benefit plans have purchased annuity contracts from our subsidiaries to provide approximately $59 million of future annual benefits to certain retirees. 48 29 The company's funding policy is to contribute annually no more than the maximum amount 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:
1999 1998 1997 ------- ------ ------ Projected benefit obligation (PBO) $ 740 $ 750 $ 667 Plan assets at fair value 1,447 1,280 1,175 ------- ------ ------ Plan assets at fair value in excess of PBO 707 530 508 Other unrecognized items, net (372) (269) (274) ------- ------ ------ Prepaid pension expense $ 335 $ 261 $ 234 ------- ------ ------
The components of pension expense and underlying assumptions were as follows:
1999 1998 1997 ------- ------ ------ Service cost (benefits earned) $ 22 $ 20 $ 18 Interest cost 55 50 46 Expected return on plan assets (117) (95) (85) Amortization (1) - 2 ------- ------ ------ Pension expense (income) $ (41) $ (25) $ (19) ------- ------ ------ Discount rate on benefit obligation 7.75% 7.00% 7.25% Rate of increase in compensation levels 4.25% 4.25% 4.00% Expected long-term rate of return on plan assets 10.35% 10.25% 10.00% ------- ------ ------
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS We provide life, medical, supplemental major medical, and dental benefits for certain retired employees and agents. Most plans are contributory, with retiree contributions adjusted annually to limit employer contributions to predetermined amounts. The company reserves the right to change or eliminate these benefits at any time. The life plans are insured through December 31, 2000. The majority of the retiree medical and dental plans are unfunded and self-insured. The accrued liability for postretirement benefits was $163 million, $175 million, and $169 million at year-end 1999, 1998, and 1997, respectively. These liabilities were discounted at the same rates used for the pension plans. Postretirement benefit expense was $8 million in 1999, $7 million in 1998, and $8 million in 1997. 9. STOCK AND INCENTIVE PLANS 9.1 STOCK OPTIONS Stock option activity was as follows:
1999 1998 1997 ------- ------ ------ Average Average Average Exercise Exercise Exercise Shares in thousands Shares Price Shares Price Shares Price ----- ------ ----- ------ ----- ------ Balance at January 1 5,761 $44.82 3,637 $34.48 4,498 $26.14 Granted 5,159 68.29 2,519 59.81 1,496 43.68 Granted for acquisition - - 1,384 24.78 - - Exercised (582) 38.43 (1,494) 25.63 (2,170) 23.13 Forfeited/expired (489) 61.78 (285) 48.70 (187) 39.05 ----- ------ ----- ------ ----- ------ Balance at December 31 9,849 $56.65 5,761 $44.82 3,637 $34.48 ----- ------ ----- ------ ----- ------ Exercisable at December 31 3,369 $39.73 2,517 $31.36 2,028 $29.13 ----- ------ ----- ------ ----- ------
Options may not be exercised within at least six months of, nor after 10 years from, grant date. During 1999, we added a reload feature to certain stock options. One reload option is granted for each previously-owned share of common stock tendered to exercise options. Reload options are exercisable for the remaining term of the original options. Information about options outstanding at December 31, 1999 was as follows:
Outstanding Exercisable ------------------------- --------------- Average Average Average Range of Shares Remaining Exercise Shares Exercise Exercise Prices (000's) Life Price (000's) Price - --------------- ------- ---- ----- ------- ----- $18.72-$29.99 964 4 $23.44 958 $ 23.39 30.00- 39.99 867 6 34.06 863 34.05 40.00- 49.99 952 7 43.47 684 43.33 50.00- 59.99 2,015 8 59.29 723 59.24 60.00- 69.99 4,850 9 68.04 141 68.00 70.00- 79.99 201 10 74.45 - - ----- -- ------ ----- ------- Total 9,849 8 $56.65 3,369 $ 39.73 ----- -- ------ ----- -------
9.2 SHARES AVAILABLE Shares available for issuance under our stock and incentive plans totaled 13.1 million, 6.2 million, and 8.8 million, at December 31, 1999, 1998, and 1997, respectively. 9.3 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 grant date and recognized over the options' vesting period. 49 30 Notes to Financial Statements In millions Had we determined compensation expense using this method, net income and net income per share would have been as follows:
1999 1998 1997 ------- ----- ----- Net income As reported $ 1,131 $ 764 $ 542 Pro forma 1,102 753 536 ------- ----- ----- Net income per share Basic As reported $ 4.52 $3.02 $2.21 Pro forma 4.40 2.97 2.19 Diluted As reported 4.40 2.96 2.19 Pro forma 4.29 2.92 2.17 ------- ----- -----
The average fair values of the options granted were $16.89 in 1999, $15.27 in 1998, and $10.41 in 1997. We estimated the fair value of each option at the grant date using a Black-Scholes option pricing model and the following assumptions:
1999 1998 1997 ---- ---- ---- Dividend yield 2.5% 2.5% 3.0% Expected volatility 24.4% 23.0% 22.0% Risk-free interest rate 4.9% 5.7% 6.4% Expected life 6 years 6 years 6 years
10. DERIVATIVE FINANCIAL STATEMENTS 10.1 INTEREST RATE AND CURRENCY SWAP AGREEMENTS Interest rate and currency swap agreements related to investment securities at December 31 were as follows:
1999 1998 1997 ----- ----- ----- Interest rate swap agreements to receive fixed rate Notional amount $ 185 $ 474 $ 169 Average receive rate 6.81% 6.24% 6.95% Average pay rate 6.59 5.48 6.39 Interest rate swap agreements to pay fixed rate Notional amount $ 55 $ 55 $ 15 Average receive rate 7.64% 6.73% 6.74% Average pay rate 6.88 6.88 6.48 ----- ----- ----- Currency swap agreements Receive U.S. $/ pay Canadian $ Notional amount $ 124 $ 124 $ 139 Average exchange rate 1.50 1.50 1.50 Receive U.S. $/ pay Australian $ Notional amount $ 23 $ - $ - Average exchange rate 1.85 - - ----- ----- -----
Interest rate swap agreements related to debt at December 31 were as follows:
1999 1998 1997 ------- ------ ------ Interest rate swap agreements to pay fixed rate Corporate Notional amount $ 400 $ 400 $ 400 Average receive rate 5.13% 4.90% 5.72% Average pay rate 6.15 6.15 6.15 Consumer Finance Notional amount $ 1,295 $ 935 $ 940 Average receive rate 5.40% 4.57% 5.69% Average pay rate 6.70 6.94 7.39
Deferred settlement costs related to the termination of interest rate swaps in conjunction with anticipated debt issuances were $8 million, $9 million, and $10 million at December 31, 1999, 1998, and 1997, respectively. 10.2 TREASURY RATE LOCK AGREEMENTS In conjunction with anticipated debt issuances, we entered into treasury rate lock agreements with notional amounts of $123 million in 1998 and $390 million in 1997. We settled these agreements in the following years. Deferred settlement costs were $16 million at December 31, 1999 and $17 million at December 31, 1998. There were no treasury rate lock agreements outstanding at December 31, 1999. 10.3 SWAPTIONS Swaptions at December 31 were as follows:
1999 1998 1997 -------- ------ ----- Call swaptions Notional amount $ 10,150 $3,875 $3,000 Average strike rate 4.64% 4.07% 4.79% Put swaptions Notional amount $ 6,600 $4,200 $ - Average strike rate 8.61% 8.33% -%
The swaptions outstanding at December 31, 1999 expire in 2000. Should the strike rates remain below market rates (for call swaptions) and above market rates (for put swaptions), the swaptions will expire and the company's exposure would be limited to the premiums paid. These premiums were immaterial. 10.4 CREDIT AND MARKET RISK Derivative financial instruments expose the company to credit risk in the event of nonperformance by counterparties. We limit this exposure by entering into agreements with counterparties having high credit ratings and by regularly monitoring the ratings. We do not expect any counterparty to fail to meet its obligation; however, nonperformance would not have a material impact on the company's results of operations and financial position. The company's exposure to market risk is mitigated 50 31 by the offsetting effects of changes in the value of the agreements and the related items being hedged. 11. DEFERRED POLICY ACQUISITIONS COSTS (DPAC) Activity in DPAC was as follows:
1999 1998 1997 ------- ------ ------- Balance at January 1 $ 3,253 $2,718 $ 2,954 Deferrals 1,125 880 631 Accretion of interest 264 242 215 Consolidation of Western National - 157 - Amortization (771) (761) (659) Effect of net unrealized gains (losses) on securities 1,119 41 (406) Other (10) (24) (17) ------- ------ ------- Balance at December 31 $ 4,980 $3,253 $ 2,718 ------- ------ -------
12. COST OF INSURANCE PURCHASED (CIP) Activity in CIP was as follows:
1999 1998 1997 ------- ------ ------- Balance at January 1 $ 956 $ 680 $ 755 Additions from acquisitions 49 359 66 Accretion of interest 81 88 74 Consolidation of Western National - 125 - Amortization (233) (249) (176) Effect of net unrealized gains (losses) on securities 301 (62) (55) Other 16 15 16 ------- ------ ------- Balance at December 31 $ 1,170 $ 956 $ 680 ------- ------ -------
CIP amortization, net of accretion, expected to be recorded in each of the next five years is $138 million, $119 million, $105 million, $93 million, and $84 million. 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, 800 million shares authorized). The only series of preferred stock outstanding is the 7% Convertible Preferred Stock. At December 31, 1999, approximately 18.3 million shares of common stock were reserved for issuance related to the conversion of convertible preferred securities and preferred stock and the issuance of stock under employee stock and incentive plans. Preferred share purchase rights attached to each share of common stock expired in 1999. These rights would have become exercisable only upon a change in control of the company. 13.2 CONVERTIBLE PREFERRED STOCK American General has 2.3 million shares of 7% Convertible Preferred Stock outstanding. On January 26, 2000, we announced the redemption of all outstanding shares on March 1, 2000. Holders will receive .8264 share of common stock for each share of preferred stock redeemed, for a total of 1.9 million common shares. 13.3 COMMON STOCK ACTIVITY Common stock activity was as follows:
In thousands 1999 1998 1997 ------- ------- ------- Shares issued Balance at beginning of year 269,298 259,135 283,739 Issuance for acquisition - 10,163 - Retirement of USLIFE treasury shares - - (24,650) Conversion of convertible preferred stock - - 46 ------- ------- ------- Balance at end of year 269,298 269,298 259,135 ------- ------- ------- Treasury shares Balance at beginning of year (17,494) (15,929) (42,568) Share repurchases (5,885) (2,971) (9,946) Issuance for acquisitions 839 - 9,462 Retirement of USLIFE treasury shares - - 24,650 Issuance under employee benefit plans and other 1,302 1,406 2,473 ------- ------- ------- Balance at end of year (21,238) (17,494) (15,929) ------- ------- ------- Outstanding at end of year 248,060 251,804 243,206 ------- ------- -------
14. REDEEMABLE EQUITY Two of the company's wholly owned subsidiaries and three subsidiary trusts (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 company's consolidated financial statements. The interest terms and payment dates of the Subordinated Debentures held by the subsidiaries correspond to those of the subsidiaries' preferred securities. American General's obligations under the Subordinated Debentures and related agreements, when taken together, constitute a full and unconditional guarantee of payments due on the preferred securities. The Subordinated Debentures are redeemable, under certain conditions, at the option of the company on a proportionate basis. 51 32 Notes to Financial Statements Information about the preferred securities and the assets held by the issuing subsidiaries at December 31, 1999 was as follows:
American American American American American American General General General General General General Institutional Institutional Capital, Capital, Delaware, Capital I Capital B Capital A L.L.C. L.L.C. L.L.C. ---------- ---------- ---------- ---------- ---------- ---------- Preferred securities Securities issued and outstanding 8.0 0.5 0.5 8.6 11.5 5.0 Par value $200 $500 $500 $215 $287 $250 Dividends paid $5 $41 $38 $17 $24 $15 Date issued 9/8/99 3/14/97 12/4/96 8/29/95 6/5/95 6/1/95 Earliest/mandatory redemption dates 2004/2048 2046/2046 2045/2045 2000/2025* 2000/2025* 2003/2025 ---------- ---------- ---------- ---------- ---------- ---------- Assets of issuing subsidiary Subordinated Debentures Principal $206 $516 $516 $269 $360 $313 Interest rate 7.875% 8.125% 7.57% 8.125% 8.45% 6% Mandatory redemption date 2048 2046 2045 2025 2025 2025 U.S. Treasury bonds - - - $ 3 $ 4 $ 4 ---------- ---------- ---------- ---------- ---------- ----------
* Subject to possible extension to 2044. The preferred securities issued by American General Delaware, L.L.C. are each convertible into 1.2288 shares of our 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 May 31, 2000, we have the option to terminate this conversion right. 15. 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, including the values of underlying customer relationships and distribution systems, and (2) the reporting of investments at fair value without a corresponding revaluation of related policyholder liabilities can be misinterpreted.
1999 1998 1997 ---------------------- --------------------- --------------------- Fair Carrying Fair Carrying Fair Carrying Value Amount Value Amount Value Amount -------- -------- -------- ------- ------- ------- Assets Fixed maturity and equity securities $ 60,964 $ 60,964 $ 63,056 $63,056 $47,863 $47,863 Mortgage loans on real estate 3,565 3,686 3,501 3,368 3,399 3,272 Policy loans 2,283 2,375 2,448 2,329 2,196 2,156 Short-term investments 676 676 654 654 306 306 Assets held in separate accounts 24,097 24,097 16,158 16,158 11,482 11,482 Finance receivables, net 10,634 10,634 9,275 9,275 7,639 7,639 Liabilities Insurance investment contracts 41,011 42,820 39,959 40,670 27,623 28,139 Liabilities related to separate accounts 24,097 24,097 16,158 16,158 11,482 11,482 Short-term debt 6,421 6,421 5,293 5,293 3,830 3,830 Long-term debt Corporate 1,168 1,188 1,222 1,136 1,407 1,341 Consumer Finance 5,641 5,717 5,342 5,177 4,117 4,011
52 33 We used the following methods and assumptions to estimate the fair value of our 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, we estimated the fair values 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. We estimated the fair value of mortgage loans primarily using discounted cash flows, based on contractual maturities and risk-adjusted discount rates. Policy Loans. We valued policy loans using discounted cash flows and actuarially determined assumptions, incorporating market rates. Assets and Liabilities Related to Separate Accounts. We valued separate account assets and liabilities based on quoted net asset value per share of the underlying mutual funds. 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. Insurance Investment Contracts. We estimated the fair value of insurance investment contracts using cash flows discounted at market interest rates. Debt. The fair value of short-term debt approximated its carrying amount. We estimated the fair value of long-term debt using cash flows discounted at current borrowing rates. Off-Balance Sheet Derivative Financial Instruments. Had we elected to terminate our interest rate swap and treasury rate lock agreements related to debt, we would have received $46 million at December 31, 1999, and we would have paid $61 million and $30 million at December 31, 1998 and 1997, respectively. These fair values were estimated using cash flows discounted at current market rates. 16. REINSURANCE Reinsurance premiums included in premiums and other considerations were as follows:
1999 1998 1997 ------- ------ ------ Direct premiums and other considerations $ 4,023 $3,717 $3,542 Reinsurance assumed 303 373 119 Reinsurance ceded (554) (485) (299) ------- ------ ------ Premiums and other considerations $ 3,772 $3,605 $3,362 ------- ------ ------
Reinsurance recoveries on ceded reinsurance contracts were $348 million in 1999, $251 million in 1998, and $131 million in 1997. 17. 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 our insurance subsidiaries did not have a material effect on their statutory equity at December 31, 1999. Statutory accounting practices differ from GAAP. Significant differences for our insurance subsidiaries were as follows:
1999 1998 1997 ------- ------- ------ Statutory net income $ 996 $ 760 $ 791 Change in DPAC and CIP 476 213 112 Investment valuation differences (1) 87 23 Policy reserve adjustments (105) (33) (21) Deferred income taxes (274) (43) 7 Litigation settlements - (191) - Other, net 115 12 1 ------- ------- ------ GAAP net income $ 1,207 $ 805 $ 913 ------- ------- ------ Statutory equity $ 4,082 $ 3,857 $3,240 Asset valuation reserve 758 664 452 Investment valuation differences* (1,537) 3,450 2,640 DPAC and CIP 6,139 4,198 3,388 Goodwill 1,266 1,275 376 Non-admitted assets 242 197 140 Policy reserve adjustments 136 180 574 Deferred income taxes (906) (1,582) (1,372) Other, net 34 (125) (26) ------- ------- ------ GAAP equity $10,214 $12,114 $9,412 ------- ------- ------
* Primarily GAAP unrealized gains (losses) on securities. 18. RESTRICTIONS AND CONTINGENCIES 18.1 SUBSIDIARY DIVIDEND RESTRICTIONS Our insurance subsidiaries are restricted by state insurance laws as to the amounts they may pay as shareholder 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. The amount of dividends available from subsidiaries during 2000 not limited by such restrictions is approximately $1.2 billion. 53 34 Notes to Financial Statements In millions 18.2 LEGAL PROCEEDINGS Satellite Dish. In the mid-1990's, one of our subsidiaries, A.G. Financial Service Center, Inc. (formerly named American General Financial Center), provided financing for satellite dishes sold by independent unaffiliated dealers. On May 18, 1999, a Mississippi state court rendered a judgment against A.G. Financial Service Center for approximately $500,000 in compensatory damages and $167 million in punitive damages, in a lawsuit brought by 29 individuals who had each purchased a satellite dish. In August 1999, A.G. Financial Service Center voluntarily filed for bankruptcy. As part of the resolution process, certain settlement agreements were executed in January 2000. Accordingly, we recorded a charge of $57 million ($36 million aftertax) in fourth quarter 1999 to cover the proposed settlements of this and other litigation. Resolution of the satellite dish litigation is dependent upon a number of factors, including the bankruptcy court's approval of A.G. Financial Service Center's plan of reorganization. If court approvals are obtained and appeals are not taken, we expect that the settlements will be final in third quarter 2000. Workers' Compensation. Prior to our acquisition of USLIFE, one of its subsidiaries entered the workers' compensation reinsurance business in 1997. We discontinued writing new workers' compensation reinsurance business in 1998. Our largest contract was a quota share reinsurance agreement with Superior National Insurance Group (Superior National), effective May 1, 1998. On November 29, 1999, we initiated an arbitration proceeding to rescind this contract from its inception, based in part on misrepresentations and nondisclosures which we believe were made by Superior National. We plan to fully pursue all remedies through the arbitration process. Although we believe, on the advice of counsel, that the company will succeed in rescinding the contract, risks and uncertainties remain with respect to the ultimate outcome. However, in the unlikely event the company does not prevail in the arbitration, we do not expect the additional aftertax losses from our workers' compensation business to exceed $85 million, based on our current estimates. We believe that our ultimate loss, if any, related to our workers' compensation business will not have a material adverse effect on our future results of operations and financial position. 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. A number of these lawsuits have resulted in substantial settlements across the life insurance industry. Certain of our subsidiaries were defendants in similar class action lawsuits. In 1998, our life insurance subsidiaries entered into agreements to resolve substantially all of the material pending market conduct class action lawsuits. We recorded a charge of $378 million ($246 million aftertax) for additional policyholder benefits and other anticipated expenses resulting from the proposed settlements, as well as other administrative and legal costs. All of these settlements were finalized in 1999. Other. The company is party to various other lawsuits and proceedings, arising in the ordinary course of business. These lawsuits and proceedings include certain class action claims, claims filed by individuals who excluded themselves from market conduct settlements, and claims concerning the sale of industrial life insurance policies. In addition, many of these claims arise in jurisdictions, such as Alabama and Mississippi, that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. Based upon information presently available, we believe that the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on the company's results of operations and financial position. However, it should be noted that the frequency of large damage awards, including large punitive damage awards, that bear little or no relation to actual economic damages incurred by plaintiffs in some jurisdictions continues to create the potential for an unpredictable judgment in any given suit. 19. DIVISION OPERATION 19.1 NATURE OF OPERATIONS We manage our business operations through three divisions, which are based on products and services offered. Retirement Services. Our retirement services division markets retirement products and services through two major distribution systems. Our financial advisors sell tax-qualified annuities and mutual funds to employees of educational, health care, and government entities, and other not-for-profit organizations. We also market non-qualified annuities through financial institution representatives at banks and other financial institutions. Life Insurance. Our life insurance division provides traditional, interest-sensitive, and variable life insurance and annuities through multiple distribution channels. The division's primary focus is the sale of life insurance and annuity products to individuals. We reach our customers through independent and career agents, as well as banks, broker dealers, and financial planners. Consumer Finance. Our consumer finance division provides a wide variety of consumer finance products, including mortgages, consumer loans, retail sales financing, and credit-related insurance. We market these products through a nationwide network of branch offices. 54 35 19.2 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, and exclude goodwill amortization, net realized investment gains (losses), and non-recurring items. This methodology is consistent with the manner in which management reviews division results. Corporate operations include parent company expenses, the cost of corporate borrowings, and earnings on corporate assets. Division earnings information was as follows:
Revenues Income before Taxes Net Income ------------------------------- ---------------------------- ----------------------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 -------- -------- ------- ------- ------- ------- ------- ------ ------ Retirement Services $ 3,570 $ 3,095 $ 1,836 $ 855 $ 699 $ 375 $ 564 $ 466 $ 246 Life Insurance 5,394 5,506 5,314 1,103 1,021 906 721 674 589 Consumer Finance 1,729 1,609 1,523 351 312 255 226 201 165 -------- -------- ------- ------- ------- ------- ------- ------ ------ Total divisions 10,693 10,210 8,673 2,309 2,032 1,536 1,511 1,341 1,000 -------- -------- ------- ------- ------- ------- ------- ------ ------ Corporate operations 5 35 214 (298) (227) (44) (192) (148) (24) Goodwill amortization (48) (45) (24) (48) (45) (24) Net dividends on preferred securities of subsidiaries (92) (89) (84) Minority interest - (11) - ------- ------ ------ Operating earnings 1,179 1,048 868 Realized investment gains (19) 6 40 (19) 6 40 (12) 4 27 Non-recurring items* - - - (57) (443) (435) (36) (288) (353) -------- -------- ------- ------- ------- ------- ------- ------ ------ Total $ 10,679 $ 10,251 $ 8,927 $ 1,887 $ 1,323 $ 1,073 $ 1,131 $ 764 $ 542 -------- -------- ------- ------- ------- ------- ------- ------ ------
* Includes litigation settlements, merger-related costs, and loss on sale of non-strategic assets described in Note 3. Also includes Y2K costs in 1998. Division balance sheet information was as follows:
Assets Liabilities -------------------------------------------- ------------------------------------------ 1999 1998 1997 1999 1998 1997 --------- --------- ------- --------- -------- -------- Retirement Services* $ 65,744 $ 55,659 $34,509 $ 62,081 $ 52,395 $ 32,964 Life Insurance* 36,401 34,354 33,265 30,326 28,710 27,692 Consumer Finance* 12,311 10,807 8,924 10,975 9,619 7,957 --------- --------- ------- --------- -------- -------- Total divisions 114,456 100,820 76,698 103,382 90,724 68,613 --------- --------- ------- --------- -------- -------- SFAS 115 adjustment (1,385) 2,473 1,805 (107) 874 636 Corporate and other* 2,376 1,814 2,117 3,828 2,910 2,062 --------- --------- ------- --------- -------- -------- Total $ 115,447 $ 105,107 $80,620 $ 107,103 $ 94,508 $ 71,311 --------- --------- ------- --------- -------- --------
* Excludes fair value adjustment under accounting standard SFAS 115. 55 36 Notes to Financial Statements In millions 20. EARNINGS PER SHARE We calculate basic and diluted earnings per share as follows:
1999 1998 1997 -------- -------- ------- Net income $ 1,131 $ 764 $ 542 Net dividends on convertible preferred stock (6) (6) (6) -------- -------- ------- Basic earnings 1,125 758 536 Net dividends on dilutive securities Convertible preferred securities of subsidiary 11 11 11 Convertible preferred stock 6 6 - -------- -------- ------- Diluted earnings $ 1,142 $ 775 $ 547 -------- -------- ------- Average basic shares outstanding 249.1 251.3 242.1 Dilutive securities Convertible preferred securities of subsidiary 6.1 6.1 6.1 Convertible preferred stock 2.3 2.3 - Stock options 1.3 1.6 1.0 Restricted stock .4 .2 - -------- -------- ------- Average diluted shares outstanding 259.2 261.5 249.2 -------- -------- ------- Net income per share Basic $ 4.52 $ 3.02 $ 2.21 Diluted 4.40 2.96 2.19 -------- -------- -------
21. QUARTERLY DATA (UNAUDITED) Selected quarterly financial data was as follows:
1999 1998 -------------------------------------------- ----------------------------------------------- 4th 3rd 2nd 1st 4th 3rd 2nd 1st ------ ------ ------ ------ ------- ------ -------- ------ Premiums and other considerations $ 906 $ 952 $ 990 $ 924 $ 920 $ 916 $ 891 $ 878 Net investment income 1,335 1,300 1,312 1,285 1,305 1,284 1,280 1,226 Total revenues 2,670 2,676 2,713 2,620 2,627 2,589 2,556 2,479 Insurance and annuity benefits 1,293 1,329 1,378 1,313 1,312 1,337 1,286 1,224 Operating costs and expenses 428 407 416 392 442 382 385 382 Total benefits and expenses 2,232(a) 2,188 2,229 2,143 2,600(b) 2,173 2,104 2,051 Net income (loss) 257(a) 294 293 287 1(b) 255 264 244 ------ ------ ------ ------ ------- ------ -------- ------ Per common share Net income (loss) Basic $ 1.03 $ 1.18 $ 1.17 $ 1.14 $ .00 $ 1.00 $ 1.03 $ .98 Diluted 1.01(a) 1.15 1.14 1.11 .00(b) .98 1.01 .96 Dividends paid .40 .40 .40 .40 .375 .375 .375 .375 Market price High 82 3/16 81 3/8 77 7/16 78 13/16 79 75 11/16 71 5/8 64 15/16 Low 61 7/8 63 69 3/8 64 13/16 52 9/16 59 7/8 63 1/16 52 5/16 Close 75 7/8 63 1/4 75 3/8 70 1/2 78 63 7/8 71 3/16 64 11/16 ------ ------ ------ ------ ------- ------ -------- ------ 1997 ------------------------------------------------- 4th 3rd 2nd 1st ------ ------ ----- ------ Premiums and other considerations $ 890 $ 839 $ 832 $ 801 Net investment income 1,037 1,010 1,002 971 Total revenues 2,324 2,235 2,226 2,142 Insurance and annuity benefits 1,135 1,074 1,083 1,040 Operating costs and expenses 383 353 344 343 Total benefits and expenses 1,940 1,851 2,272(c) 1,791 Net income (loss) 230 226 (124)(c) 210 ------ ------ ----- ------ Per common share Net income (loss) Basic $ .94 $ .92 $ (.52) $ .87 Diluted .92 .91 (.52)(c) .85 Dividends paid .35 .35 .35 .35 Market price High 56 1/4 54 3/4 49 5/8 44 5/8 Low 46 9/16 46 13/16 36 1/2 39 3/8 Close 54 1/16 51 7/8 47 3/4 40 3/4 ------ ------ ---- ------
(a) Includes litigation settlements of $57 million pretax ($36 million aftertax or $.14 per share). (b) Includes litigation settlements of $378 million pretax ($246 million aftertax or $.98 per share). (c) Includes litigation settlement, merger-related costs, and loss on sale of non-strategic assets totaling $435 million pretax ($353 million aftertax or $1.46 per share). 56 37 REPORT OF INDEPENDENT AUDITORS To The Board of Directors and Shareholders American General Corporation We have audited the accompanying consolidated balance sheet of American General Corporation and subsidiaries as of December 31, 1999, 1998, and 1997, and the related consolidated statements of income, shareholders' equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999, 1998, and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Houston, Texas February 18, 2000 57 EX-21 15 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 March 1, 2000. Subsidiaries of subsidiaries are indicated by indentations.
Jurisdiction Name of Incorporation - ----------------------------------------------------------------------------------------- AGC Life Insurance Company.................................. Missouri American General Life and Accident Insurance Company... Tennessee American General Life Insurance Company................ Texas American General Annuity Service Corporation...... Texas American General Life Companies................... Delaware American General Life Insurance Company of New York............................................ New York The Variable Annuity Life Insurance Company....... Texas The Variable Annuity Marketing Company....... Texas VALIC Retirement Services Company............ Texas VALIC Trust Company.......................... Texas American General Property Insurance Company............ Tennessee American General Property Insurance Company of Florida......................................... Florida The Franklin Life Insurance Company.................... Illinois The American Franklin Life Insurance Company...... Illinois Franklin Financial Services Corporation........... Delaware Western National Corporation........................... Delaware WNL Holding Corp.................................. Delaware American General Annuity Insurance Company... Texas WNL Insurance Services, Inc. ..................... Delaware American General Capital, L.L.C. ........................... Delaware American General Delaware, L.L.C. .......................... Delaware American General Delaware Management Corporation............ Delaware American General Enterprise Services, Inc. ................. Delaware American General Finance, Inc. ............................. Indiana AGF Investment Corp. .................................. Indiana American General Auto Finance, Inc. ................... Delaware American General Bank, FSB............................. 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........................ Indiana American General Finance, Inc. ........................ Alabama HSA Residential Mortgage Services of Texas, Inc. ...... Delaware American General Investment Holding Corporation............. Delaware American General Investment Management Corporation.......... Delaware American General Realty Advisors, Inc. ..................... Delaware American General Realty Investment Corporation ............. Texas Knickerbocker Corporation................................... Texas USLIFE Corporation.......................................... Delaware All American Life Insurance Company.................... Illinois American General Assurance Company..................... Illinois American General Life Insurance Company of Pennsylvania.......................................... Pennsylvania North Central Life Insurance Company................... Minnesota The Old Line Life Insurance Company of America......... Wisconsin The United States Life Insurance Company in the City of New York.............................................. New York
1999 FORM 10-K 22 EX-23 16 CONSENT OF ERNST & YOUNG LLP 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 18, 2000, included in the 1999 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-8 333-13401................................................... 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-8 333-52015................................................... S-8 333-52103................................................... S-8 333-70923................................................... 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-3 333-67513................................................... S-3 333-67531................................................... S-3
of our report dated February 18, 2000, 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 -------------------------------- ERNST & YOUNG LLP Houston, Texas March 17, 2000 EX-24 17 POWERS OF ATTORNEY 1 American General Corporation: Board of Directors Date: January 20, 2000 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 1999 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, 1999 (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, NICHOLAS R. RASMUSSEN, and MARK S. BERG, 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 20th day of January, 2000. /S/ J. EVANS ATTWELL 2 American General Corporation: Board of Directors Date: January 20, 2000 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 1999 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, 1999 (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, NICHOLAS R. RASMUSSEN, and MARK S. BERG, 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 20th day of January, 2000. /S/ BRADY F. CARRUTH 3 American General Corporation: Board of Directors Date: January 20, 2000 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 1999 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, 1999 (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, NICHOLAS R. RASMUSSEN, and MARK S. BERG, 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 20th day of January, 2000. /S/ W. LIPSCOMB DAVIS, JR. 4 American General Corporation: Board of Directors Date: January 20, 2000 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 1999 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, 1999 (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, NICHOLAS R. RASMUSSEN, and MARK S. BERG, 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 20th day of January, 2000. /S/ ROBERT M. DEVLIN 5 American General Corporation: Board of Directors Date: January 20, 2000 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 1999 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, 1999 (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, NICHOLAS R. RASMUSSEN, and MARK S. BERG, 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 20th day of January, 2000. /S/ J. EDWARD EASLER II 6 American General Corporation: Board of Directors Date: January 20, 2000 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 1999 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, 1999 (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, NICHOLAS R. RASMUSSEN, and MARK S. BERG, 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 20th day of January, 2000. /S/ LARRY D. HORNER 7 American General Corporation: Board of Directors Date: January 20, 2000 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 1999 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, 1999 (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, NICHOLAS R. RASMUSSEN, and MARK S. BERG, 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 20th day of January, 2000. /S/ RICHARD J.V. JOHNSON 8 American General Corporation: Board of Directors Date: January 20, 2000 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 1999 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, 1999 (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, NICHOLAS R. RASMUSSEN, and MARK S. BERG, 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 20th day of January, 2000. /S/ MICHAEL E. MURPHY 9 American General Corporation: Board of Directors Date: January 20, 2000 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 1999 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, 1999 (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, NICHOLAS R. RASMUSSEN, and MARK S. BERG, 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 20th day of January, 2000. /S/ JON P. NEWTON 10 American General Corporation: Board of Directors Date: January 20, 2000 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 1999 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, 1999 (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, NICHOLAS R. RASMUSSEN, and MARK S. BERG, 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 20th day of January, 2000. /S/ MICHAEL J. POULOS 11 American General Corporation: Board of Directors Date: January 20, 2000 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 1999 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, 1999 (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, NICHOLAS R. RASMUSSEN, and MARK S. BERG, 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 20th day of January, 2000. /S/ ROBERT E. SMITTCAMP 12 American General Corporation: Board of Directors Date: January 20, 2000 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 1999 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, 1999 (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, NICHOLAS R. RASMUSSEN, and MARK S. BERG, 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 20th day of January, 2000. /S/ ANNE M. TATLOCK EX-27 18 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-31-1999 JAN-01-1999 DEC-31-1999 60,625 0 0 339 3,686 222 68,335 294 0 6,150 115,447 63,147 338 422 2,494 13,326 1,924 85 962 5,373 115,447 3,772 5,232 (19) 1,694 5,313 659 (1,136) 1,887 664 1,131 0 0 0 1,131 4.52 4.40 0 0 0 0 0 0 0 ALL FIXED MATURITY SECURITIES ARE CLASSIFIED AS AVAILABLE-FOR-SALE AND RECORDED AT FAIR VALUE. INCLUDES COST OF INSURANCE PURCHASED (CIP). THE SUM OF POLICY LOSSES, UNEARNED PREMIUMS, POLICY-OTHER, AND POLICYHOLDER FUNDS COMPRISES INSURANCE AND ANNUITY LIABILITIES. CONSISTS OF NON-CONVERTIBLE AND CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES. CONSISTS OF CONVERTIBLE PREFERRED STOCK. CONSISTS OF NET OF THE FOLLOWING: COST OF TREASURY STOCK; RETAINED EARNINGS; AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS). 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 $142 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $50 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
-----END PRIVACY-ENHANCED MESSAGE-----