-----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, D4gfdhuobhqoivx1FS7SDLvSpm6SjTd2gKjeQ5B+1UsvjHl9IMncqCCdfHAyJ22I qB+/gDBNihYD3wuyFAc/Qw== 0000005103-01-500022.txt : 20010516 0000005103-01-500022.hdr.sgml : 20010516 ACCESSION NUMBER: 0000005103-01-500022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN GENERAL CORP /TX/ CENTRAL INDEX KEY: 0000005103 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 740483432 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07981 FILM NUMBER: 1634723 BUSINESS ADDRESS: STREET 1: 2929 ALLEN PKWY CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135221111 10-Q 1 form10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to ___________________ Commission file number 1-7981 American General Corporation (Exact name of registrant as specified in its articles of incorporation) Texas 74-0483432 (State of Incorporation) (I.R.S. Employer Identification No.) 2929 Allen Parkway, Houston, Texas 77019-2155 (Address of principal executive offices) (Zip Code) (713) 522-1111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . As of April 30, 2001, there were 499,115,156 shares (excluding shares held in treasury and by a subsidiary) of American General's Common Stock outstanding. INDEX TO FORM 10-Q Page Part I. FINANCIAL INFORMATION. Item 1. Financial Statements. Consolidated Income Statement for the three months ended March 31, 2001 and 2000 ...................... 2 Consolidated Balance Sheet at March 31, 2001 and December 31, 2000 .............................. 3 Consolidated Statements of Shareholders' Equity and Comprehensive Income for the three months ended March 31, 2001 and 2000 ............................ 4 Consolidated Condensed Statement of Cash Flows for the three months ended March 31, 2001 and 2000 ..... 5 Notes to Consolidated Financial Statements ........... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................ 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk .................................. 27 Part II. OTHER INFORMATION. Item 1. Legal Proceedings .................................... 28 Item 6. Exhibits and Reports on Form 8-K ..................... 28 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AMERICAN GENERAL CORPORATION Consolidated Income Statement (Unaudited) (In millions, except per share data) Three Months Ended March 31, 2001 2000 Revenues Premiums and other considerations ................ $ 928 $ 993 Net investment income ............................ 1,388 1,330 Finance charges .................................. 420 391 Investment gains (losses) ........................ (35) (51) Other revenues ................................... 69 74 Total revenues ............................... 2,770 2,737 Benefits and expenses Insurance and annuity benefits ................... 1,377 1,384 Operating costs and expenses ..................... 379 396 Commissions ...................................... 296 317 Change in deferred policy acquisition costs and cost of insurance purchased ..................... (111) (116) Provision for finance receivable losses .......... 60 49 Goodwill amortization ............................ 12 12 Interest expense Corporate ....................................... 57 54 Consumer Lending ................................ 172 163 Total benefits and expenses .................. 2,242 2,259 Net income Income before income tax expense ................. 528 478 Income tax expense ............................... 177 168 Income before net dividends on preferred securities of subsidiaries ...................... 351 310 Net dividends on preferred securities of subsidiaries ................................. 28 25 Net income ................................... $ 323 $ 285 Net income per share Basic ........................................... $ .65 $ .57 Diluted ......................................... $ .64 $ .56 AMERICAN GENERAL CORPORATION Consolidated Balance Sheet (Unaudited) (In millions) March 31, December 31, 2001 2000 Assets Investments Fixed maturity securities (amortized cost: $66,323; $64,460) ........................ $ 67,228 $ 64,132 Mortgage loans on real estate .............. 3,931 3,920 Equity securities (cost: $805; $832) ....... 783 831 Policy loans ............................... 2,432 2,433 Real estate and other long-term investments. 361 306 Short-term investments ..................... 4,131 671 Total investments ...................... 78,866 72,293 Assets held in separate accounts ............ 20,028 23,234 Finance receivables, net .................... 11,366 11,378 Deferred policy acquisition costs ........... 5,235 5,464 Cost of insurance purchased ................. 901 994 Goodwill .................................... 1,437 1,448 Other assets ................................ 6,523 5,283 Total assets ........................... $124,356 $120,094 Liabilities Insurance and annuity liabilities ........... $ 69,709 $ 68,309 Liabilities related to separate accounts .... 20,028 23,234 Debt (short-term) Corporate ($2,116; $1,921) ................. 3,454 3,259 Consumer Lending ($5,180; $5,162) .......... 10,820 10,833 Income tax liabilities ...................... 1,422 1,151 Other liabilities ........................... 8,279 3,421 Total liabilities ...................... 113,712 110,207 Redeemable equity Company-obligated mandatorily redeemable preferred securities of subsidiaries holding solely company subordinated notes .. 2,067 2,067 Shareholders' equity Common stock Shares issued: 538.6; 538.6 Shares outstanding: 499.7; 500.7 ........... 879 887 Retained earnings ........................... 8,498 8,294 Accumulated other comprehensive income (loss) 285 (304) Cost of treasury stock ...................... (1,085) (1,057) Total shareholders' equity ............. 8,577 7,820 Total liabilities and equity ........... $124,356 $120,094 AMERICAN GENERAL CORPORATION Consolidated Statements of Shareholders' Equity and Comprehensive Income (Unaudited) (In millions, except per share data) Three Months Ended March 31, Shareholders' Equity 2001 2000 Preferred stock Balance at beginning of period ...................... $ - $ 85 Conversion into common shares ....................... - (85) Balance at end of period ............................ - - Common stock Balance at beginning of period ...................... 887 962 Issuance of treasury shares ......................... (8) (26) Balance at end of period ............................ 879 936 Retained earnings Balance at beginning of period ...................... 8,294 7,732 Net income .......................................... 323 285 Cash dividends (per share) Common ($.24; $.22) ................................ (119) (109) Preferred (-; $.64) ............................... - (1) Balance at end of period ............................ 8,498 7,907 Accumulated other comprehensive income (loss) Balance at beginning of period....................... (304) (1,278) Change in net unrealized gains (losses) on securities 632 87 Change in net unrealized gains (losses) on derivatives ........................................ (55) - Other ............................................... 12 10 Balance at end of period ............................ 285 (1,181) Treasury stock Balance at beginning of period ...................... (1,057) (1,081) Repurchase of common shares ......................... (63) (93) Conversion of preferred stock ....................... - 99 Issuance under employee benefit plans and other ..... 35 23 Balance at end of period ............................ (1,085) (1,052) Total shareholders' equity ........................ $ 8,577 $ 6,610 Comprehensive Income Net income ........................................... $ 323 $ 285 Change in net unrealized gains (losses) Securities: Fair value of fixed maturity and equity securities . 1,211 116 Deferred policy acquisition costs and cost of insurance purchased ............................... (436) 18 Deferred income taxes .............................. (143) (47) Change related to securities .................... 632 87 Derivatives: Fair value of derivatives .......................... (40) - Deferred income taxes .............................. 14 - Cumulative adjustment for change in accounting principle, net of tax ............................. (29) - Change related to derivatives ................... (55) - Other ............................................... 12 10 Total change in net unrealized gains (losses) ..... 589 97 Comprehensive income (loss) .......................... $ 912 $ 382 AMERICAN GENERAL CORPORATION Consolidated Condensed Statement of Cash Flows (Unaudited) (In millions) Three Months Ended March 31, 2001 2000 Operating activities Net cash provided by operating activities ... $ 713 $ 629 Investing activities Investment purchases .............................. (9,575) (4,550) Investment dispositions and repayments ............ 7,852 3,485 Finance receivable originations and purchases ..... (1,500) (1,505) Finance receivable principal payments received .... 1,440 1,333 Net increase in short-term investments ............ (3,460) (1,179) Other, net ........................................ (94) (48) Net cash used for investing activities ...... (5,337) (2,464) Financing activities Asset Accumulation and Financial Services - Life Insurance Policyholder account deposits ................... 2,239 1,770 Policyholder account withdrawals ................ (1,271) (1,712) Net policyholder account deposits ............ 968 58 Short-term collateralized financings ............ 3,619 1,698 Total Asset Accumulation and Financial Services - Life Insurance ................... 4,587 1,756 Financial Services - Consumer Lending Net increase in short-term debt ................. 18 80 Long-term debt issuances ........................ 81 379 Long-term debt redemptions ...................... (113) (396) Other ........................................... 46 - Total Financial Services - Consumer Lending .. 32 63 Corporate Net increase in short-term debt ................. 195 117 Common stock repurchases ........................ (68) (90) Dividends on common stock ....................... (119) (109) Other, net ...................................... (48) 44 Total Corporate .............................. (40) (38) Net cash provided by financing activities ... 4,579 1,781 Net decrease in cash ............................... (45) (54) Cash at beginning of period ........................ 266 294 Cash at end of period .............................. $ 221 $ 240 Supplemental disclosure of cash flow information: Cash paid during the period for Income taxes .................................... $ 7 $ 36 Interest Corporate ...................................... 70 60 Consumer Lending ............................... 191 195 Dividends on preferred securities of subsidiaries ................................... 39 28 AMERICAN GENERAL CORPORATION Notes to Consolidated Financial Statements March 31, 2001 (In millions, except per share data) 1. Accounting Policies. The accompanying unaudited consolidated financial statements of American General Corporation (American General) and its subsidiaries (collectively, the company or we) have been prepared in accordance with accounting principles generally accepted in the United States for interim periods. In the opinion of management, these statements include all adjustments that are necessary for a fair presentation of the company's consolidated financial position at March 31, 2001, and the consolidated results of operations, shareholders' equity, comprehensive income, and cash flows for the three months ended March 31, 2001 and 2000. 2. Merger. As previously announced, on March 11, 2001, the company, Prudential plc (Prudential), a public limited company incorporated in England and Wales, and certain wholly owned subsidiaries of Prudential entered into an Agreement and Plan of Merger (the Prudential Agreement). On May 11, 2001, these parties together with American International Group, Inc.(AIG), a Delaware corporation, entered into a Tri-Party Agreement, pursuant to which, among other things, the Prudential Agreement has been terminated. In accordance with the terms of the Prudential Agreement, the company concurrently paid Prudential the $600 million termination fee mandated by that agreement. On May 11, 2001, the company, AIG, and a wholly owned subsidiary of AIG entered into an Agreement and Plan of Merger (the AIG Agreement), pursuant to which the company will become a wholly owned subsidiary of AIG. Under the terms of the AIG Agreement, which has been approved by the boards of directors of AIG and the company, company shareholders will receive AIG common stock according to an exchange ratio that will be determined based on the 10-day average price of AIG's common stock ending three days prior to closing (the AIG Average Price). This exchange ratio will provide company shareholders with AIG common stock valued at $46 per American General share as long as the AIG Average Price is between $76.20 and $84.22. If the AIG Average Price is between $76.20 and $84.22, the exchange ratio will be equal to $46 divided by the AIG Average Price. If the AIG Average Price is equal to or less than $76.20 or equal to or more than $84.22, company shareholders will receive 0.6037 or 0.5462 AIG shares, respectively. The AIG Agreement is subject to various regulatory approvals and other customary conditions, as well as the approval of company shareholders. The transaction is expected to close by year end. 3. Derivative Financial Instruments. Effective January 1, 2001, we adopted 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 are reported in net income or comprehensive income, depending upon the intended use of the derivative instrument. Upon adoption of SFAS 133, we recorded aftertax cumulative adjustments to reduce accumulated other comprehensive income in shareholders' equity by $29 million and to reduce net income by $1 million. The reduction of accumulated other comprehensive income was primarily the result of recognizing the fair value of interest rate swaps related to debt on the balance sheet. Since we anticipate holding the swaps for their full term, we do not expect this amount to impact earnings in future periods. The reduction of net income relates to the company's use of swaptions, which do not meet the new requirements for hedge accounting. Our use of derivative financial instruments is generally limited to reducing our exposure to interest rate and currency exchange risk. We currently use interest rate and currency swap agreements, substantially all of which qualify as cash flow hedges, and options to enter into interest rate swap agreements, which are not accounted for as hedges. For derivative instruments that are designated and qualify as cash flow hedges, we report the effective portion of the gain or loss on the derivative instrument as a component of comprehensive income. For derivative instruments that are designated and qualify as fair value hedges, we recognize the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item, in investment gains (losses). We report any ineffectiveness for either type of hedge, as well as changes in fair value of derivatives not considered hedges, in investment gains (losses). Activity in derivative financial instruments did not have a material effect on net investment income, interest expense, investment gains (losses), or net income during the three months ended March 31, 2001 or 2000. 4. Calculation of Earnings Per Share. We calculate basic and diluted earnings per share as follows: Three Months Ended March 31, 2001 2000 Net income/basic earnings ...................... $ 323 $ 285 Net dividends on convertible preferred securities of subsidiary ...... ............... - 3 Diluted earnings ......... ................... $ 323 $ 288 Average basic shares outstanding ............... 499.1 497.7 Dilutive securities Stock options ................................ 4.0 2.9 Restricted stock ............................. 1.3 1.1 Convertible preferred securities of subsidiary - 12.3 Average diluted shares outstanding ......... 504.4 514.0 Net income per share Basic ......................................... $.65 $.57 Diluted ....................................... $.64 $.56 5. Dollar Rolls. We use dollar roll agreements as part of our strategy to increase investment income. Dollar rolls are agreements to sell mortgage- backed securities and 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. At March 31, 2001, the company had $3.7 billion of outstanding dollar roll agreements. The average amount outstanding and the weighted-average interest rate on the short-term collateralized borrowings for the three months ended March 31, 2001 were $3.2 billion and 4.9%, respectively. 6. Investing Activities. Cash flows related to investing activities were as follows: Dispositions and Purchases Repayments Three Months Ended Three Months Ended March 31, March 31, 2001 2000 2001 2000 Fixed maturity securities $ 9,441 $ 4,340 $ 7,744 $ 3,345 Mortgage loans 72 85 91 105 Equity securities 35 10 10 10 Other 27 115 7 25 Total $ 9,575 $ 4,550 $ 7,852 $ 3,485 7. Legal Proceedings. The company is party to various lawsuits and proceedings, including the following: 1) In the mid-1990s, 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, were also named as defendants in other 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 was 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. As part of the resolution process, settlement agreements were executed in January 2000 to settle the Clayton Smith matter and certain other claims. Accordingly, we recorded a charge of $57 million ($36 million aftertax) in fourth quarter 1999 to cover the proposed settlements and other litigation. On September 1, 2000, payment was made in connection with the final settlement of the Clayton Smith matter. In 2000, Financial Service Center filed a plan of reorganization to resolve the remaining claims in the bankruptcy. In January 2001, Financial Service Center and the creditors' committee in the bankruptcy entered into a settlement that has been approved by the bankruptcy court. The plan of reorganization was confirmed by the bankruptcy court in February 2001. Certain creditors have appealed the confirmation of the plan, but we do not expect their appeal to prevail. We expect our remaining recorded liability related to this matter to be sufficient to cover the costs of the plan of reorganization. 2) 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, Inc. and its affiliates (collectively, 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's insurance subsidiaries as a result of their financial condition. On April 26, 2000, Superior National Insurance Group, Inc. filed a voluntary petition to reorganize under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Central District of California. Through the arbitration with Superior National, which commenced in fourth quarter 2000, we plan to fully pursue all remedies. 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. 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, after recoveries from reinsurers. We believe that any ultimate loss related to our workers' compensation business will not have a material adverse effect on our results of operations and financial position. 3) Four purported class action lawsuits have been filed by alleged shareholders against the company and certain of its officers and directors in connection with the Agreement and Plan of Merger entered into on March 11, 2001, between the company and Prudential pursuant to which the company would become a wholly owned subsidiary of Prudential: (1) Samuel Bamdas Revocable Trust v. American General Corp., et al., Civil Action No. 2001-14869 (filed March 20, 2001, in the District Court of Harris County, Texas, 11th Judicial District), (2) Harold Goldberg v. American General Corp., et al., Civil Action No. 2001-18388 (filed April 4, 2001, in the District Court of Harris County, Texas, 133rd Judicial District), (3) Kenneth Steiner v. Robert M. Devlin, et al., Civil Action No. 2001-18389 (filed April 4, 2001, in the District Court of Harris County, Texas, 164th Judicial District), and (4) Richard Britten v. Robert M. Devlin, et al., Civil Action No. 2001-19670 (filed April 12, 2001,in the District Court of Harris County, Texas, 189th Judicial District). These actions were each filed by a purported class of shareholders alleging that certain officers and directors of the company breached their fiduciary duties in connection with the pricing and terms of the proposed Prudential transaction. In each of these actions, the plaintiffs generally are seeking injunctive relief and other unspecified damages, fees, and expenses. Additional suits making similar allegations are possible. Also, on April 9, 2001, two shareholder derivative lawsuits were filed in the United States District Court for the Southern District of Texas, purportedly on behalf of the company against certain officers and directors of the company challenging the company's merger with Prudential: (1) Michael Hastings v. Morris J. Kramer, et al., Civil Action No. H-01-1174 and (2) Carolinas Electrical Workers Retirement Fund v. Morris J. Kramer, et al., Civil Action No. H-01- 1176. These derivative actions allege that the defendants breached their fiduciary duties by entering into the agreement and plan of merger with Prudential, and generally seek injunctive relief and other monetary damages. Additional similar derivative suits are possible. Also on April 9, 2001, Prudential filed an action against AIG seeking injunctive and other relief in connection with AIG's offer to acquire the company. Certain plaintiffs in the derivative actions have intervened in that action, captioned Prudential plc, et al. v. American International Group, Inc., Civil Action No. 2001- 19138 (District Court of Harris County, Texas, 295th Judicial District) (the Prudential-AIG Action), purportedly on behalf of the company. These intervenor/plaintiffs have named certain officers and directors of the company as defendants in the Prudential-AIG Action. The Prudential-AIG Action was removed to the United States District Court for the Southern District of Texas and is now Civil Action No. H-01-1273. Prudential entered into a Tri-Party Agreement dated May 11, 2001, with AIG and the company pursuant to which Prudential agreed to terminate with prejudice its lawsuit against AIG. 4) The company is also party to various other lawsuits and proceedings arising in the ordinary course of business. These lawsuits and proceedings include certain class action claims and claims filed by individuals who excluded themselves from industrial life and market conduct settlements relating to life insurance pricing and sales practices. In addition, many of these proceedings are pending in jurisdictions 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 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. 8. Tax Return Examinations. American General and the majority of its subsidiaries file a consolidated Federal income tax return. The Internal Revenue Service has completed examinations of our tax returns through 1992 and is currently examining our tax returns for 1993 through 1999. 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. 9. Dividends on Preferred Securities of Subsidiaries. Dividends related to redeemable equity were as follows: Three Months Ended March 31, 2001 2000 Net dividends on preferred securities of subsidiaries $ 28 $ 25 Tax benefit 15 13 Pretax dividends 43 38 Amortization of debt issue costs (1) - Dividends accrued but not paid (3) (10) Dividends paid $ 39 $ 28 10. Division Results. We report our financial results in three business divisions, as well as a category for corporate operations. Results of each division include earnings from its business operations that reflect the amount of equity we consider sufficient to support risks inherent in the division's business and to maintain financial strength and debt ratings. Corporate operations include parent company expenses, the cost of corporate borrowings, and earnings on corporate assets. Goodwill amortization, investment gains (losses), and non-recurring items are also excluded from division results, consistent with the manner in which management reviews and evaluates division results. Division earnings information for the three months ended March 31, was as follows: Income Revenues before Taxes Net Income 2001 2000 2001 2000 2001 2000 Asset Accumulation $1,072 $ 983 $ 268 $ 243 $ 183 $ 162 Financial Services - Life Insurance 1,277 1,352 297 284 198 187 Financial Services - Consumer Lending 490 463 103 92 66 59 Total divisions 2,839 2,798 668 619 447 408 Corporate operations (34) (10) (93) (78) (61) (53) Goodwill amortization (12) (12) (12) (12) Net dividends on preferred securities of subsidiaries (28) (25) Operating earnings 346 318 Investment losses (35) (51) (35) (51) (23) (33) Total $2,770 $2,737 $ 528 $ 478 $ 323 $ 285 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This item presents specific comments on material changes to our consolidated results of operations, investments, capital resources, and liquidity for the periods reflected in the interim financial statements filed with this report. This analysis should be read in conjunction with the consolidated financial statements and related notes on pages 2 through 12 of this Quarterly Report on Form 10-Q. Amounts in the tables are in millions, except per share data. OVERVIEW The company is a diversified financial services organization with $124 billion of assets and over $23 billion of annual revenues and deposits. We are a leading provider of retirement services, life insurance, consumer loans, and investments to over 12 million customers. Our operating earnings per share for first quarter 2001 increased 11% to $.69 and return on equity reached 17.2%. Our financial highlights were as follows: Three Months Ended March 31, 2001 2000 Revenues and deposits $ 5,829 $ 5,565 Earnings Operating earnings 346 318 Net income 323 285 Per share Operating earnings .69 .62 Net income .64 .56 Shareholders' equity* 16.44 15.80 Assets* 123,812 123,061 Return on equity* 17.17% 16.07% Average shares outstanding 504 514 * Excludes SFAS 115 and SFAS 133 unrealized gains (losses). Revenues and deposits increased $264 million, or 5%, for the three months ended March 31, 2001, compared to the same period in 2000, primarily due to higher fixed annuity deposits in our asset accumulation division. Operating earnings increased 9% for the three months of 2001 due to increases in earnings in our asset accumulation division (up 13%), financial services - life insurance division (up 6%), and financial services - consumer lending division (up 12%). Operating earnings per share increased 11%, compared to the 9% increase in operating earnings, as a result of the decline in average shares outstanding, primarily reflecting the repurchase of 12.2 million shares of our common stock in the last twelve months. The percentage increase in net income and net income per share, which include investment gains (losses), was higher at 14%, due to larger security investment losses in 2000. Significant declines in equity market values reduced separate account assets from $26.5 billion at March 31, 2000 to $20.0 billion at March 31, 2001, limiting growth in our total assets year over year. BUSINESS DIVISIONS To better respond to market demands and capitalize on opportunities for growth, we recently realigned our organization into two strategic business groups - asset accumulation and financial services. Our asset accumulation group encompasses our retirement services and asset management businesses, while the new financial services group includes the life insurance and consumer lending businesses. For financial reporting, we continue to have three divisions, which substantially mirror the divisions in our 2000 financial statements. Asset Accumulation. Our asset accumulation division results were as follows: Three Months Ended March 31, 2001 2000 Fixed margin $ 291 $ 243 Variable fees 48 57 Asset management fees 16 17 Other revenue 22 16 Net revenues 377 333 Operating expenses 87 82 Commissions 108 103 Change in DPAC/CIP (86) (95) Total expenses 109 90 Pretax earnings 268 243 Income taxes 85 81 Division earnings $ 183 $ 162 Earnings. Asset accumulation earnings are a function of the level of our managed assets, fixed margin, variable fees, asset management fees, and total expenses. Division earnings for the three months ended March 31, 2001 increased 13%, or $21 million, compared to the same period in 2000. The increase was due to the growth in invested assets, as well as wider fixed investment spread, partially offset by the decline in average separate account balances. Premiums and Deposits. Premiums and deposits were as follows: Three Months Ended March 31, 2001 2000 Premiums and deposits Fixed $ 1,761 $ 1,337 Variable 836 887 Mutual funds 225 271 Total $ 2,822 $ 2,495 Fixed premiums and deposits for the three months ended March 31, 2001 grew 32% compared to the same period in 2000. The increase resulted from our sales of proprietary fixed annuities through financial institutions and expanded distribution of annuities through life insurance agents in our financial services - life insurance division. Variable deposits decreased 6% in first quarter 2001, reflecting reduced interest in variable products due to declining equity markets. Annuity net flow, which represents annuity deposits less annuity surrenders and withdrawals, totaled $1.5 billion for the quarter, an increase of 52% from $1.0 billion in the prior-year quarter, reflecting the higher level of deposits and significantly lower surrenders. Mutual fund deposits declined $46 million compared to first quarter 2000, which included over $100 million in a large case transfer. Retail mutual fund deposits increased 26% from the prior-year period. Surrenders. Surrender ratios were as follows: Three Months Ended March 31, 2001 2000 Surrender ratios Fixed 8.12% 9.86% Variable 5.96 6.04 The 174 basis point decrease in the fixed surrender ratio reflects our improved fixed asset retention levels, resulting from policyholder reaction to the decline in market interest rates and uncertain equity markets, which reduced incentives to transfer funds. The fixed surrender ratio decrease was also impacted by strong fixed annuity deposits in the past twelve months, which increased the proportion of reserves that are subject to withdrawal penalties. Assets Under Management. Assets under management, which include off-balance sheet assets that generate revenues for the division, were as follows: March 31, 2001 2000 Assets under management Average Invested assets (1) $45,966 $41,746 Separate accounts 19,292 22,082 Mutual funds (2) 2,738 1,770 Other third-party assets (2) 3,764 1,965 Total $71,760 $67,563 Balance at March 31 $71,832 $70,909 (1) Excludes SFAS 115 and SFAS 133 unrealized gains (losses). (2) Not included on balance sheet. Average assets under management grew 6% from March 31, 2000 to March 31, 2001, primarily due to annuity net flow of $4.6 billion over the last twelve months. Average separate account assets declined $2.8 billion, due to the decline in market value in the twelve months ended March 31, 2001, which more than offset strong separate account annuity net flow of $2.1 billion over the last twelve months. Fixed Margin. Fixed margin, the difference between net investment income on general account investments and interest credited to policyholders' fixed accounts, increased 20% in the first three months of 2001 compared to 2000. Fixed investment spread measures this difference in terms of interest rates. Net investment income and the components of fixed investment spread were as follows: Three Months Ended March 31, 2001 2000 Net investment income $ 853 $ 775 Average investment yield* 7.85% 7.70% Average crediting rate 5.35 5.35 Fixed investment spread 2.50% 2.35% *Excludes SFAS 115 and SFAS 133 unrealized gains (losses). The higher level of invested assets generated 10% growth in net investment income and a $48 million increase in fixed margin for the three months ended March 31, 2001. Investment yield and fixed investment spread increased during the first three months of 2001, compared to the same period in 2000, due to market rates on new investments exceeding average portfolio yields and higher prepayment-related income. Variable and Asset Management Fees. Variable fees are annuity product fees, primarily mortality and expense charges, which we earn from separate accounts. Asset management fees are the advisory and management fees we earn on mutual funds, separate account assets, and institutional third-party assets. The decline in variable fees and asset management fees resulted from the 13% decrease in average separate account assets. Variable fees as a percentage of average separate account assets were 1.00% and 1.04% in the first quarter 2001 and 2000, respectively. Asset management fees as a percentage of average separate account and mutual fund assets under management increased to .34% in first quarter 2001 from .31% in the prior-year period. Operating Expenses. Operating expenses increased $5 million for the three months ended March 31, 2001, compared to the same period in 2000, due to the inclusion of $5 million of operating expenses for our investment management business in first quarter 2001. The ratio of operating expenses to average assets under management remained unchanged at .48%. Financial Services - Life Insurance Our financial services - life insurance division results were as follows: Three Months Ended March 31, 2001 2000 Net premiums and insurance charges $ 688 $ 757 Net investment income 546 544 Other income 43 51 Total revenues 1,277 1,352 Insurance and annuity benefits 657 707 Operating expenses 161 167 Commissions 186 215 Change in DPAC/CIP (24) (21) Total expenses 980 1,068 Pretax earnings 297 284 Income taxes 99 97 Division earnings $ 198 $ 187 Earnings. The division's profitability is driven by growth in insurance in force and insurance and annuity liabilities, as well as interest spread, mortality experience, and operating expenses. Earnings increased 6% for the three months ended March 31, 2001 compared to the same period in 2000. The increase reflects growth in life insurance in force, a higher investment spread, and continued improvements in operating efficiencies. Sales. Sales, which represent annualized premiums and deposits for new products issued, were as follows: Three Months Ended March 31, 2001 2000 Individual life Independent distribution Periodic sales $ 92 $ 63 Unscheduled deposits and single premiums 31 43 Total independent distribution 123 106 Career agent distribution 21 33 Total individual life $144 $139 Annuities $141 $236 Corporate markets 53 35 Group and credit 36 52 Sales of individual life insurance through our independent distribution channel increased 15% in first quarter 2001 over the 2000 period, and more than offset the anticipated decline in sales through career agents that resulted from our change in marketing emphasis. Individual annuity sales decreased 40% in the first three months of 2001, compared to the same period of 2000, due to lower variable annuity sales through financial institutions. Variable products have been less attractive due to the decline in equity markets over the past year. Sales by our life insurance division agents of fixed annuities manufactured and reported by our asset accumulation division nearly tripled, totaling $151 million in the current period. Group and credit sales decreased $16 million quarter over quarter as a result of the softening economy. Customer Account Liabilities. The balances in our customer account liabilities and life insurance in force were as follows: March 31, 2001 2000 General account liabilities $ 25,906 $ 26,085 Separate account liabilities 2,987 2,890 Total $ 28,893 $ 28,975 Life insurance in force $393,432 $376,510 Separate account balances remained relatively flat year over year since deposits of $771 million for the prior twelve months were offset by market value decline of $567 million and surrenders. Life insurance in force increased 4.5% to $393.4 billion, from March 31, 2000 to March 31, 2001, reflecting continued growth in sales of larger policies, including variable life insurance products, to upper income markets. Premiums represent funds received on traditional life insurance products, while deposits represent funds we receive for interest-sensitive insurance and annuities. Direct premiums and deposits (before net reinsurance) were as follows: Three Months Ended March 31, 2001 2000 Life insurance $ 837 $ 864 Annuities 149 236 Other 134 146 Total $ 1,120 $ 1,246 Direct life insurance premiums and deposits decreased 3% in the three month period due to lower premiums from our career agent channel and group and credit sales, as well as lower unscheduled deposits, partially offset by an increase in corporate market deposits. The decrease in annuity deposits arose primarily from a decline in sales of variable annuities through financial institutions. Other premiums and deposits, which include discontinued and de- emphasized lines, declined 8% for the first three months of 2001, compared to the same period of 2000. Investment Spread. Investment spread was as follows: Three Months Ended March 31, 2001 2000 Average investment yield* 8.12% 8.03% Average crediting rate 5.83 5.82 Fixed investment spread 2.29% 2.21% *Excludes SFAS 115 and SFAS 133 unrealized gains (losses). Net investment income, average investment yield, and fixed investment spread increased during the first three months of 2001, compared to the same period in 2000, due to increased prepayment income on mortgage-backed securities. Mortality and Persistency. Death claims per $1,000 of in force and premium termination rates were as follows: Three Months Ended March 31, 2001 2000 Death claims per $1,000 of in force $ 3.97 $ 3.76 Premium termination rate 12.29% 12.15% Death claims per $1,000 of in force increased during the first three months of 2001, compared to the same period in 2000, reflecting less favorable mortality experience in the career agent channel and the increasing average age of the in force business. Mortality and persistency are expected to fluctuate and, overall, experience remained within pricing assumptions during first quarter 2001. Operating and Other Expenses. The division continues to benefit from the expansion of its shared services platform, expense control initiatives, and more efficient use of technology. Operating expenses decreased $6 million, or 3%, for the first three months of 2001, compared to the same period in 2000. The first quarter ratio of operating expenses to direct premiums and deposits increased to 14.36% in 2001, compared to 13.25% in 2000, as lower operating expenses were more than offset by the effect of lower variable annuity sales. Commissions net of the change in DPAC and CIP decreased 16% in the first three months of 2001, compared to the same period in 2000. Commissions decreased due to lower career agent sales. The amortization rate for previously- capitalized DPAC and CIP was reduced for certain product lines during first quarter 2001, to reflect improved expense, interest, and related margins. Financial Services - Consumer Lending Our financial services - consumer lending division results were as follows: Three Months Ended March 31, 2001 2000 Finance margin $ 248 $ 228 Other income, net* 70 72 Net revenue 318 300 Operating expenses 155 159 Provision for finance receivable losses 60 49 Total expenses 215 208 Pretax earnings 103 92 Income taxes 37 33 Division earnings $ 66 $ 59 *Primarily income from credit-related insurance products. Earnings. Division earnings are a function of the amount and mix of finance receivables, interest spread, credit quality, and operating expenses. Earnings increased 12% for the three months ended March 31, 2001, compared to the same period in 2000, due to increases in average receivables and interest spread, in addition to a decrease in operating expenses. Finance Receivables. The mix of finance receivables was as follows: March 31, 2001 2000 Real estate loans $ 7,413 $ 7,232 Non-real estate loans 2,944 2,521 Retail sales finance 1,395 1,360 Total finance receivables 11,752 11,113 Allowance for losses (386) (369) Finance receivables, net $11,366 $10,744 Average finance receivables $11,738 $11,058 We increased our finance receivables portfolio $639 million during the last twelve months. Average finance receivables in the first three months of 2001 increased 6% compared to the same period in 2000, mainly due to growth in non- real estate loans. Over the last twelve months, we generated $6.6 billion of loans in our branch offices and purchased $.5 billion of real estate loans and $.5 billion of non-real estate loans, while $6.8 billion of loans were repaid. At March 31, 2001, 63% of the portfolio was secured by real estate, compared to 65% a year ago and 63% at December 31, 2000. The allowance for finance receivable losses increased $17 million year over year, to cover portfolios purchased during the past twelve months. Finance Margin. Finance margin is the difference between the finance charges paid by 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: Three Months Ended March 31, 2001 2000 Finance charges $ 420 $ 391 Interest expense 172 163 Finance margin $ 248 $ 228 Average yield on finance receivables 14.47% 14.19% Average borrowing cost 6.44 6.42 Interest spread 8.03% 7.77% Finance charges increased 8% from the prior year period due to increases in average finance receivables and average yield. Interest expense increased for the same period due to an increase in average debt outstanding and slightly higher borrowing costs. Interest spread increased in first quarter 2001, compared to first quarter 2000, due to the combined effect of the increase in yield and relatively stable borrowing costs. Credit Quality. Net charge-off and delinquency ratios reflect the quality of our finance receivables portfolio, the success of our collection efforts, and general economic conditions. Credit quality information was as follows: Three Months Ended Three Months Ended March 31, December 31, 2000 2001 2000 Charge offs $ 60 $ 49 $ 59 Delinquencies 402 355 421 Allowance for losses 386 369 383 Ratios Charge-off 2.05% 1.76% 2.04% Delinquency 3.26 3.05 3.41 Allowance 3.29 3.32 3.26 Charge-off coverage 1.61x 1.90x 1.62x Risk-adjusted yield 12.42% 12.43% 12.20% The increases in charge offs and the charge-off ratio reflect the result of higher net charge-offs due to the aging of loans purchased in 2000 and slowing economic conditions. Delinquencies are finance receivables that are 60 days or more past due. The increases in delinquencies and the delinquency ratio at March 31, 2001 compared to March 31, 2000 reflect the maturation of real estate and non-real estate loan portfolios purchased in 2000, which were primarily new originations or current receivables when purchased, and slowing economic conditions. The allowance for finance receivable losses is maintained at an amount that we believe is adequate to absorb anticipated charge offs in our existing portfolio. The allowance as a percentage of finance receivables has continued to decline as the portfolio has grown, reflecting improved credit quality. Risk-adjusted yield represents the yield on finance receivables less the charge-off ratio. The risk-adjusted yield for first quarter 2001 remained level with the prior year period due to the corresponding increases in both average yield and the charge-off ratio. Operating Expenses. Operating expenses as a percentage of average finance receivables for the first three months of 2001 improved to 4.22% from 4.57% for the same period of 2000. This decrease reflects a 6% increase in average finance receivables, combined with a $5 million reduction of collection, litigation, and advertising expenses. INVESTMENTS Our invested assets consisted primarily of fixed maturity securities (85%), mortgage loans on real estate (5%), short-term investments (5%), and policy loans (3%) at March 31, 2001. Fair Value of Securities. At March 31, 2001, the market value of our fixed maturity and equity securities portfolio was 101.3% of amortized cost, compared to 99.5% at year-end 2000. During first quarter 2001, the fair value adjustment on our securities portfolio increased by $1.2 billion, with a related $632 million positive adjustment to shareholders' equity. The components of the fair value adjustment at March 31, 2001 and December 31, 2000, and the first quarter change, were as follows: March 31, December 31, 2001 2000 Change Fair value adjustment to fixed maturity and equity securities $ 883 $ (328) $1,211 Related increase (decrease) in DPAC/CIP (348) 88 (436) Related decrease (increase) in deferred income taxes (188) 85 (273) Valuation allowance on deferred tax asset - (130) 130 Net unrealized gains (losses) Fixed maturity and equity securities 347 (285) 632 Other, net 8 (19) 27 Net unrealized gains (losses) on securities $ 355 $ (304) $ 659 Fixed Maturity Securities. At March 31, 2001, our fixed maturity securities investment portfolio consisted of $50.4 billion of corporate bonds, $14.9 billion of mortgage-backed securities, and $1.9 billion of bonds issued by governmental agencies. The average credit rating of the portfolio was A at March 31, 2001 and December 31, 2000. Average ratings by category at March 31, 2001 were as follows: March 31, Average Credit 2001 % Rating Investment grade $48,799 73% A Mortgage-backed 14,867 22 AAA Below investment grade 3,562 5 B+ Total fixed maturity securities $67,228 100% A Investment income from our below investment grade securities was $93 million (9.5% yield) for the three months ended March 31, 2001 and $90 million (9.9% yield) for the same period in 2000. Realized investment losses on below investment grade securities were $85 million and $54 million for the three months ended March 31, 2001 and 2000, respectively. Non-performing bonds were less than .2% of total fixed maturity securities at March 31, 2001 and December 31, 2000. We classify bonds as non-performing when the payment of interest is sufficiently uncertain as to preclude accrual of interest. Investment Gains (Losses). Investment gains (losses) include the pretax realized gains or losses and any related DPAC amortization associated with the disposition of securities, the write-down of securities for other than temporary declines in value, and our share of changes in fair value of the underlying equity investments held by equity partnerships. SFAS 133 derivative gains (losses) generated by hedge inefficiencies and derivatives not accounted for as hedges are also included in investment gains (losses) beginning in 2001. Investment losses in first quarter 2001 reflect our ongoing active management of the investment portfolio to maximize relative value and to optimize our tax position. CAPITAL RESOURCES Asset Accumulation and Financial Services - Life Insurance. The amount of statutory equity required to support the business of our asset accumulation and life insurance companies is principally a 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. To provide sufficient capital to support the risks inherent in our businesses, as well as to maintain our financial strength ratings, we currently manage the statutory equity of our principal asset accumulation 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 March 31, 2001, our principal asset accumulation and life insurance companies had statutory equity with a weighted-average of 2.6 times the Company Action Level RBC. Adoption of the NAIC's Codification of Statutory Accounting Principles by our principal asset accumulation and life insurance companies, as of January 1, 2001, did not have a material impact on their statutory equity at March 31, 2001. Financial Services - Consumer Lending. The capital of our consumer lending division varies directly with the level of its finance receivables. This capital, totaling $12.4 billion at March 31, 2001, consisted of $1.6 billion of equity and $10.8 billion of consumer lending debt, which was not guaranteed by American General. The capital mix of consumer lending debt and equity is based upon maintaining leverage at a level that supports cost-effective funding. The consumer lending division's target ratio of debt to tangible net worth, a standard measure of financial risk in the consumer lending industry, is currently 7.5 to 1. The ratio was 7.5 to 1 at March 31, 2001 and December 31, 2000. Corporate. 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 March 31, 2001 and December 31, 2000 were as follows: March 31, December 31, 2001 2000 Corporate capital* $13,813 $13,449 Corporate debt 25.0% 24.2% Redeemable equity 15.0 15.4 Shareholders' equity 60.0 60.4 *Excludes SFAS 115 and SFAS 133 unrealized gains (losses). Shareholders' Equity. We use share repurchases as a means of maintaining our target capital structure. We repurchased 1.7 million shares for $63 million in first quarter 2001. Since 1987, American General has repurchased 260.8 million common shares for an aggregate cost of $3.7 billion. Our future repurchase activity will be based on the company's corporate development activities, capital management strategy, corporate growth rates, and fluctuations in our common stock price. 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. At March 31, 2001, we had committed and unused credit facilities of $6.2 billion, substantially all of which were to support the company's commercial paper borrowings. We believe that our overall sources of liquidity will continue to be sufficient to satisfy our foreseeable financial obligations. Asset Accumulation. Principal sources of cash for our asset accumulation division were as follows: Three Months Ended March 31, 2001 2000 Cash from operating activities $ 567 $ 505 Deposits, net of withdrawals Fixed 944 72 Variable 400 787 Mutual funds 98 200 Short-term collateralized financings 2,711 1,024 The increase in cash from operating activities reflects the growth in earnings for the division. The decrease in net variable account and mutual fund deposits and the increase in net fixed policyholder account deposits period over period resulted from growth in single premium fixed annuity business sold through financial institutions, as well as a shift in customer preferences away from variable products due to increased equity market volatility. Because the investment risk on variable accounts and mutual fund products lies predominately with the policyholder, deposits and withdrawals related to separate accounts and mutual funds are not included in the company's cash flow statement. The increase in cash from short-term collateralized financings relates to the company's expanded use of dollar rolls as part of our investment strategy. The division's major use of cash was the net purchase of investments necessary to support increases in insurance and annuity liabilities. The division received net capital contributions of $20 million from the parent in the first three months of 2001. Financial Services - Life Insurance. Principal sources of cash for our financial services - life insurance division were as follows: Three Months Ended March 31, 2001 2000 Cash from operating activities $ 138 $ 39 Deposits, net of withdrawals Fixed 24 (14) Variable 130 219 Short-term collateralized financings 908 674 Net cash provided by operating activities increased quarter over quarter due to fluctuations in reinsurance activity. The $38 million increase in net fixed policyholder account deposits and the decline in net variable account deposits in the first three months of 2001, compared to 2000, resulted from a shift in customer preference away from variable products due to increased equity market volatility. The increase in short-term collateralized financings relates to our expanded use of dollar rolls. The division's major use of cash was the net purchase of investments necessary to support increases in insurance and annuity liabilities. In the first three months of 2001, the division paid net dividends of $141 million to the parent. Financial Services - Consumer Lending. Principal sources of cash for our financial services - consumer lending division were as follows: Three Months Ended March 31, 2001 2000 Cash from operating activities $239 $191 Increase(decrease)in debt (14) 63 Net cash provided by operating activities increased $48 million in first quarter 2001, compared to first quarter 2000, due to the increase in finance charges from higher average net receivables. Cash generated by borrowings decreased in 2001 due to the decline in finance receivables compared to an increase in receivables in first quarter 2000. The division's major use of cash was the net purchase of investments due to excess capital in the division's insurance subsidiaries. Net cash used to fund finance receivables was $60 million in the first three months of 2001, compared to $172 million in the first three months of 2000. The division paid dividends of $68 million to the parent in first quarter 2001. Corporate. 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. Corporate operations use cash to pay dividends to shareholders, to pay 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 target capital structure. Net dividends received from our business divisions were as follows: Three Months Ended March 31, 2001 2000 Dividends received Asset Accumulation $ 21 $ 70 Financial Services - Life Insurance 141 123 Financial Services - Consumer Lending 68 27 Total received 230 220 Contributions paid Asset Accumulation 41 - Financial Services - Life Insurance - 22 Total paid 41 22 Net dividends received $ 189 $ 198 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, accounting, or tax changes that affect the cost, availability, or demand for, our products; (4) our ability to secure necessary regulatory approvals, including approvals for dividends and products; 5) our ability to realize projected expense savings; (6) adverse litigation or arbitration results or resolution of litigation or arbitration, including proceedings related to industrial life insurance, satellite dish financing, and workers' compensation insurance; (7) the formation of strategic alliances or business combinations among our competitors or our business partners; and (8) our ability to obtain shareholder and regulatory approvals to complete a merger. 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. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Our 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 included in the section titled "Asset/Liability Management" of Management's Discussion and Analysis in our 2000 Annual Report to Shareholders. There have been no material changes in such risks or our asset/liability management program during the three months ended March 31, 2001. See Note 3 of the financial statements for information about derivative financial instrument activity during first quarter 2001 and related SFAS 133 disclosures. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Refer to Note 7 of Notes to Consolidated Financial Statements included in Part I of this Form 10-Q for the quarter ended March 31, 2001. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. 2.1 Agreement and Plan of Merger, dated as of March 11, 2001, by and among the company, Prudential, Holborn Delaware Partnership (HDP), and Ascend Merger Corp., incorporated by reference to Exhibit 2.01 to the American General Corporation Current Report on Form 8-K dated March 12, 2001 (File No. 1-7981) 2.2 Tri-Party Agreement, dated as of May 11, 2001, by and among the company, Prudential, HDP, Ascend Merger Corp., and AIG, incorporated by reference to Exhibit 2.01 to the American General Current Report on Form 8-K dated May 11, 2001 (File No. 1-7981) 2.3 Agreement and Plan of Merger, dated as of May 11, 2001, by and among the company, AIG, and Washington Acquisition Corporation, incorporated by reference to Exhibit 2.02 to the American General Current Report on Form 8-K/A dated May 14, 2001 (File No. 1-7981) 10.01 Employment Agreement dated as of May 11, 2001, between Robert M. Devlin, American General Corporation, and American International Group, Inc. 10.02 Employment Agreement dated as of May 11, 2001, between Rodney O. Martin, Jr., American General Corporation, and American International Group, Inc. 10.03 Employment Agreement dated as of May 11, 2001, between John A. Graf, American General Corporation, and American International Group, Inc. 11 Computation of Earnings per Share (included in Note 4 of Notes to Consolidated Financial Statements) 12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends b. Reports on Form 8-K. 1) Current Report on Form 8-K dated March 12, 2001, with respect to the Agreement and Plan of Merger, dated as of March 11, 2001, entered into by and among American General; Prudential plc, a public limited company incorporated in England and Wales; and certain wholly owned subsidiaries of Prudential. 2) Current Report on Form 8-K dated May 11, 2001, with respect to: a) Tri-Party Agreement, dated as of May 11, 2001, by and among the company, Prudential, certain wholly owned subsidiaries of Prudential, and AIG and b) Agreement and Plan of Merger, dated as of May 10, 2001, by and among the company, AIG, and a wholly owned subsidiary of AIG. 3) Amended Current Report on Form 8-K/A dated May 14, 2001, with respect to the Agreement and Plan of Merger, dated as of May 11, 2001, by and among the company, AIG, and a wholly owned subsidiary of AIG, with the sole correction from the May 11, 2001 Form 8-K reflecting the correct date of the Agreement. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 15, 2001. AMERICAN GENERAL CORPORATION (Registrant) By: NICHOLAS R. RASMUSSEN Nicholas R. Rasmussen Executive Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) EXHIBIT INDEX Exhibit 2.1 Agreement and Plan of Merger, dated as of March 11, 2001, by and among the company, Prudential, Holborn Delaware Partnership (HDP), and Ascend Merger Corp., incorporated by reference to Exhibit 2.01 to the American General Corporation Current Report on Form 8-K dated March 12, 2001 (File No. 1-7981) 2.2 Tri-Party Agreement, dated as of May 11, 2001, by and among the company, Prudential, HDP, Ascend Merger Corp., and AIG, incorporated by reference to Exhibit 2.01 to the American General Current Report on Form 8-K dated May 11, 2001 (File No. 1-7981) 2.3 Agreement and Plan of Merger, dated as of May 11, 2001, by and among the company, AIG, and Washington Acquisition Corporation, incorporated by reference to Exhibit 2.02 to the American General Current Report on Form 8-K/A dated May 14, 2001 (File No. 1-7981) 10.01 Employment Agreement dated as of May 11, 2001, between Robert M. Devlin, American General Corporation, and American International Group, Inc. 10.02 Employment Agreement dated as of May 11, 2001, between Rodney O. Martin, Jr., American General Corporation, and American International Group, Inc. 10.03 Employment Agreement dated as of May 11, 2001, between John A. Graf, American General Corporation, and American International Group, Inc. 11 Computation of Earnings per Share (included in Note 4 of Notes to Consolidated Financial Statements) 12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends EX-10 2 exrmd.txt EMPLOYMENT AGREEMENT AGREEMENT by and among American International Group, Inc., a Delaware corporation (the "Parent"), American General Corporation, a Texas corporation (the "Company"), and Robert M. Devlin (the "Executive") dated as of the 11th day of May, 2001. Parent has determined that it is in the best interests of Parent and the Company and their respective shareholders to assure that the Company will have the continued services of the Executive following the merger (the "Merger") of the Company and Washington Acquisition Corporation, a Texas corporation and a wholly owned subsidiary of Parent ("Merger Sub"), pursuant to the Agreement and Plan of Merger dated as of May 11th, 2001 (the "Merger Agreement"), to provide the surviving corporation after the Merger with continuity of management. Pursuant to the terms of the Prior Agreement (as defined below), Executive would have had the right to terminate his employment upon consummation of the Merger. However, Parent desires to retain the Executive's continued services pursuant to the terms of this Agreement. Therefore, in order to accomplish these objectives, Parent, the Company and the Executive agree as follows: NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Effective Date. The "Effective Date" shall mean the "Effective Date" (as defined in the Merger Agreement) of the Merger. This Agreement shall be and become effective on the Effective Date. If the Effective Date does not occur on or before February 28, 2002 or if the Merger Agreement is earlier terminated in accordance with its terms, then this Agreement shall terminate automatically on February 28, 2002 or on such earlier Merger Agreement termination date and none of Parent, the Company or the Executive shall have any obligation to the other hereunder. 2. Employment Period. Parent and the Company hereby agree to employ the Executive, and the Executive hereby agrees to serve Parent and continue to serve the Company, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary thereof (the "Employment Period"). 3. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive shall serve as Vice Chairman of Parent and Chairman and Chief Executive Officer of the Company, with the duties and responsibilities assigned to him by the Chief Executive Officer of Parent consistent with such position and (B) the Executive's services shall be performed in Houston, Texas and New York, New York, as determined in good faith by the Executive to be necessary or appropriate for the reasonable performance of his duties hereunder; provided that for 2001, the Executive shall not be required to be in New York for more than 182 days during the calendar year (inclusive of periods prior to the Effective Date). As Chief Executive Officer of the Company, all officers of the Company (including, without limitation, the Senior Vice Chairmen) will report to the Executive, and the Executive shall have responsibility over all business units reporting to any such officers at the Effective Date (except with respect to investments and administrative serv- ices (such human resources and legal, which shall report toother appropriate officers of Parent). The consumer finance business unit shall also report to an officer of Parent on a matrix basis. Effective as of the Effective Date, Parent shall recommend to Parent's board of directors (the "Parent Board") that the Executive be elected and thereafter be re- nominated as a member of the Parent Board and shall serve as a member of Parent Board during his employment hereunder. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and Parent and to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not interfere with the performance of the Executive's responsibilities as an employee of the Company and Parent in accordance with this Agreement, and with respect to the activities described in clauses (A) and (C) hereof subject to Parent's policies as in effect from time to time. (b) Compensation. (i) Initial Payment. On the Effective Date, the Company shall pay to the Executive a lump sum payment of $16.5 million, which is equal to the cash payment that the Executive would have been entitled to receive pursuant to Section 8(c)(iii) (the "Cash Severance") of the Employment Agreement between the Company and the Executive dated as of February 1, 1998, as amended (the "Prior Agreement"), had he been terminated by the Company without "cause" (as defined therein) upon the Effective Date. In addition, on the Effective Date, the Company shall pay to the insurance company which has issued the policy which is the subject of the Split- Dollar Agreement between the Executive and the Company, dated as of May 15, 1998, as amended (the "Split-Dollar Agreement"), the amount necessary to satisfy the Company's obligations to make all premium payments that the Company would have been required to make for the remaining portion of the "Premium Payment Period" (as defined in the Split-Dollar Agreement), pursuant to Paragraph 5(b) of the Split- Dollar Agreement. The Executive shall also be entitled to an excise tax gross-up payment as set forth in Section 9 of the Prior Agreement solely with respect to the payments and benefits that the Executive was entitled to receive under the terms of the Prior Agreement, the Supplemental Executive Retirement Agreement between the Company and the Executive, dated as of February 1, 1998, as amended (the "SERA") and the Split-Dollar Agreement (collectively, the "Pre-Effective Date Agreements") or with respect to the vesting of or lapse of restrictions on, as a direct result of the Merger, compensation earned, benefits accrued or equity awards granted prior to the Effective Date (including, without limitation, benefits due and owing under the Pre-Effective Date Agreements and specifically incorporated herein). Except as set forth in the preceding sentence, in no event shall the Executive be entitled to an excise tax gross-up payment with respect to any amounts payable or benefits provided under the terms of this Agreement. The Executive acknowledges and agrees that in no event shall he be entitled to the payments or benefits under the Prior Agreement based upon a "Termination Deemed to Be after Change in Control" (as described in the Prior Agreement). (ii) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary") of no less than the annual base salary in effect with respect to the Executive for calendar year 2001. (iii) Annual Bonus. For each calendar year ending during the Employment Period, the Executive shall receive (or at his election pursuant to the deferred compensation plan of Parent or the Company (if any) defer part or all of) an annual cash bonus at least equal to $4,500,000 (the "Annual Bonus") no later than January 31 of the following year, and the Annual Bonus hereunder shall be in lieu of any bonus amount (or portion thereof) payable to the Executive under any agreement or bonus plan of the Company, including without limitation, the Company Performance-Based Plan for Executive Officers with respect to the calendar year in which the Effective Date occurs, and the Executive hereby waives all right under any such agreements or plans. For the calendar year within which the Employment Period ends, the Executive shall receive no later than January 31 of the following year (or at his election pursuant to the applicable deferred compensation plan of Parent or the Company (if any) defer part or all of) a bonus which shall equal or exceed an amount determined by multiplying $4,500,000 by a fraction the numerator of which shall be the number of days in such calendar year which were included in the Employment Period and the denominator of which shall be 365. (iv) Incentive Awards. At the time equity grants are made to other employees of the Company pursuant to the Merger Agreement, the Executive will be granted equity based awards with respect to the common stock of Parent (the "2001 Service Awards"), pursuant to the terms of the applicable Parent plan as in effect from time to time, that is equal in value to the value of all options (valued using a Black- Scholes value of $10.00, after giving effect to the stock split in 2001), restricted shares and Performance Awards contained in a Performance Based Restricted Stock/Restricted Share Unit Award (valued using the fair market value of the Company's common stock on the date of grant) with respect to restricted share units and performance awards that were granted to the Executive by the Company on January 17, 2001, and with the ratio of the options, restricted shares and performance awards being the same as the ratio of the awards granted to the Executive on January 17, 2001. For purposes of the immediately preceding sentence, the value of the options in Parent's common stock shall be determined using the Black-Scholes valuation model, using assumptions established in manner consistent with the assumptions applied by Parent, consistent with past practices, in respect of stock option grants in 2001. Any stock options on Parent common stock granted in connection with the 2001 Service Awards will have an exercise price equal to the fair market value of the Parent common stock subject thereto on the date of grant and, except as otherwise provided herein, shall vest in four equal installments on each of the first, second, third and fourth anniversaries of the date of grant. Any restricted shares and Performance Awards granted in respect of Parent common stock shall have terms and conditions that are substantially comparable to those applied in respect of the 2001 awards made by the Company, provided that in no event shall the 2001 Service Awards vest upon the Executive's retirement or attainment of a specified age. In the event that the Executive receives any equity award grants (other than reload options) from the Company after the date hereof, the 2001 Service Awards shall be reduced by the value of any such awards (determined using a Black- Scholes value with respect to options, using assumptions established on a basis consistent with those applied by the Company in determining such Black-Scholes value in respect of the 2001 grants to the Executive, and the fair market value on the date of grant with respect to performance based or restricted stock awards). (v) Retirement Benefits. On the Effective Date, the Executive shall be paid the benefits payable to the Executive under the SERA, which benefits shall be calculated under the terms and conditions thereof (including without limitation, any enhanced service and age credits provided under Section 2.6 in respect of a termination of the Executive's employment following the occurrence of a Change of Control) as though the Executive's employment terminated on the Effective Date without Cause and the Executive elected to receive a lump sum distribution of such benefits, with any offset against such benefits related to the benefits payable to the Executive under any other retirement plan maintained by the Company based on the benefits accrued by the Executive thereunder as of the Effective Date. From and after the Effective Date, the Executive shall not be entitled to accrue any additional benefit under the SERA. From and after the Effective Date, the Executive shall participate in the applicable retirement plans of Parent or the Company, whichever is available generally to the employees of the Company, as though no SERA benefit was accrued, provided that the Executive shall not become a participant in the Company's or Parent's Supplemental Executive Retirement Plan and that in no event shall the Executive be entitled to duplicate benefits with respect to the same period of service. To the extent anything contained in this Section 3(b)(v) is inconsistent with the terms and conditions of the SERA, the SERA shall be deemed amended hereby. (vi) Other Employee Benefit Plans. During the Employment Period, except as otherwise expressly provided herein, the Executive shall be entitled to participate in all employee benefit, welfare and other plans, practices, policies and programs generally applicable to similarly situated executives of Parent or the Company, provided that, in no event shall the Executive be entitled to receive duplicate benefits with respect to the same period of service under any plans, practices, policies or programs of the Company and/or Parent. Notwithstanding anything contained herein to the contrary, the Executive expressly understands and agrees that he will not initially be entitled to become a participant in the STARR International Co., Inc. ("SICO") Deferred Compensation Profit Participation Plan ("SICO Plan") or to become a stockholder in C.V. STARR & Co., Inc. ("STARR"), but that following the first anniversary of the Effective Date, Parent will recommend to the Boards of Directors of SICO and STARR that the Executive be eligible to commence participation in the SICO Plan and to become a stockholder of STARR, consistent with similarly situated executives of Parent. Any participation in the SICO Plan or STARR will require a mutually agreeable reduction in the other compensation payable or provided to the Executive, including without limitation the Base Salary and the Annual Bonus, and such reduction will be a condition to participation in such plans and will in no event be deemed a breach of this Agreement. Any reduction in the compensation otherwise payable hereunder shall be agreed to, in writing, by the parties in advance of the time such reduction is to be effective, and such writing shall set forth, in reasonable detail sufficient for the Executive to understand, the compensation being provided in lieu thereof and all vesting and forfeiture provisions related thereto (and other restrictions, if any, on the ability of the Executive to access or receive such compensation). (vii) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with Parent's policies. (viii) Perquisites. During the Employment Period, the Executive shall be entitled to the same perquisites as were made available to him by the Company immediately prior to the Effective Date in accordance with the terms of the Prior Agreement. (ix) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of Parent as in effect with respect to the similarly situated executives of Parent. (x) Other Benefits From the Prior Agreement. The Executive shall be provided with the medical and dental benefits described in Section 8(e)(i) of the Prior Agreement, as though the Executive's employment terminated under such Prior Agreement without Cause on the Effective Date, including, without limitation, during his employment hereunder, if such benefits are more favorable to the Executive than those which would be available to him as an employee of Parent. Parent shall indemnify the Executive during his employment hereunder and following the termination of the Executive's employment hereunder, on the same basis as Parent indemnifies similarly situated executives of Parent. Upon and following any termination of the Executive's employment with the Company and Parent following the Effective Date, regardless of the reason, the Company shall provide the Executive with the life and accident benefits (excluding the split- dollar benefits) described in Section 8(c)(iv) of the Prior Agreement, the auto allowance described in Section 8(c)(vi) of the Prior Agreement, in any such case for the 36 months after his termination of employment. For purposes of the preceding sentence, the monthly amount of the car allowance shall be at least equal to the amount of the annual lease payment on the car made available to the Executive for his use immediately prior to the Effective Date, divided by 12. Following the Executive's termination of employment, the Executive shall be provided the office facilities described in 8(e)(iii) of the Prior Agreement in New York City (or such other city as the parties agree) until the date otherwise specified therein. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company or Parent determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 10(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and reasonably acceptable to the Executive or the Executive's legal representative. (b) With or Without Cause. The Company or Parent may terminate the Executive's employment during the Employment Period with or without Cause. For purposes of this Agreement, "Cause" shall mean: (i) the continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by Parent that specifically identifies the manner in which Parent believes that the Executive has not substantially performed the Executive's duties, or (ii) the engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company or one of its affiliates, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Parent Board or upon the instructions of the Chief Executive Officer of Parent or based upon the advice of counsel for Parent shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. Any determination as to whether Cause exists under this Agreement shall be made by resolution of a majority of the members of the Parent Board (excluding the Executive), after the Executive has had the opportunity to respond to such board in person (with the assistance of counsel) with respect to such acts or omissions as are alleged by Parent to constitute Cause, which acts and omissions shall be identified to the Executive in reasonable detail in writing within a reasonable period (but not less than the three business days) prior to time that the Executive has his hearing before the Parent Board. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean a material breach by the Company or Parent of a material provision of this Agreement. Without limiting the generality of the foregoing, Parent and the Executive agree that any of the following would constitute a material breach of this Agreement by Parent: (i) any reduction in the Executive's base salary or annual bonus (other than a reduction consented to by the Executive in writing, including, without limitation, any reduction contemplated by Section 3(b)(vi)); (ii) any failure, during the period after the Effective Date and during the Executive's employment with Parent and the Company during the Employment Period, to nominate or elect (or re-nominate or re-elect) the Executive as a member of the Parent Board; (iii) any material adverse change (without his prior written consent) in the Executive's duties and responsibilities, or titles, as set forth in Section 3(a)(i) hereof; and (iv) any relocation of his principal place of employment without his prior written consent, other than for travel reasonably necessary in the performance of his duties hereunder. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 10(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive, the Company or Parent to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive, the Company or Parent, respectively, hereunder or preclude the Executive, the Company or Parent, respectively, from asserting such fact or circumstance in enforcing the Executive's, the Company's or Parent's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company or Parent for Cause, or by the Executive with or without Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be, (ii) if the Executive's employment is terminated by the Company or Parent other than for Cause or Disability, the Date of Termination shall be the date on which the Company or Parent notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company or Parent shall terminate the Executive's employment other than for Cause, death or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid ("Accrued Salary"), (2) the benefits described in Section 3(b)(x) hereof and (3) any benefits to which the Executive is entitled under the terms and conditions of any applicable employee benefits plan, program or agreement (collectively, subclause (1)-(3) shall be referred to as the "Accrued Obligations"); and B. a lump sum amount equal to the greater of (x) the severance under the severance policy of Parent applicable to similarly situated executives of Parent, as in effect from time to time, and (y) the sum of the Executive's Annual Base Salary and the Annual Bonus amount set forth in Section 3(b)(iii); and C. a pro-rata portion of the Annual Bonus payable to the Executive under Section 3(b)(iii), which shall be determined by multiplying such bonus by a fraction, the numerator of which is the number of days in the calendar year in which the Executive's date of termination occurs which have elapsed prior to such date of termination and the denominator of which is 365; and D. outplacement services for the duration and of the nature described in Section 8(c)(v) of the Prior Agreement; and (ii) to the extent granted prior to the Date of Termination, the 2001 Service Awards shall vest immediately. (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than the Accrued Obligations (to the extent applicable upon the Executive's death). Accrued Salary shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. In addition, (i) to the extent granted prior to the Date of Termination, all of the 2001 Service Awards shall become fully vested and, to the extent applicable, exercisable for the maximum period allowable under the applicable plan for a termination due to death and (ii) the Executive's estate shall be entitled to the death benefits as in effect on the date of the Executive's death with respect to similarly situated executives of Parent (including, without limitation, any rights to accelerated vesting and enhanced exercise periods applicable in respect of any equity awards made to the Executive in connection with his employment after the Effective Date (excluding the 2001 Service Awards, which are addressed in subclause (i)) that are generally available to executive officers of Parent whose employment has terminated for such reason under the terms of the plan, program or arrangement under which such awards have been made (the "Equity Enhancements")). (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than in respect of the Accrued Obligations. Accrued Salary shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. In addition, (i) to the extent granted prior to the Date of Termination, all of the 2001 Service Awards shall become fully vested and, to the extent applicable, exercisable for the maximum period allowable under the applicable Parent plan for a termination due to disability and (ii) the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits as in effect at any time thereafter generally with respect to similarly situated executives of Parent (including, without limitation, the Equity Enhancements). (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive the Accrued Obligations and the only duties, obligations and liabilities of the Executive to the Company or Parent thereafter shall be the restrictive covenants set forth in Section 7 hereof. 6. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or Parent may have against the Executive or others. 7. Confidential Information; Noncompetition; Nonsolicitation. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company and Parent all secret or confidential information, knowledge or data relating to the Company, Parent or any of their affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company, Parent or any of their affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, Parent or any of their affiliated companies, the Executive shall not, without the prior written consent of Parent or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company, Parent or any of their affiliated companies and those designated by them. (b) The Executive agrees that until the earlier of (i) the fourth anniversary of the Effective Date and (ii) the first anniversary of the Executive's termination of employment for any reason (the "Restricted Period"), the Executive will not, without the written consent of Parent, engage in any business of, or enter the employ of, or have any interest in, directly or indirectly, any other person, firm, corporation or other entity engaged in a business that competes with, or provides services and/or products of a nature substantially similar to those provided by, the Company, Parent or their affiliates, with an office or facility in any geographic area in which the Company, Parent or their affiliates do business. Nothing herein shall restrict the Executive from owning 1% or less of the outstanding securities of any corporation or other entity whose securities are listed on any national securities exchange or traded over-the-counter, if the Executive has no other connection or relationship with the issuer of such securities. (c) During the Restricted Period, the Executive will not, directly or indirectly, on behalf of the Executive or any other person, solicit for employment or employ by other than the Company or Parent any person who, at any time during the six-month period immediately preceding the date of such solicitation, was an employee of the Company, Parent or any of their affiliates. (d) The Executive acknowledges and agrees that due to the nature of the business in which the Company, Parent and their affiliates are engaged and because of the nature of the confidential information to which the Executive has access, it would be impractical and excessively difficult to determine the actual damages of the Company or Parent in the event the Executive breached any of the covenants of this Section 7 and that remedies at law (such as monetary damages) for any breach of the Executive's obligations under this Section 7 would be inadequate. The Executive therefore agrees and consents that, if the Executive commits any breach of a covenant under this Section 7 or threatens to commit any such breach, the Company and Parent shall have the right (in addition to, and not in lieu of, any other right or remedy that may be available to each of them) to temporary and permanent injunctive relief from a court of competent jurisdiction. With respect to any provision of this Section 7 finally determined by a court of competent jurisdiction to be unenforceable, the Executive, the Company and Parent hereby agree that such court shall have jurisdiction to reform this Agreement or any provision hereof so that it is enforceable to the maximum extent permitted by law, and the parties agree to abide by such court's determination. (e) The provisions of this Section 7 shall remain in full force and effect until the expiration of the period specified therein, notwithstanding the earlier termination of the Executive's employment hereunder, the Employment Period or this Agreement, provided that the Effective Date has occurred. 8. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company and Parent shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and Parent and their respective successors and assigns. (c) The Company and Parent will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company or Parent, as applicable, to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company and/or Parent would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" and "Parent" shall mean the Company and Parent as hereinbefore defined and any successor to their respective businesses and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. As used in this Agreement, the term "affiliated companies" and "affiliates" shall include any company controlled by, controlling or under common control with the Company. 9. Dispute Mechanism. (a) Pre-Effective Date Agreements. To the extent that there is any dispute between the parties with respect to any benefits payable hereunder which are due and payable under a Pre-Effective Date Agreement (including, without limitation, the amounts payable under Sections 3(b)(i) and 3(b)(x), the SERA benefits payable under Section 3(b)(v) and the benefits payable or provided under Section 5(a)(i)(D)), such dispute shall be resolved pursuant to the mechanism set forth in Section 21 of the Prior Agreement, which is incorporated by reference herein and made a part hereof, and Parent shall be obligated to pay (or shall cause the Company to pay) the Executive's legal and arbitration fees and expenses as provided under Section 11 of the Prior Agreement, which is incorporated by reference herein and made a part hereof. (b) Benefits and Claims Not Related to the Pre-Effective Date Agreements. To the extent that there is any dispute between the parties with respect to any benefits payable hereunder which are not due and payable under a Pre-Effective Date Agreement (and therefore not subject to the dispute mechanism set forth in Section 9(a) above), Parent shall be obligated to pay (or shall cause the Company to pay) the Executive's legal and arbitration fees and expenses related to such dispute in the event that the Executive prevails at arbitration or trial as to any material issue presented in such dispute. 10. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: At the most recent address on file at the Company If to the Company: American General Corporation 2929 Allen Parkway Houston, Texas 77019 Attention: General Counsel Copy to Parent: American International Group, Inc. 70 Pine Street New York, New York 10270 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The Company's obligations (i) to provide the Executive with benefits and compensation pursuant to Section 5, (ii) to pay any gross-up payment required to be paid under Section 3(b)(i), and (iii) to pay any amount not previously paid (and required to be paid hereunder ) in respect of any Pre-Effective Date Agreement shall survive the termination of the Executive's employment hereunder, the Employment Period or this Agreement, provided that the Effective Date has occurred. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) None of the benefits provided to the Executive under any of the Pre-Effective Date Agreements or under Section 5 hereof shall be subject to any mitigation or offset, except as may otherwise be expressly provided hereunder. (f) The Company or Parent may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) The Executive's or the Company's or Parent's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive, the Company or Parent may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (h) From and after the Effective Date, this Agreement shall supersede and terminate the Prior Agreement and any amendments thereto, except to the extent that any of the benefits made available under the Prior Agreement or any of the other provisions of the Prior Agreement are expressly intended to continue under the terms of this Agreement. From and after the Effective Date, the SERA and the Split-Dollar Agreement shall be amended in accordance with the terms hereof, and, upon satisfaction of the Company's obligations as set forth herein, the Company and Parent shall have no further obligations under such agreements. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from their respective Boards of Directors, each of the Company and Parent has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/Robert M. Devlin ROBERT M. DEVLIN AMERICAN GENERAL CORPORATION By /s/ Mark S. Berg Name: MARK S. BERG Title:Executive Vice President, General Counsel and Corporate Secretary AMERICAN INTERNATIONAL GROUP, INC. By /s/ Ernest T. Patrikis Name: ERNEST T. PATRIKIS Title:Senior Vice President and General Counsel EX-10 3 exrom.txt EMPLOYMENT AGREEMENT AGREEMENT by and among American International Group, Inc., a Delaware corporation (the "Parent"), American General Corporation, a Texas corporation (the "Company"), and Rodney O. Martin (the "Executive") dated as of the 11th day of May, 2001. Parent has determined that it is in the best interests of Parent and the Company and their respective shareholders to assure that the Company will have the continued services of the Executive following the merger (the "Merger") of the Company and Washington Acquisition Corporation, a Texas corporation and a wholly owned subsidiary of Parent ("Merger Sub"), pursuant to the Agreement and Plan of Merger dated as of May 11th, 2001 (the "Merger Agreement"), to provide the surviving corporation after the Merger with continuity of management. Pursuant to the terms of the Prior Agreement (as defined below), Executive would have had the right to terminate his employment upon consummation of the Merger. However, Parent desires to retain the Executive's continued services pursuant to the terms of this Agreement. Therefore, in order to accomplish these objectives, Parent, the Company and the Executive agree as follows: NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Effective Date. The "Effective Date" shall mean the "Effective Date" (as defined in the Merger Agreement) of the Merger. This Agreement shall be and become effective on the Effective Date. If the Effective Date does not occur on or before February 28, 2002 or if the Merger Agreement is earlier terminated in accordance with its terms, then this Agreement shall terminate automatically on February 28, 2002 or on such earlier Merger Agreement termination date and none of Parent, the Company or the Executive shall have any obligation to the other hereunder. 2. Employment Period. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to continue to serve the Company, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary thereof (the "Employment Period"). 3. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive shall serve in the position set forth on Exhibit A attached hereto, with the duties and responsibilities associated with such position on the Effective Date (except to the extent expressly provided in Exhibit A) as shall be assigned to him by the Board of Directors or Chief Executive Officer of the Company and (B) the Executive's services shall be performed in the location set forth on Exhibit A hereto. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and Parent and to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not interfere with the performance of the Executive's responsibilities as an employee of the Company and Parent in accordance with this Agreement, and with respect to the activities described in clauses (A) and (C) hereof subject to Parent's policies as in effect from time to time. (b) Compensation. (i) Initial Payment. On the Effective Date, the Company shall pay to the Executive a lump sum payment equal to the amount set forth on Exhibit A hereto, which is equal to the cash payment that the Executive would have been entitled to receive pursuant to Section 4.5 (the "Cash Severance") of the Change in Control Severance Agreement between the Company and the Executive dated as of April 1, 2000 (the "Severance Agreement"), had he been terminated by the Company without "cause" (as defined therein) upon the Effective Date. In addition, on the Effective Date, the Company shall pay to the insurance company which has issued the policy which is the subject of the Split- Dollar Agreement between the Executive and the Company, dated as of May 15, 1998 (the "Split-Dollar Agreement"), the amount set forth on Exhibit A hereto (the "Split Dollar Payment"), which is equal to the projected amount of the premium payments that the Company would have been required to make during the three-year period immediately following the Effective Date on the policy underlying the Split-Dollar Agreement, pursuant to Paragraph 5(b) of the Split- Dollar Agreement. The Executive shall also be entitled to an excise tax gross-up payment as set forth in Section 4.7 of the Severance Agreement solely with respect to the payments and benefits that the Executive was entitled to receive under the terms of the Severance Agreement, the Employment Agreement between the Executive and the Company dated as of May 1, 2000 (the "Prior Employment Agreement"), the Supplemental Executive Retirement Agreement between the Company and the Executive, dated as of May 1, 2000, as amended (the "SERA") and the Split-Dollar Agreement (collectively, the "Pre-Effective Date Agreements") or with respect to the vesting of or lapse of restrictions on, as a direct result of the Merger, compensation earned, benefits accrued or equity awards granted prior to the Effective Date (including, without limitation, benefits due and owing under the Pre-Effective Date Agreements and specifically incorporated herein). Except as set forth in the preceding sentence, in no event shall the Executive be entitled to an excise tax gross-up payment with respect to any amounts payable or benefits provided under the terms of this Agreement. The Executive acknowledges and agrees that in no event shall he be entitled to the payments or benefits under the Severance Agreement based upon a termination during a "Period of Anticipated Change in Control" (as defined in the Severance Agreement). (ii) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary") of no less than the annual base salary in effect with respect to the Executive for calendar year 2001. (iii) Annual Bonus. For each calendar year ending during the Employment Period, the Executive shall receive (or at his election pursuant to the deferred compensation plan of the Company (if any) defer part or all of) an annual cash bonus at least equal to the amount set forth on Exhibit A hereto (the "Annual Bonus") no later than January 31 of the following year, and the Annual Bonus hereunder shall be in lieu of any bonus amount (or portion thereof) payable to the Executive under any agreement or bonus plan of the Company, including without limitation, the Company Performance-Based Plan for Executive Officers with respect to the calendar year in which the Effective Date occurs, and the Executive hereby waives all right under any such agreements or plans. For the calendar year within which the Employment Period ends, the Executive shall receive no later than January 31 of the following year (or at his election pursuant to the applicable deferred compensation plan of the Company (if any) defer part or all of) a bonus which shall equal or exceed an amount determined by multiplying the Annual Bonus amount set forth on Exhibit A by a fraction the numerator of which shall be the number of days in such calendar year which were included in the Employment Period and the denominator of which shall be 365. (iv) Incentive Awards. At the time equity grants are made to other employees of the Company pursuant to the Merger Agreement, the Executive will be granted equity based awards with respect to the common stock of Parent (the "2001 Service Awards"), pursuant to the terms of the applicable Parent plan as in effect from time to time, that is equal in value to the value of all options (valued using a Black-Scholes value of $10.00, after giving effect to the stock split in 2001), restricted shares and Performance Awards contained in a Performance Based Restricted Stock/Restricted Share Unit Award (valued using the fair market value of the Company's common stock on the date of grant) with respect to restricted share units and performance awards that were granted to the Executive by the Company on January 17, 2001, and with the ratio of the options, restricted shares and performance awards being the same as the ratio of the awards granted to the Executive on January 17, 2001. For purposes of the immediately preceding sentence, the value of the options in Parent's common stock shall be determined using the Black-Scholes valuation model, using assumptions established in manner consistent with the assumptions applied by Parent, consistent with past practices, in respect of stock option grants in 2001. Any stock options on Parent common stock granted in connection with the 2001 Service Awards will have an exercise price equal to the fair market value of the Parent common stock subject thereto on the date of grant and, except as otherwise provided herein, shall vest in four equal installments on each of the first, second, third and fourth anniversaries of the date of grant. Any restricted shares and Performance Awards granted in respect of Parent common stock shall have terms and conditions that are substantially comparable to those applied in respect of the 2001 awards made by the Company. In the event that the Executive receives any equity award grants (other than reload options) from the Company after the date hereof, the 2001 Service Awards shall be reduced by the value of any such awards (determined using a Black-Scholes value with respect to options, using assumptions established on a basis consistent with those applied by the Company in determining such Black-Scholes value in respect of the 2001 grants to the Executive, and the fair market value on the date of grant with respect to performance based or restricted stock awards). (v) Retirement Benefits. On the Effective Date, the Executive shall be paid the benefits payable to the Executive under the SERA, which benefits shall be calculated under the terms and conditions thereof (including without limitation, any enhanced service and age credits provided under Section 2.6 in respect of a termination of the Executive's employment following the occurrence of a Change of Control) as though the Executive's employment terminated on the Effective Date without Cause and the Executive elected to receive a lump sum distribution of such benefits, with any offset against such benefits related to the benefits payable to the Executive under any other retirement plan maintained by the Company based on the benefits accrued by the Executive thereunder as of the Effective Date. From and after the Effective Date, the Executive shall not be entitled to accrue any additional benefit under the SERA. From and after the Effective Date, the Executive shall participate in the applicable retirement plans of the Company as though no SERA benefit was accrued, provided that the Executive shall not become a participant in the Company's or Parent's Supplemental Executive Retirement Plan and that in no event shall the Executive be entitled to duplicate benefits with respect to the same period of service. To the extent anything contained in this Section 3(b)(v) is inconsistent with the terms and conditions of the SERA, the SERA shall be deemed amended hereby. (vi) Other Employee Benefit Plans. During the Employment Period, except as otherwise expressly provided herein, the Executive shall be entitled to participate in all employee benefit, welfare and other plans, practices, policies and programs generally applicable to similarly situated executives of the Company, provided that, in no event shall the Executive be entitled to receive duplicate benefits with respect to the same period of service under any plans, practices, policies or programs of the Company and/or Parent. Notwithstanding anything contained herein to the contrary, the Executive expressly understands and agrees that he will not initially be entitled to become a participant in the STARR International Co., Inc. ("SICO") Deferred Compensation Profit Participation Plan ("SICO Plan") or to become a stockholder of C.V. STARR & Co., Inc. ("STARR"), but that following the first anniversary of the Effective Date, Parent will recommend to the Boards of Directors of SICO and of STARR that the Executive be eligible to commence participation in the SICO Plan and to become a stockholder of STARR, consistent with similarly situated executives of subsidiaries of Parent. Any participation in the SICO Plan or STARR will require a mutually agreeable reduction in the other compensation payable or provided to the Executive, including without limitation the Base Salary and the Annual Bonus, and such reduction will be a condition to participation in such plans and will in no event be deemed a breach of this Agreement. Any reduction in the compensation otherwise payable hereunder shall be agreed to, in writing, by the parties in advance of the time such reduction is to be effective, and such writing shall set forth, in reasonable detail sufficient for the Executive to understand, the compensation being provided in lieu thereof and all vesting and forfeiture provisions related thereto (and other restrictions, if any, on the ability of the Executive to access or receive such compensation). (vii) Indemnification. The Company shall indemnify the Executive during his employment hereunder and following the termination of the Executive's employment hereunder, on the same basis as the Company indemnifies similarly situated executives of the Company. (viii) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the Company's policies. (ix) Perquisites. During the Employment Period, the Executive shall be entitled to perquisites in accordance with the plans, practices, policies and programs generally applicable to similarly situated executives of the Company. (x) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company as in effect with respect to the similarly situated executives of the Company. (xi) Other Benefits From Prior Employment Agreement. Upon and following any termination of the Executive's employment with the Company following the Effective Date, regardless of the reason, the Company shall provide the Executive with the benefits described in Section 8(c)(iv) of the Prior Employment Agreement for the duration described in the Prior Employment Agreement, based on the comparable benefits provided immediately prior to the Date of Termination. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company or Parent determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 10(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and reasonably acceptable to the Executive or the Executive's legal representative. (b) With or Without Cause. The Company or Parent may terminate the Executive's employment during the Employment Period with or without Cause. For purposes of this Agreement, "Cause" shall mean: (i) the continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by Parent that specifically identifies the manner in which Parent believes that the Executive has not substantially performed the Executive's duties, or (ii) the engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company or one of its affiliates, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Parent Board or the Board of Directors of the Company or upon the instructions of the Chief Executive Officer of Parent or the Company or based upon the advice of counsel for Parent or the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The acts and/or omissions which are alleged to constitute the basis for a Cause termination shall be identified to the Executive in reasonable detail in writing, at the time of any such termination of the Executive's employment for Cause. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean a material breach by the Company or Parent of a material provision of this Agreement. Without limiting the generality of the foregoing, Parent and the Executive agree that any of the following would constitute a material breach of this Agreement by Parent: (i) any reduction in the Executive's base salary or annual bonus (other than a reduction consented to by the Executive in writing, including, without limitation, any reduction contemplated by Section 3(b)(vi)); (ii) any material adverse change (without his prior written consent) in the Executive's duties and responsibilities, or titles, as set forth in Section 3(a)(i) and Exhibit A attached hereto; and (iii) any relocation of his principal place of employment in violation of Section 3(a)(i) and Exhibit A attached hereto. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 10(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive, the Company or Parent to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive, the Company or Parent, respectively, hereunder or preclude the Executive, the Company or Parent, respectively, from asserting such fact or circumstance in enforcing the Executive's, the Company's or Parent's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company or Parent for Cause, or by the Executive with or without Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be, (ii) if the Executive's employment is terminated by the Company or Parent other than for Cause or Disability, the Date of Termination shall be the date on which the Company or Parent notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company or Parent shall terminate the Executive's employment other than for Cause, death or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid ("Accrued Salary"), (2) the benefits described in Section 3(b)(xi) hereof and (3) any benefits to which the Executive is entitled under the terms and conditions of any applicable employee benefits plan, program or agreement (collectively, subclause (1)-(3) shall be referred to as the "Accrued Obligations"); and B. a lump sum amount equal to the greater of (x) the severance under the severance policy applicable to similarly situated executives of the Company, as in effect from time to time, and (y) the sum of the Executive's Annual Base Salary and the Annual Bonus amount set forth in Section 3(b)(iii); and C. a pro-rata portion of the Annual Bonus payable to the Executive under Section 3(b)(iii), which shall be determined by multiplying such bonus by a fraction, the numerator of which is the number of days in the calendar year in which the Executive's date of termination occurs which have elapsed prior to such date of termination and the denominator of which is 365; and D. outplacement services for the duration and of the nature described in Section 8(c)(v) of the Prior Employment Agreement; and (ii) to the extent granted prior to the Date of Termination, the 2001 Service Awards shall vest immediately. (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than the Accrued Obligations (to the extent applicable upon the Executive's death). Accrued Salary shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. In addition, (i) to the extent granted prior to the Date of Termination, all of the 2001 Service Awards shall become fully vested and, to the extent applicable, exercisable for the maximum period allowable under the applicable plan for a termination due to death and (ii) the Executive's estate shall be entitled to the death benefits as in effect on the date of the Executive's death with respect to similarly situated executives of the Company (including, without limitation, any rights to accelerated vesting and enhanced exercise periods applicable in respect of any equity awards made to the Executive in connection with his employment after the Effective Date (excluding the 2001 Service Awards, which are addressed in subclause (i)) that are generally available to similarly situated executives of subsidiaries of Parent whose employment has terminated for such reason under the terms of the plan, program or arrangement under which such awards have been made (the "Equity Enhancements")). (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than in respect of the Accrued Obligations. Accrued Salary shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. In addition, (i) to the extent granted prior to the Date of Termination, all of the 2001 Service Awards shall become fully vested and, to the extent applicable, exercisable for the maximum period allowable under the applicable Parent plan for a termination due to disability and (ii) the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits as in effect at any time thereafter generally with respect to similarly situated executives of the Company and to the Equity Enhancements). (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive the Accrued Obligations and the only duties, obligations and liabilities of the Executive to the Company or Parent thereafter shall be the restrictive covenants set forth in Section 7 hereof. 6. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or Parent may have against the Executive or others. 7. Confidential Information; Noncompetition; Nonsolicitation. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company and Parent all secret or confidential information, knowledge or data relating to the Company, Parent or any of their affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company, Parent or any of their affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, Parent or any of their affiliated companies, the Executive shall not, without the prior written consent of Parent or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company, Parent or any of their affiliated companies and those designated by them. (b) The Executive agrees that until the earlier of (i) the fourth anniversary of the Effective Date and (ii) the first anniversary of the Executive's termination of employment for any reason (the "Restricted Period"), the Executive will not, without the written consent of Parent, engage in any business of, or enter the employ of, or have any interest in, directly or indirectly, any other person, firm, corporation or other entity engaged in a business that competes with, or provides services and/or products of a nature substantially similar to those provided by, the Company, Parent or their affiliates, with an office or facility in any geographic area in which the Company, Parent or their affiliates do business. Nothing herein shall restrict the Executive from owning 1% or less of the outstanding securities of any corporation or other entity whose securities are listed on any national securities exchange or traded over-the-counter, if the Executive has no other connection or relationship with the issuer of such securities. (c) During the Restricted Period, the Executive will not, directly or indirectly, on behalf of the Executive or any other person, solicit for employment or employ by other than the Company or Parent any person who, at any time during the six-month period immediately preceding the date of such solicitation, was an employee of the Company, Parent or any of their affiliates. (d) The Executive acknowledges and agrees that due to the nature of the business in which the Company, Parent and their affiliates are engaged and because of the nature of the confidential information to which the Executive has access, it would be impractical and excessively difficult to determine the actual damages of the Company or Parent in the event the Executive breached any of the covenants of this Section 7 and that remedies at law (such as monetary damages) for any breach of the Executive's obligations under this Section 7 would be inadequate. The Executive therefore agrees and consents that, if the Executive commits any breach of a covenant under this Section 7 or threatens to commit any such breach, the Company and Parent shall have the right (in addition to, and not in lieu of, any other right or remedy that may be available to each of them) to temporary and permanent injunctive relief from a court of competent jurisdiction. With respect to any provision of this Section 7 finally determined by a court of competent jurisdiction to be unenforceable, the Executive, the Company and Parent hereby agree that such court shall have jurisdiction to reform this Agreement or any provision hereof so that it is enforceable to the maximum extent permitted by law, and the parties agree to abide by such court's determination. (e) The provisions of this Section 7 shall remain in full force and effect until the expiration of the period specified therein, notwithstanding the earlier termination of the Executive's employment hereunder, the Employment Period or this Agreement, provided that the Effective Date has occurred. 8. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company and Parent shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and Parent and their respective successors and assigns. (c) The Company and Parent will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company or Parent, as applicable, to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company and/or Parent would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" and "Parent" shall mean the Company and Parent as hereinbefore defined and any successor to their respective businesses and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. As used in this Agreement, the term "affiliated companies" and "affiliates" shall include any company controlled by, controlling or under common control with the Company. 9. Dispute Mechanism. (a) Pre-Effective Date Agreements. To the extent that there is any dispute between the parties with respect to any benefits payable hereunder which are due and payable under a Pre-Effective Date Agreement (including, without limitation, the amounts payable under Section 3(b)(i), the SERA benefits payable under Section 3(b)(v) and the benefits payable or provided under Section 5(a)(i)(D)), such dispute shall be resolved pursuant to the mechanism set forth in Section 20 of the Prior Employment Agreement, which is incorporated by reference herein and made a part hereof, and Parent shall be obligated to pay (or shall cause the Company to pay) the Executive's legal and arbitration fees and expenses as provided under Section 10 of the Prior Employment Agreement, which is incorporated by reference herein and made a part hereof. (b) Benefits and Claims Not Related to the Pre-Effective Date Agreements. To the extent that there is any dispute between the parties with respect to any benefits payable hereunder which are not due and payable under a Pre-Effective Date Agreement (and therefore not subject to the dispute mechanism set forth in Section 9(a) above), Parent shall be obligated to pay (or shall cause the Company to pay) the Executive's legal and arbitration fees and expenses related to such dispute in the event that the Executive prevails at arbitration or trial as to any material issue presented in such dispute. 10. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: At the most recent address on file at the Company If to the Company: American General Corporation 2929 Allen Parkway Houston, Texas 77019 Attention: General Counsel Copy to Parent: American International Group, Inc. 70 Pine Street New York, New York 10270 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company's obligations (i) to indemnify the Executive pursuant to Section 3(vii), (ii) to provide the Executive with benefits and compensation pursuant to Section 5, (iii) to pay any gross-up payment required to be paid under Section 3(b)(i), and (iv) to pay any amount not previously paid (and required to be paid hereunder ) in respect of any Pre-Effective Date Agreement, as well as the dispute mechanisms set forth in Section 9, shall survive the termination of the Executive's employment hereunder, the Employment Period or this Agreement, provided that the Effective Date has occurred. (e) None of the benefits provided to the Executive under any of the Pre-Effective Date Agreements or under Section 5 hereof shall be subject to any mitigation or offset, except as may otherwise be expressly provided hereunder. (f) The Company or Parent may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) The Executive's or the Company's or Parent's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive, the Company or Parent may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (h) From and after the Effective Date, this Agreement shall supersede and terminate the Severance Agreement, the Prior Employment Agreement, and any amendments thereto, except to the extent that any of the benefits made available under the Prior Employment Agreement are expressly intended to continue under the terms of this Agreement. From and after the Effective Date, the SERA and the Split-Dollar Agreement shall be amended in accordance with the terms hereof, and, upon satisfaction of the Company's obligations as set forth herein, the Company and Parent shall have no further obligations under such agreements. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from their respective Boards of Directors, each of the Company and Parent has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ Rodney O. Martin RODNEY O. MARTIN AMERICAN GENERAL CORPORATION By /s/ Mark S. Berg Name: MARK S. BERG Title:Executive Vice President, General Counsel and Corporate Secretary AMERICAN INTERNATIONAL GROUP, INC. By /s/ Ernest T. Patrikis Name: ERNEST T. PATRIKIS Title:Senior Vice President and General Counsel Exhibit A Name: Rodney O. Martin Position: Senior Vice Chairman Adjustments to Responsibilities: Excluding responsibilities related to consumer finance. Location: Houston, Texas Cash Severance Amount: $5,062,500 Split-Dollar Payment: $572,052 Annual Bonus: $1,250,000 EX-10 4 exjag.txt EMPLOYMENT AGREEMENT AGREEMENT by and among American International Group, Inc., a Delaware corporation (the "Parent"), American General Corporation, a Texas corporation (the "Company"), and John A. Graf (the "Executive") dated as of the 11th day of May, 2001. Parent has determined that it is in the best interests of Parent and the Company and their respective shareholders to assure that the Company will have the continued services of the Executive following the merger (the "Merger") of the Company and Washington Acquisition Corporation, a Texas corporation and a wholly owned subsidiary of Parent ("Merger Sub"), pursuant to the Agreement and Plan of Merger dated as of May 11th, 2001 (the "Merger Agreement"), to provide the surviving corporation after the Merger with continuity of management. Pursuant to the terms of the Prior Agreement (as defined below), Executive would have had the right to terminate his employment upon consummation of the Merger. However, Parent desires to retain the Executive's continued services pursuant to the terms of this Agreement. Therefore, in order to accomplish these objectives, Parent, the Company and the Executive agree as follows: NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Effective Date. The "Effective Date" shall mean the "Effective Date" (as defined in the Merger Agreement) of the Merger. This Agreement shall be and become effective on the Effective Date. If the Effective Date does not occur on or before February 28, 2002 or if the Merger Agreement is earlier terminated in accordance with its terms, then this Agreement shall terminate automatically on February 28, 2002 or on such earlier Merger Agreement termination date and none of Parent, the Company or the Executive shall have any obligation to the other hereunder. 2. Employment Period. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to continue to serve the Company, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary thereof (the "Employment Period"). 3. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive shall serve in the position set forth on Exhibit A attached hereto, with the duties and responsibilities associated with such position on the Effective Date (except to the extent expressly provided in Exhibit A) as shall be assigned to him by the Board of Directors or Chief Executive Officer of the Company and (B) the Executive's services shall be performed in the location set forth on Exhibit A hereto. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and Parent and to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not interfere with the performance of the Executive's responsibilities as an employee of the Company and Parent in accordance with this Agreement, and with respect to the activities described in clauses (A) and (C) hereof subject to Parent's policies as in effect from time to time. (b) Compensation. (i) Initial Payment. On the Effective Date, the Company shall pay to the Executive a lump sum payment equal to the amount set forth on Exhibit A hereto, which is equal to the cash payment that the Executive would have been entitled to receive pursuant to Section 4.5 (the "Cash Severance") of the Change in Control Severance Agreement between the Company and the Executive dated as of April 1, 2000 (the "Severance Agreement"), had he been terminated by the Company without "cause" (as defined therein) upon the Effective Date. In addition, on the Effective Date, the Company shall pay to the insurance company which has issued the policy which is the subject of the Split- Dollar Agreement between the Executive and the Company, dated as of May 15, 1998 (the "Split-Dollar Agreement"), the amount set forth on Exhibit A hereto (the "Split Dollar Payment"), which is equal to the projected amount of the premium payments that the Company would have been required to make during the three-year period immediately following the Effective Date on the policy underlying the Split-Dollar Agreement, pursuant to Paragraph 5(b) of the Split- Dollar Agreement. The Executive shall also be entitled to an excise tax gross-up payment as set forth in Section 4.7 of the Severance Agreement solely with respect to the payments and benefits that the Executive was entitled to receive under the terms of the Severance Agreement, the Employment Agreement between the Executive and the Company dated as of May 1, 2000 (the "Prior Employment Agreement"), the Supplemental Executive Retirement Agreement between the Company and the Executive, dated as of May 1, 2000 (the "SERA") and the Split-Dollar Agreement (collectively, the "Pre-Effective Date Agreements") or with respect to the vesting of or lapse of restrictions on, as a direct result of the Merger, compensation earned, benefits accrued or equity awards granted prior to the Effective Date (including, without limitation, benefits due and owing under the Pre-Effective Date Agreements and specifically incorporated herein). Except as set forth in the preceding sentence, in no event shall the Executive be entitled to an excise tax gross- up payment with respect to any amounts payable or benefits provided under the terms of this Agreement. The Executive acknowledges and agrees that in no event shall he be entitled to the payments or benefits under the Severance Agreement based upon a termination during a "Period of Anticipated Change in Control" (as defined in the Severance Agreement). (ii) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary") of no less than the annual base salary in effect with respect to the Executive for calendar year 2001. (iii) Annual Bonus. For each calendar year ending during the Employment Period, the Executive shall receive (or at his election pursuant to the deferred compensation plan of the Company (if any) defer part or all of) an annual cash bonus at least equal to the amount set forth on Exhibit A hereto (the "Annual Bonus") no later than January 31 of the following year, and the Annual Bonus hereunder shall be in lieu of any bonus amount (or portion thereof) payable to the Executive under any agreement or bonus plan of the Company, including without limitation, the Company Performance-Based Plan for Executive Officers with respect to the calendar year in which the Effective Date occurs, and the Executive hereby waives all right under any such agreements or plans. For the calendar year within which the Employment Period ends, the Executive shall receive no later than January 31 of the following year (or at his election pursuant to the applicable deferred compensation plan of the Company (if any) defer part or all of) a bonus which shall equal or exceed an amount determined by multiplying the Annual Bonus amount set forth on Exhibit A by a fraction the numerator of which shall be the number of days in such calendar year which were included in the Employment Period and the denominator of which shall be 365. (iv) Incentive Awards. At the time equity grants are made to other employees of the Company pursuant to the Merger Agreement, the Executive will be granted equity based awards with respect to the common stock of Parent (the "2001 Service Awards"), pursuant to the terms of the applicable Parent plan as in effect from time to time, that is equal in value to the value of all options (valued using a Black-Scholes value of $10.00, after giving effect to the stock split in 2001), restricted shares and Performance Awards contained in a Performance Based Restricted Stock/Restricted Share Unit Award (valued using the fair market value of the Company's common stock on the date of grant) with respect to restricted share units and performance awards that were granted to the Executive by the Company on January 17, 2001, and with the ratio of the options, restricted shares and performance awards being the same as the ratio of the awards granted to the Executive on January 17, 2001. For purposes of the immediately preceding sentence, the value of the options in Parent's common stock shall be determined using the Black-Scholes valuation model, using assumptions established in manner consistent with the assumptions applied by Parent, consistent with past practices, in respect of stock option grants in 2001. Any stock options on Parent common stock granted in connection with the 2001 Service Awards will have an exercise price equal to the fair market value of the Parent common stock subject thereto on the date of grant and, except as otherwise provided herein, shall vest in four equal installments on each of the first, second, third and fourth anniversaries of the date of grant. Any restricted shares and Performance Awards granted in respect of Parent common stock shall have terms and conditions that are substantially comparable to those applied in respect of the 2001 awards made by the Company. In the event that the Executive receives any equity award grants (other than reload options) from the Company after the date hereof, the 2001 Service Awards shall be reduced by the value of any such awards (determined using a Black-Scholes value with respect to options, using assumptions established on a basis consistent with those applied by the Company in determining such Black-Scholes value in respect of the 2001 grants to the Executive, and the fair market value on the date of grant with respect to performance based or restricted stock awards). (v) Retirement Benefits. On the Effective Date, the Executive shall be paid the benefits payable to the Executive under the SERA, which benefits shall be calculated under the terms and conditions thereof (including without limitation, any enhanced service and age credits provided under Section 2.6 in respect of a termination of the Executive's employment following the occurrence of a Change of Control) as though the Executive's employment terminated on the Effective Date without Cause and the Executive elected to receive a lump sum distribution of such benefits, with any offset against such benefits related to the benefits payable to the Executive under any other retirement plan maintained by the Company based on the benefits accrued by the Executive thereunder as of the Effective Date. From and after the Effective Date, the Executive shall not be entitled to accrue any additional benefit under the SERA. From and after the Effective Date, the Executive shall participate in the applicable retirement plans of the Company as though no SERA benefit was accrued, provided that the Executive shall not become a participant in the Company's or Parent's Supplemental Executive Retirement Plan and that in no event shall the Executive be entitled to duplicate benefits with respect to the same period of service. To the extent anything contained in this Section 3(b)(v) is inconsistent with the terms and conditions of the SERA, the SERA shall be deemed amended hereby. (vi) Other Employee Benefit Plans. During the Employment Period, except as otherwise expressly provided herein, the Executive shall be entitled to participate in all employee benefit, welfare and other plans, practices, policies and programs generally applicable to similarly situated executives of the Company, provided that, in no event shall the Executive be entitled to receive duplicate benefits with respect to the same period of service under any plans, practices, policies or programs of the Company and/or Parent. Notwithstanding anything contained herein to the contrary, the Executive expressly understands and agrees that he will not initially be entitled to become a participant in the STARR International Co., Inc. ("SICO") Deferred Compensation Profit Participation Plan ("SICO Plan") or to become a stockholder of C.V. STARR & Co., Inc. ("STARR"), but that following the first anniversary of the Effective Date, Parent will recommend to the Boards of Directors of SICO and of STARR that the Executive be eligible to commence participation in the SICO Plan and to become a stockholder of STARR, consistent with similarly situated executives of subsidiaries of Parent. Any participation in the SICO Plan or STARR will require a mutually agreeable reduction in the other compensation payable or provided to the Executive, including without limitation the Base Salary and the Annual Bonus, and such reduction will be a condition to participation in such plans and will in no event be deemed a breach of this Agreement. Any reduction in the compensation otherwise payable hereunder shall be agreed to, in writing, by the parties in advance of the time such reduction is to be effective, and such writing shall set forth, in reasonable detail sufficient for the Executive to understand, the compensation being provided in lieu thereof and all vesting and forfeiture provisions related thereto (and other restrictions, if any, on the ability of the Executive to access or receive such compensation). (vii) Indemnification. The Company shall indemnify the Executive during his employment hereunder and following the termination of the Executive's employment hereunder, on the same basis as the Company indemnifies similarly situated executives of the Company. (viii) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the Company's policies. (ix) Perquisites. During the Employment Period, the Executive shall be entitled to perquisites in accordance with the plans, practices, policies and programs generally applicable to similarly situated executives of the Company. (x) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company as in effect with respect to the similarly situated executives of the Company. (xi) Other Benefits From Prior Employment Agreement. Upon and following any termination of the Executive's employment with the Company following the Effective Date, regardless of the reason, the Company shall provide the Executive with the benefits described in Section 8(c)(iv) of the Prior Employment Agreement for the duration described in the Prior Employment Agreement, based on the comparable benefits provided immediately prior to the Date of Termination. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company or Parent determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 10(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and reasonably acceptable to the Executive or the Executive's legal representative. (b) With or Without Cause. The Company or Parent may terminate the Executive's employment during the Employment Period with or without Cause. For purposes of this Agreement, "Cause" shall mean: (i) the continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by Parent that specifically identifies the manner in which Parent believes that the Executive has not substantially performed the Executive's duties, or (ii) the engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company or one of its affiliates, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Parent Board or the Board of Directors of the Company or upon the instructions of the Chief Executive Officer of Parent or the Company or based upon the advice of counsel for Parent or the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The acts and/or omissions which are alleged to constitute the basis for a Cause termination shall be identified to the Executive in reasonable detail in writing, at the time of any such termination of the Executive's employment for Cause. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean a material breach by the Company or Parent of a material provision of this Agreement. Without limiting the generality of the foregoing, Parent and the Executive agree that any of the following would constitute a material breach of this Agreement by Parent: (i) any reduction in the Executive's base salary or annual bonus (other than a reduction consented to by the Executive in writing, including, without limitation, any reduction contemplated by Section 3(b)(vi)); (ii) any material adverse change (without his prior written consent) in the Executive's duties and responsibilities, or titles, as set forth in Section 3(a)(i) and Exhibit A attached hereto; and (iii) any relocation of his principal place of employment in violation of Section 3(a)(i) and Exhibit A attached hereto. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 10(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive, the Company or Parent to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive, the Company or Parent, respectively, hereunder or preclude the Executive, the Company or Parent, respectively, from asserting such fact or circumstance in enforcing the Executive's, the Company's or Parent's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company or Parent for Cause, or by the Executive with or without Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be, (ii) if the Executive's employment is terminated by the Company or Parent other than for Cause or Disability, the Date of Termination shall be the date on which the Company or Parent notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company or Parent shall terminate the Executive's employment other than for Cause, death or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid ("Accrued Salary"), (2) the benefits described in Section 3(b)(xi) hereof and (3) any benefits to which the Executive is entitled under the terms and conditions of any applicable employee benefits plan, program or agreement (collectively, subclause (1)-(3) shall be referred to as the "Accrued Obligations"); and B. a lump sum amount equal to the greater of (x) the severance under the severance policy applicable to similarly situated executives of the Company, as in effect from time to time, and (y) the sum of the Executive's Annual Base Salary and the Annual Bonus amount set forth in Section 3(b)(iii); and C. a pro-rata portion of the Annual Bonus payable to the Executive under Section 3(b)(iii), which shall be determined by multiplying such bonus by a fraction, the numerator of which is the number of days in the calendar year in which the Executive's date of termination occurs which have elapsed prior to such date of termination and the denominator of which is 365; and D. outplacement services for the duration and of the nature described in Section 8(c)(v) of the Prior Employment Agreement; and (ii) to the extent granted prior to the Date of Termination, the 2001 Service Awards shall vest immediately. (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than the Accrued Obligations (to the extent applicable upon the Executive's death). Accrued Salary shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. In addition, (i) to the extent granted prior to the Date of Termination, all of the 2001 Service Awards shall become fully vested and, to the extent applicable, exercisable for the maximum period allowable under the applicable plan for a termination due to death and (ii) the Executive's estate shall be entitled to the death benefits as in effect on the date of the Executive's death with respect to similarly situated executives of the Company (including, without limitation, any rights to accelerated vesting and enhanced exercise periods applicable in respect of any equity awards made to the Executive in connection with his employment after the Effective Date (excluding the 2001 Service Awards, which are addressed in subclause (i)) that are generally available to similarly situated executives of subsidiaries of Parent whose employment has terminated for such reason under the terms of the plan, program or arrangement under which such awards have been made (the "Equity Enhancements")). (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than in respect of the Accrued Obligations. Accrued Salary shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. In addition, (i) to the extent granted prior to the Date of Termination, all of the 2001 Service Awards shall become fully vested and, to the extent applicable, exercisable for the maximum period allowable under the applicable Parent plan for a termination due to disability and (ii) the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits as in effect at any time thereafter generally with respect to similarly situated executives of the Company and to the Equity Enhancements). (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive the Accrued Obligations and the only duties, obligations and liabilities of the Executive to the Company or Parent thereafter shall be the restrictive covenants set forth in Section 7 hereof. 6. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or Parent may have against the Executive or others. 7. Confidential Information; Noncompetition; Nonsolicitation. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company and Parent all secret or confidential information, knowledge or data relating to the Company, Parent or any of their affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company, Parent or any of their affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, Parent or any of their affiliated companies, the Executive shall not, without the prior written consent of Parent or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company, Parent or any of their affiliated companies and those designated by them. (b) The Executive agrees that until the earlier of (i) the fourth anniversary of the Effective Date and (ii) the first anniversary of the Executive's termination of employment for any reason (the "Restricted Period"), the Executive will not, without the written consent of Parent, engage in any business of, or enter the employ of, or have any interest in, directly or indirectly, any other person, firm, corporation or other entity engaged in a business that competes with, or provides services and/or products of a nature substantially similar to those provided by, the Company, Parent or their affiliates, with an office or facility in any geographic area in which the Company, Parent or their affiliates do business. Nothing herein shall restrict the Executive from owning 1% or less of the outstanding securities of any corporation or other entity whose securities are listed on any national securities exchange or traded over-the-counter, if the Executive has no other connection or relationship with the issuer of such securities. (c) During the Restricted Period, the Executive will not, directly or indirectly, on behalf of the Executive or any other person, solicit for employment or employ by other than the Company or Parent any person who, at any time during the six-month period immediately preceding the date of such solicitation, was an employee of the Company, Parent or any of their affiliates. (d) The Executive acknowledges and agrees that due to the nature of the business in which the Company, Parent and their affiliates are engaged and because of the nature of the confidential information to which the Executive has access, it would be impractical and excessively difficult to determine the actual damages of the Company or Parent in the event the Executive breached any of the covenants of this Section 7 and that remedies at law (such as monetary damages) for any breach of the Executive's obligations under this Section 7 would be inadequate. The Executive therefore agrees and consents that, if the Executive commits any breach of a covenant under this Section 7 or threatens to commit any such breach, the Company and Parent shall have the right (in addition to, and not in lieu of, any other right or remedy that may be available to each of them) to temporary and permanent injunctive relief from a court of competent jurisdiction. With respect to any provision of this Section 7 finally determined by a court of competent jurisdiction to be unenforceable, the Executive, the Company and Parent hereby agree that such court shall have jurisdiction to reform this Agreement or any provision hereof so that it is enforceable to the maximum extent permitted by law, and the parties agree to abide by such court's determination. (e) The provisions of this Section 7 shall remain in full force and effect until the expiration of the period specified therein, notwithstanding the earlier termination of the Executive's employment hereunder, the Employment Period or this Agreement, provided that the Effective Date has occurred. 8. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company and Parent shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and Parent and their respective successors and assigns. (c) The Company and Parent will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company or Parent, as applicable, to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company and/or Parent would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" and "Parent" shall mean the Company and Parent as hereinbefore defined and any successor to their respective businesses and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. As used in this Agreement, the term "affiliated companies" and "affiliates" shall include any company controlled by, controlling or under common control with the Company. 9. Dispute Mechanism. (a) Pre-Effective Date Agreements. To the extent that there is any dispute between the parties with respect to any benefits payable hereunder which are due and payable under a Pre-Effective Date Agreement (including, without limitation, the amounts payable under Section 3(b)(i), the SERA benefits payable under Section 3(b)(v) and the benefits payable or provided under Section 5(a)(i)(D)), such dispute shall be resolved pursuant to the mechanism set forth in Section 20 of the Prior Employment Agreement, which is incorporated by reference herein and made a part hereof, and Parent shall be obligated to pay (or shall cause the Company to pay) the Executive's legal and arbitration fees and expenses as provided under Section 10 of the Prior Employment Agreement, which is incorporated by reference herein and made a part hereof. (b) Benefits and Claims Not Related to the Pre-Effective Date Agreements. To the extent that there is any dispute between the parties with respect to any benefits payable hereunder which are not due and payable under a Pre-Effective Date Agreement (and therefore not subject to the dispute mechanism set forth in Section 9(a) above), Parent shall be obligated to pay (or shall cause the Company to pay) the Executive's legal and arbitration fees and expenses related to such dispute in the event that the Executive prevails at arbitration or trial as to any material issue presented in such dispute. 10. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: At the most recent address on file at the Company If to the Company: American General Corporation 2929 Allen Parkway Houston, Texas 77019 Attention: General Counsel Copy to Parent: American International Group, Inc. 70 Pine Street New York, New York 10270 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company's obligations (i) to indemnify the Executive pursuant to Section 3(vii), (ii) to provide the Executive with benefits and compensation pursuant to Section 5, (iii) to pay any gross-up payment required to be paid under Section 3(b)(i), and (iv) to pay any amount not previously paid (and required to be paid hereunder ) in respect of any Pre-Effective Date Agreement, as well as the dispute mechanisms set forth in Section 9, shall survive the termination of the Executive's employment hereunder, the Employment Period or this Agreement, provided that the Effective Date has occurred. (e) None of the benefits provided to the Executive under any of the Pre-Effective Date Agreements or under Section 5 hereof shall be subject to any mitigation or offset, except as may otherwise be expressly provided hereunder. (f) The Company or Parent may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) The Executive's or the Company's or Parent's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive, the Company or Parent may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (h) From and after the Effective Date, this Agreement shall supersede and terminate the Severance Agreement, the Prior Employment Agreement, and any amendments thereto, except to the extent that any of the benefits made available under the Prior Employment Agreement are expressly intended to continue under the terms of this Agreement. From and after the Effective Date, the SERA and the Split-Dollar Agreement shall be amended in accordance with the terms hereof, and, upon satisfaction of the Company's obligations as set forth herein, the Company and Parent shall have no further obligations under such agreements. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from their respective Boards of Directors, each of the Company and Parent has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ John A. Graf JOHN A. GRAF AMERICAN GENERAL CORPORATION By /s/ Mark S. Berg Name: MARK S. BERG Title:Executive Vice President, General Counsel and Corporate Secretary AMERICAN INTERNATIONAL GROUP, INC. By /s/ Ernest T. Patrikis Name: ERNEST T. PATRIKIS Title:Senior Vice President and General Counsel Exhibit A Name: John A. Graf Position: Senior Vice Chairman Adjustments to Responsibilities: Excluding responsibilities related to investments. Location: Houston, Texas Cash Severance Amount: $4,875,000 Split-Dollar Payment: $222,387 Annual Bonus: $1,250,000 EX-12 5 ex12.txt Exhibit 12 AMERICAN GENERAL CORPORATION Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (Unaudited) ($ in millions) Three Months Ended March 31, 2001 2000 Consolidated operations: Income before income tax expense and net dividends on preferred securities of subsidiaries .......... $ 528 $ 478 Fixed charges deducted from income Interest expense ................................. 229 217 Implicit interest in rents ....................... 6 6 Total fixed charges deducted from income ....... 235 223 Earnings available for fixed charges.......... $ 763 $ 701 Fixed charges per above ............................ $ 235 $ 223 Dividends on preferred stock and securities ........ 43 41 Combined fixed charges and preferred stock dividends ................................ $ 278 $ 264 Ratio of earnings to fixed charges .......... 3.24 3.14 Ratio of earnings to combined fixed charges and preferred stock dividends ........... 2.74 2.66 Consolidated operations, corporate fixed charges and preferred stock dividends only: Income before income tax expense and net dividends on preferred securities of subsidiaries ........ $ 528 $ 478 Corporate fixed charges deducted from income - corporate interest expense ..................... 64 61 Earnings available for fixed charges ......... $ 592 $ 539 Corporate fixed charges per above ................ $ 64 $ 61 Dividends on preferred stock and securities ...... 43 41 Combined corporate fixed charges and preferred stock dividends .................... $ 107 $ 102 Ratio of earnings to corporate fixed charges ................................. 9.27 8.80 Ratio of earnings to combined corporate fixed charges and preferred stock dividends ......................... 5.54 5.29 Three Months Ended March 31, 2001 2000 American General Finance, Inc.: Income before income tax expense ................ $ 104 $ 94 Fixed charges deducted from income Interest expense .............................. 172 163 Implicit interest in rents .................... 4 4 Total fixed charges deducted from income..... 176 167 Earnings available for fixed charges ...... $ 280 $ 261 Ratio of earnings to fixed charges .... 1.59 1.56 -----END PRIVACY-ENHANCED MESSAGE-----