American General Corporation


     At American General Corporation we started from looking at company's market
standing from potential investors point of view. First we take a look at the
companies profile. American General Corporation is a diversified financial
services organization, provides retirement services, life insurance, and
consumer loans. The company offers retail financial programs through fifteen
thousand merchants. American General Corp. operates in 41 states. Puerto Rico,
and the United States Virgin Islands. Well, first we find out that American

General Corporation is a blue chip, multibillion dollar company. This tells us
right from the beginning that this financial giant is really worth looking at as
a potential candidates to be added in our stock portfolio. Considering that this
is a financial company dealing with investments, pension funds and life
insurance we have to be very careful because these industries are most sensible
to overall economy changes, and we know that at this point US economy is going
through the period when recession is most expected. To get a better
understanding of how this might affect companies risk we have to know how
diversified companies investments are. For that we have to evaluate companies
performance compare to market performance. ( for this purpose we use chart on
returns for American General Corporation to S&P 500 ). As we can see from
the chart behavior of the company is almost identical to the behavior of the
market, this observation becomes more obvious when we take a look at company's
beta which is .95. Well this is not such a great sign because as I already
mentioned recession is expected., and as we know with recession overall market
returns go down this is knowing the relationship between market and AGC we can
predict that American General Corp. performance will decrease as well. The
question is how deep will the market fall, and how long the recession would
last, of course, if the recession will occur. There were no recent revelation,
as far as, companies financial structure is concern, well, may be the only
exception is a slight change in companies management structure which so far did
not make any significant impact on companies market value, so the only major
aspect in evaluating of how risky the company is how correlated it is with the
market. Of course there are other things to be considered. There are couple of
good signs that should lower the risk of AGC. For instance, the decrease in the
charge off and delinquency ratios compared to prior periods reflect the positive
impact of the company's credit quality improvement program, which included an
increase in thee proportion of real estate secured loans and higher underwriting
standards. The decrease in the allowance reflects the improvement in charge-off
experience, partially offset by an increase in the allowance to support the
growth in receivables. Also, company's operating expenses as a percentage of
average finance receivables decreased to 5.8% for thee first six month of 1998
from 5.98% for the same period of 1997, and to 5.73% from 5.99% for the same
comparable second quarter periods, due to the increase in average finance
receivables, which more than offset the increase in operating expenses. Company
rapidly grows in value. A decrease in interest rates and resulting increases in
bond value in second quarter 1998 caused a $555 increase in the fair value
adjustment to fixed maturity securities and related $335 million positive
adjustment to shareholders' equity from December 31, 1997. So, the interest rate
would be a very important fact to consider in evaluating this company. According
to the latest news Federal Reserve has no intention to decrease interest rate
any further, there is actually a great possibility of increasing it in defensive
move against coming recession. Having such prediction for the future and keeping
in mind how greatly American General Corp. influenced by the interest rate, AGC
becomes more of a risky investment. The company is very careful with it's
investments. AGS decreases its investments into the below investment grade
securities ( have credit rating below BBB- ) from 5% at June 31 of 1998 to 4% at

December 31 of 1997%. The company invests in below investment securities to
enhance the overall yield of the portfolio. Investment income from below
investment grade securities was $148 million for the six months ended June 30,

1998. This tells us that this company is not looking for the quick profit, so it
does not through its money around passing on opportunities for greater rate of
return on equity for stability and safety. For some investors this might seem as
an extreme measure, because after all earning money on market is all about risk.

But for those who investors who are looking for a stable and secure investment

American General Corporation should fit the profile. Then again, getting rid of
risky investments moved company's beta closer to market beta ( which considered
to be 1 and AGC beta right now is about .95 ) was not such a good idea, because
now with there is a more chance for the company to take a deeper dive with
recession of overall U.S. economy. Consumer Finance division's capital varies
directly with the amount of total finance receivables. The capital mix of
consumer finance debt and equity is based primarily upon maintaining at a level
that supports cost-effective funds. From financial research we know that

American General Corp. had $ 9.2 billion in consumer finance capital at June 30,

1998 this included $ 7.9 billion of consumer financed debt, which was not
guaranteed by the parent company, and $1.3 billion of equity. The Consumer

Finance division's target ratio of debt to tangible net worth, a standard
measure of financial risk in the consumer finance industry, is 7.5 to 1. For AGC
the ratio equaled the target at June 30, 1998 and December 31, 1997. This data
clearly shows us that the company is safe not just as stocks are concern but
since it maintains leverage of consumer financed debt to equity so well AGC's
bonds look just as atractive.