American General Corporation Essay, Research Paper

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.