American General Corporation American General Corporation Evaluating the Risk of the 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 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. Marketing and Advertising.