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storms have completely eroded through the island. American General’s planning document for the development proposes spending $44 million for a “dune stabilization” program to combat erosion. Shiner and Moseley cite a 1974 UT Bureau of Economic Geology article that says no washover channels exist within the project area. But Morton says hurricanes and storms can quickly create new washover sites. Storm Clouds Brewing Although erosion constitutes a relatively longterm danger for the development and the eventual costs may be extraordinary more immediately dangerous are the hurricanes, which hit South Padre Island more often than any other part of the Gulf coast. Since 1900, when a hurricane killed 6,000 people in Galveston, prompting the building of the Galveston seawall, the threat of hurricanes has been the gravest danger confronting coastal development. After Hurricane Allen in 1980, for example, most bulkheads and seawalls either failed or were badly damaged. Many had to be completely replaced, at great public expense. In some parts of the Texas coast the amount of money spent to save coastal developments actually exceeded the value of the property, according to Morton. Hurricane season runs from June to October with the big ones coming around August and September during periods of peak resort occupation. Hurricanes are “heat machines,” and so they’re more likely to occur during the hottest part of the summer. No roads will access the project according to the company three high-speed ferries will shuttle workers and visitors back and forth from the mainland every day. Morton says ferries are not an efficient evacuation method, since they are subject to high tides, waves, etc. He says tourists tend to disbelieve that a hurricane will hit their location, and that most people wait until the last minute to evacuate. “I would be concerned about that,” he said. The American General planning document addresses the question of hurricanes, but offers no alternative transportation off the island besides the three ferries. The document says, “the system could evacuate 30,000 guests and employees in a ’12 hour period.” It cites no contingency plan, but promises the company will develop a “comprehensive disaster plan.” Morton stresses that American General would build its project on “one of the most hazardous areas on the Texas shoreline,” and says he so informed American General’s engineering consultants. The project site cannot even receive federal flood insurance because it lies within the Coastal Barrier Resource System. Last summer Corpus Christi Congressman Solomon Ortiz who received at least $6,000 in campaign contributions from American General between July 1989 and December 1990 unsuccessfully tried to remove the property from the CBRS \(TO clares that the project “will be totally insured in the private market.” This fact bolsters the argument that the “New Century Habitat” may never be built. On April 19, the Observer questioned whether American General actually planned to build a resort, and quoted the company’s chief lobbyist Dick Ingram, who wrote in a letter, “American General is not a resort developer and does not intend to build a resort on South Padre Island.” The lack. of federal insurance may be one reason why. The astronomical insurance premiums required [email protected] the resort does not qualify for federal Morton stresses that American General would build its pro jest on “one of the most hazardous areas on the Texas shoreline.” flood insurance create an expensive, longterm burden for even a profitable new venture. For a resort destined to become mired in lawsuits with environmentalists, such expenses would quickly mount. On the Political Economy of American General Corp. If the New Century Habitat project will have unusually high expenses, American General may not be the company best suited to develop it. A cursory review of the corporation’s finances reveals a business plagued with debt and short on cash. Throughout the 1980s American General borrowed heavily to finance its acquisitions and an ambitious stock-repurchase program. American General “entered the 1980s with equity of $1 billion. By the end of the ’80s, American General equity had grown to $4.5 billion, and during this period American General shareholders received a total of $1.4 billion in dividends,” according to the cover of its 1989 annual report. But most of this expansion came in the form of acquisitions rather than through the growth of existing enterprises. A Feb. 1, 1990 financial statement by Fitch Investors Services reports, “the company’s record of growth through acquisition, share repurchase programs, and use of corporate leverage are all guided by the company’s explicit desire to raise its common share earnings, book value, stock price, and shareholder dividends. These will likely continue to guide the companies decisions in the future.” It’s no wonder American General’s management wants to boost stock prices. Accord ing to its annual proxy statement issued March 27, 1991, all members of the board of directors and corporate officers as a group \(45 one-dollar increase in stock value brings in $1.7 million for these 45 people. That quickly adds up to real money. American General’s recent debt-based acquisitions include major purchases in its realestate/consumer-finance segments. But according to the Fitch report, “comparably little of consumer-finance/real-estate’s income is available to the parent to support corporate borrowings and dividends and one has to look more to insurance to. support American General’s holding company leverage.” In other words, American General gets the money it needs to buy out other companies and pay for its developments from insurance premiums. The home-service insurance segment, “the foundation of earnings” for the company, currently pays most of the debt service for the riskier investments. American General’s home-service segment “is a stable business in which over 8,000 employee agents sell life, health & accident, and fire insurance doorto-door to lowto middle-income families, principally in the Sun Belt,” the report states. “Home service is not a dynamic business, but earnings stability is high.” Meanwhile in 1987 the company borrowed money in order to finance a stock-buyback plan designed to shrink the total number of stocks on the market and therefore boost stock prices. American General’s total debt had grown to $7A billion by the end of 1990, according to its most recent annual report, as opposed to $4.5 billion in shareholder equity. In essence, then, if American General ever finally builds its “international destination resort,” the loans with which it funds the project will be serviced by lowand middleincome families’ insurance premiums, just as the company used premiums to pay for its corporate takeovers and stock repurchase programs that benefit management, not policyholders. Ironically, in a time when insurance giants complain loudly and bitterly that large court settlements demand a rise in premiums, American General, a major insurer, uses surplus from its insurance business to fund its speculative projects. However, in American General’s case, it may have reached the end of its ability to finance its acquisitions with debt. The Fitch report warns darkly, “Further purchase acquisitions and share buybacks financed by debt at the [holding company] level, and serviced by dividends from subsidiaries, could raise adverse implications for the creditworthiness of the operating units. In addition, such developments suggest higher risk for the holding company as well.” But if increasing its debt to finance projects becomes impos T sible, where will American General Corp. find the wherewithal to fund its New Century Habitat? 14 MAY 17, 1991