<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1997
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 1-11733
AMERICAN STATES FINANCIAL CORPORATION
INDIANA NO. 35-1976549
State of Incorporation I.R.S. Employer Identification No.
500 NORTH MERIDIAN STREET
INDIANAPOLIS , INDIANA 46204 - 1275 (317) 262-6262
Address of principal executive offices Telephone Number
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 [ ]
Shares of common stock outstanding as of May 6, 1996: 60,050,515
The exhibit index to this report is located on page 18.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December, 31
1997 1996
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale at fair value:
Fixed maturity (amortized cost: 1997 - $3,578,395; 1996 - $3,579,807) $3,689,243 $3,763,880
Equity (cost: 1997 - $361,404; $1996 - $362,720) 427,766 435,137
Mortgage loans 22,609 32,293
Short-term investments 75,486 73,276
Other invested assets 38,985 37,986
---------- ----------
Total investments 4,254,089 4,342,572
Cash 15,797 13,610
Premium receivable 447,865 413,444
Deferred policy acquisition costs 210,021 202,233
Properties to be sold 30,671 30,633
Property and equipment 31,902 31,143
Accrued investment income 58,598 64,602
Deferred federal income taxes recoverable 154,863 128,742
Cost in excess of net assets of acquired subsidiaries 96,918 97,772
Ceded reinsurance on claims and claims expense reserves 178,252 179,445
Miscellaneous 35,279 36,887
---------- ----------
Total assets $5,514,255 $5,541,083
========== ==========
</TABLE>
(continued on next page)
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
March 31, December, 31
1997 1996
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Losses, loss adjustment expense and future policy benefits $2,862,150 $2,868,348
Unearned premiums 728,197 711,955
---------- ----------
Total policy liabilities and accruals 3,590,347 3,580,303
Commissions and other expenses 99,708 120,872
Current federal income taxes payable 15,752 5,303
Outstanding checks 56,906 69,901
Short-term debt due LNC 66,667 66,667
Notes payable 99,559 99,511
Debt due LNC 133,333 133,333
Other liabilities 124,035 129,154
---------- ----------
Total liabilities 4,186,307 4,205,044
Shareholders' equity:
Common stock, no par value: 195,000,000 shares authorized, shares issued
and outstanding: 1997 and 1996 - 60,050,515 304,493 304,493
Net unrealized gain on securities available-for-sale 114,129 163,647
Retained earnings 909,326 867,899
---------- ----------
Total shareholders' equity 1,327,948 1,336,039
---------- ----------
Total liabilities and shareholders' equity $5,514,255 $5,541,083
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1997 1996
---------- ----------
(Dollars in Thousands,
Except Per Share Data)
<S> <C> <C>
Revenue:
Premiums and other revenue $ 423,276 $ 423,994
Net investment income 66,478 68,333
Realized gain on investments 9,687 21,096
Gain on operating properties 2,463 -
---------- ----------
Total revenue 501,904 513,423
Benefits and expenses:
Benefits and settlement expenses 297,541 323,563
Commissions 69,105 71,872
Operating and administrative expenses 52,011 51,173
Taxes, licenses and fees 10,737 11,918
Interest on debt 5,165 -
---------- ----------
Total benefits and expenses 434,559 458,526
Income before federal income taxes 67,345 54,897
Federal income taxes (credit):
Current 12,775 15,931
Deferred 543 (7,947)
---------- ----------
Total federal income taxes 13,318 7,984
---------- ----------
Net income $ 54,027 $ 46,913
========== ==========
Net income per share $ .90 $ .94
========== ==========
Weighted average shares outstanding 60,050,515 50,000,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1997 1996
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Common stock:
Balance at beginning and end of period $ 304,493 $ 387,547
Net unrealized gain (loss) on securities available-for-sale:
Balance at beginning of period 163,647 211,767
Change during the period (49,518) (61,926)
---------- ----------
Balance at end of period 114,129 149,841
Retained earnings:
Balance at beginning of period 867,899 1,069,393
Dividends paid to LNC prior to public offering - (46,000)
Dividends declared and paid on Common Stock ($.21 per share) (12,600) -
Net income 54,027 46,913
---------- ----------
Balance at end of period 909,326 1,070,306
---------- ----------
Total shareholders' equity $1,327,948 $1,607,694
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1997 1996
-------- --------
(Dollars in Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 54,027 $ 46,913
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Deferred policy acquisition costs (4,688) (973)
Premiums and fees in course of collection (34,421) (10,917)
Accrual of discount on investments (4,747) (5,431)
Amortization of premium on investments 1,039 1,478
Accrued investment income 6,004 7,581
Policy liabilities and accruals 1,942 90,209
Federal income taxes 10,991 2,115
Provisions for depreciation 1,853 1,917
Gain on sale of investments (9,687) (21,095)
Gain on operating properties (2,463) -
Ceded reinsurance on claims and claims expense reserves 1,193 (40,250)
Other (34,487) (5,701)
-------- --------
Net adjustments (67,471) 18,933
-------- --------
Net cash provided by (used in) operating activities (13,444) 65,846
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
Purchase of investments (152,448) (372,983)
Sales of investments 161,305 339,239
Maturities and redemptions 7,660 7,156
Purchase of mortgage loans and other investments (2,172) (3,714)
Sale or maturity of mortgage loans and other investments 10,240 1,427
Net increase in short-term investments (2,211) (7,880)
Net purchase of property and equipment (187) (1,760)
Other (2,058) 5,350
-------- --------
Net cash provided by (used in) investing activities 20,129 (33,165)
CASH FLOWS FROM FINANCING ACTIVITIES
Universal life investment contract deposits 11,917 12,222
Universal life investment contract withdrawals (3,815) (2,907)
Dividends paid (12,600) (46,000)
-------- --------
Net cash used in financing activities (4,498) (36,685)
-------- --------
Net increase (decrease) in cash 2,187 (4,004)
Cash at beginning of period 13,610 12,708
-------- --------
Cash at end of period $ 15,797 $ 8,704
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following notes should be read in conjunction with the notes to
consolidated financial statements included in the American States Financial
Corporation Form 10-K dated February 26, 1997. Unless the context otherwise
indicates; (i) the "Company" refers to American States Financial Corporation
and its wholly-owned, consolidated subsidiaries; (ii) "ASI" refers to American
States Insurance Company, the Company's sole direct wholly-owned subsidiary,
and its consolidated subsidiaries; and (iii) the "Subsidiaries" refer to the
direct and indirect subsidiaries of the Company, which include ASI and its
subsidiaries. Operating results for the three months ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the full
year ending December 31, 1997.
1. ORGANIZATION AND BASIS OF PRESENTATION
On February 5, 1996, the Company was incorporated in the State of Indiana
to serve as the holding company for ASI. The formation of the Company was done
in contemplation of an initial public offering. On April 22, 1996, ASI
declared, and on May 15, 1996, it distributed to its parent, Lincoln National
Corporation ("LNC"), a dividend of $300 million, consisting primarily of
tax-exempt securities ("Dividended Assets"). On May 16, 1996, LNC transferred
all of the outstanding shares of ASI to the Company in exchange for 50,000,000
shares of the Company's common stock. Concurrently with the transfer of the
ASI stock, the Company assumed $100 million of LNC debt ("Assumed Debt") and
issued a $200 million note to LNC (the "Term Note").
On May 29, 1996, the Company issued 10,000,000 shares of common stock at
$23 per share to the public (the "Offering"). The net proceeds from the
Offering (after deduction of underwriting discounts and offering expenses) were
$215.2 million. The Company contributed $140.5 million of such net proceeds to
ASI to enable it to invest in taxable securities for its investment portfolio
to partially replace the Dividended Assets. The remainder of the net proceeds
were retained by the Company for general corporate purposes. As a result of
the Offering, LNC's ownership was reduced to approximately 83%.
The 50,000,000 shares held by LNC are "restricted shares" as defined by
Rule 144 of the Securities Act of 1933, as amended (the "Securities Act").
Such shares may not be resold in the absence of registration under the
Securities Act or exemptions from such registration, including, among others,
the exemption provided by Rule 144 under the Securities Act. As an affiliate
of the Company, LNC is subject to certain volume restrictions on the sale of
shares of the Company's common stock.
The Company's common stock is publicly traded on the New York Stock
Exchange under the symbol "ASX".
The transfer of ASI stock to the Company by LNC in exchange for Company
common stock and the Assumed Debt and Term Note have been accounted for similar
to a pooling of interests in the consolidated financial statements of the
Company, in that the assets, liabilities, shareholders' equity and the results
of operation of the Company and its subsidiaries have been combined at
historical carrying values.
The consolidated financial statements as of and for the three months ended
March 31, 1997 and 1996, are unaudited. In the opinion of management, these
financial statements include all adjustments, consisting only of normal
recurring items, which are necessary to present fairly the Company's financial
position and results of operations on a basis consistent with that of prior
audited consolidated financial statements. The balance sheet at December 31,
1996, has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. Significant
intercompany balances and transactions have been eliminated. Certain amounts
from prior periods were reclassified to conform to the 1997 presentation. Net
income and shareholders' equity have not been affected by these
reclassifications.
7
<PAGE> 8
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)
The Company underwrites property and casualty insurance, concentrating on
providing commercial insurance to small to medium-sized businesses and
preferred personal lines coverages to individuals. As a complement to its
property and casualty operations, the Company also markets life insurance. The
Company writes business throughout the United States with the greatest volume
in the Midwest and Pacific Northwest.
2. CHANGE IN ACCOUNTING PRINCIPLE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("FAS 128"), Earnings Per
Share which the Company will adopt in the fourth quarter of 1997. Earlier
adoption is not permitted. In accordance with FAS 128, the Company will
present "basic" and "diluted" earnings per share on the face of the income
statement regardless of the difference between the two calculations. When
calculating the diluted earnings per share, the treasury stock method will be
applied using the average market price for the period rather than the higher of
the average market price or the ending market price. Using the terms of FAS
128, the basic and diluted earnings per share for the first three months of
1997 would be 90 cents. The basic and diluted earnings per share for the first
three months of 1996 would be 94 cents.
3. FEDERAL INCOME TAXES
A consolidated federal income tax return is filed by LNC and includes the
Company. Pursuant to an agreement with LNC, the Company provides for income
taxes on the basis of a separate return calculation. The taxes computed are
remitted to or collected from LNC.
The effective tax rate on pre-tax income is lower than the prevailing
corporate federal income tax rate primarily due to tax-exempt interest on
municipal securities.
4. NOTES PAYABLE AND DEBT DUE LNC
The Assumed Debt is governed by an agreement between the Company and LNC
(the "Assumption Agreement") which provides for the payment by the Company of
the currently outstanding 7 1/8% notes due July 15, 1999, originally issued to
the public by LNC on July 15, 1992. LNC will continue to be the primary
obligor of this public debt; however, pursuant to the Assumption Agreement,
the Company will make a $100 million principal payment on July 15, 1999 to
repay the holders of the public debt. The Assumption Agreement also provides
that interest at 7 1/8% is payable semi-annually by the Company.
The Term Note will pay interest quarterly at a rate of 50 basis points
over the rate on three year Treasury Notes through and including November 14,
1997, 50 basis points over the rate on two year Treasury Notes from November
15, 1997 through and including November 14, 1998 and 50 basis points over the
rate on one-year Treasury Bills from November 15, 1998 through the maturity
date. The current rate on the Term Note is 6.7%. The Term Note will be
payable in three equal principal payments due on August 15, 1997, 1998 and
1999. Pursuant to the provisions on the Term Note, the Company will have the
right to prepay the Term Note at any time. The Term Note also contains
covenants that will, among other things, (i) require the Company to maintain
certain levels of adjusted consolidated net worth (as defined in the Term
Note), and (ii) restrict the ability of the Company to incur indebtedness in
excess of 50% of its adjusted consolidated net worth and to enter into a major
corporate transaction unless the Company is the survivor and would not be in
default.
8
<PAGE> 9
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. NOTES PAYABLE AND DEBT DUE LNC (Continued)
On May 29, 1996, the Company entered into a revolving credit agreement in
which the Company may borrow and repay amounts up to a maximum of $200 million
(the "Line of Credit"). Borrowings using the Line of Credit will bear interest
generally at variable rates tied to LIBOR, an adjusted certificate of deposit
rate or other short-term indices. No debt was outstanding using the Line of
Credit at March 31, 1997.
5. CONTINGENCIES
On February 14, 1996, three of the Company's property and casualty
insurance subsidiaries were among 23 underwriters of real property insurance
named defendants in a case brought in the United States District Court for the
Western District of Missouri alleging that their underwriting, sales and
marketing practices violated a number of civil rights laws (including, without
limitation, the Fair Housing Act). The plaintiffs seek to represent themselves
and a putative class of similarly situated persons in the State of Missouri.
This action seeks injunction relief, unspecified compensatory damages, punitive
damages and attorney's fees. In response to motions filed by the defendants,
the court dismissed the conspiracy count by Order dated October 2, 1996 but has
required that the defendants answer the remaining counts. Discovery related to
class certification issues has been completed and briefing is under way.
Management believes, based upon current information, that the Company's
underwriting, sales and marketing practices have complied in all material
respects with the applicable requirements of both state and federal law. The
Company intends to vigorously defend this action.
On August 29, 1996, the first of two actions were brought in Missouri
state courts alleging that underinsured motorist insurance coverage sold in
that state by three of the Company's property and casualty insurance
subsidiaries constitutes "phantom coverage" when sold at limits equal to the
State's financial responsibility requirements. In both actions, the plaintiffs
seek to represent themselves and a putative class of similarly situated persons
in the State of Missouri. The actions seek both compensatory and punitive
damages based upon a number of legal theories, including, without limitation,
breach of fiduciary duty, negligence, breach of contract, unjust enrichment and
misrepresentation. A motion to consolidate the two cases has been filed but
not yet ruled upon. Discovery has begun. Management does not believe, based
upon current information, that the allegations have merit and it therefore
intends to defend these actions vigorously.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Except for historical information contained herein, the discussion in this
Quarterly Report on Form 10-Q includes certain forward-looking statements based
upon management expectations. Factors which could cause future results to
differ from these expectations include the following: financial markets (e.g.
interest rates and securities markets), state and federal legislative and
regulatory initiatives, acts of God (e.g. hurricanes, earthquakes and storms),
other insurance risks and competition.
RESULTS OF OPERATION
The discussion which follows compares the results of the first quarter
ended March 31, 1997 to the first quarter ended March 31, 1996:
CONSOLIDATED
The Company's revenues decreased 2.2% or $11.5 million to $501.9 million
in the first quarter of 1997 from $513.4 million in the first quarter of 1996.
Net premiums earned and other revenue decreased 0.2% or $.7 million to $423.3
million in the first quarter of 1997 from $424.0 million in the first quarter
of 1996. Net investment income decreased 2.6% or $1.8 million to $66.5 million
in the first quarter of 1997 from $68.3 million in the first quarter of 1996.
Realized gains on investments decreased $11.4 million to $9.7 million in the
first quarter of 1997 from $21.1 million in the first quarter of 1996.
Benefits and settlement expenses decreased 8.0% or $26.1 million to $297.5
million in the first quarter of 1997 from $323.6 million in the first quarter
of 1996. Commissions decreased 3.9% or $2.8 million to $69.1 million in the
first quarter of 1997 from $71.9 million in the first quarter of 1996.
Operating and administrative expenses increased 1.6% or $0.8 million to $52.0
million in the first quarter of 1997 from $51.2 million in the first quarter of
1996. The company incurred interest on debt of $5.2 million in the first
quarter of 1997 from the Assumed Debt and Term Note.
Net income for the first quarter of 1997 was $54.0 million or 90 cents per
share compared to $46.9 million or 94 cents per share for the first quarter of
1996. Excluding realized gain on investments, the Company earned $46.2 million
or 77 cents per share for the first quarter of 1997 compared to $33.3 million
or 67 cents per share for the first quarter of 1996.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
PROPERTY AND CASUALTY
The following table sets forth certain summarized financial data and key
operating ratios for the Company's property and casualty operations for the
quarters ended March 31, 1997 and 1996. All ratios are computed using data
reported in accordance with statutory accounting principles ("SAP").
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
------- -------
(Dollars in Millions)
<S> <C> <C>
Net premiums written $ 422.8 $ 405.7
Net premiums earned and other revenue $ 408.7 $ 409.5
Losses and loss adjustment expense 284.8 311.0
Other costs and expenses 126.4 129.3
------- -------
Underwriting loss (2.5) (30.8)
Net investment income 57.1 59.8
Realized gain on investments 9.8 21.1
Gain on operating properties 2.5 -
Federal income tax expense 13.2 6.3
------- -------
Net income $ 53.7 $ 43.8
======= =======
Loss ratio 58.8% 64.9%
Loss adjustment expense ratio 11.2 11.4
Underwriting expense ratio 30.5 31.7
Policyholder dividend ratio .4 .2
Combined ratio 100.8% 108.3%
</TABLE>
Net Premiums Written
Net premiums written increased 4.2% or $17.1 million to $422.8 million in
the first quarter of 1997 from $405.7 million in the first quarter of 1996.
The increase in net premiums written can be attributed to the Company's various
growth initiatives working as anticipated as well as market acceptance of the
Company's realignment initiative. Net premiums written within the Company's
eight core states increased 7.6% or $15.0 million in the first quarter of 1997
compared to the first quarter of 1996. The eight core states include Illinois,
Washington, Indiana, Missouri, Ohio, Michigan, Kansas and Oregon. Excluding
the states of California and Florida, states in which the Company has planned a
reduction in exposure, net premiums written increased 5.7% or $20.7 million in
the first quarter of 1997 compared to the first quarter of 1996.
Net premiums written for commercial lines products (excluding reinsurance
in run-off) increased 2.7% or $6.6 million to $247.8 million in the first
quarter of 1997 from $241.2 million in the first quarter of 1996. Increases in
businessowners, commercial multi-peril and commercial automobile lines were
offset in part by decreases in workers' compensation and general liability
lines. Net premiums written for personal lines products increased 6.5% or
$10.7 million to $174.9 million in the first quarter of 1997 from $164.2
million in the first quarter of 1996. Substantially all of the personal lines
growth was in private passenger auto.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
Net Premiums Earned and Other Revenue
Net premiums earned and other revenue (primarily finance and service fees)
decreased 0.2% or $0.8 million to $408.7 million in the first quarter of 1997
from $409.5 million in the first quarter of 1996.
Losses and Loss Adjustment Expense ("LAE")
Losses and LAE decreased 8.4% or $26.2 million to $284.8 million in the
first quarter of 1997 from $311.0 million in the first quarter of 1996. The
SAP loss ratio for the first quarter of 1997 was 58.8% compared to 64.9% for
the first quarter of 1996. The 6.1 point decrease in the quarter was primarily
due to a decrease in natural peril losses. The Company incurred heavy storm
losses of $42.8 million in the first quarter of 1996 compared to storm losses
of $22.8 million in the first quarter of 1997. The storm losses incurred in
the first quarter of 1997 are in line with historic norms.
The SAP LAE ratio declined slightly to 11.2% in the first quarter of 1997
from 11.4% for the first quarter of 1997.
Other Costs and Expenses
Other costs and expenses decreased 2.2% or $2.9 million to $126.4 million
in the first quarter of 1997 from $129.3 million in the first quarter of 1996.
The realignment of field offices and implementation of internal cost controls,
announced in the fourth quarter of 1995, continues to produce expense savings
which are in line with expectations. The SAP underwriting expense ratio
decreased by 1.2 points to 30.5%.
Combined Ratio
The SAP combined ratio, after policyholder dividends, was 100.8% and
108.3% for the first quarter of 1997 and 1996, respectively. The decrease in
the SAP combined ratio is primarily due to a decrease in natural peril losses.
Net Investment Income
Net investment income decreased 4.5% or $2.7 million to $57.1 million in
the first quarter of 1997 from $59.8 million in the first quarter of 1996.
This decrease is due primarily to a decline in total average invested assets.
The pre-tax yield on invested assets (excluding realized and unrealized gains)
was 6.4% and 6.5% for the first quarters of 1997 and 1996, respectively.
Federal Income Tax Expense
Federal income tax expense was $13.2 million for the first quarter of 1997
compared to $6.3 million for the first quarter of 1996. The increase in
expense is due primarily to improved underwriting results.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
LIFE
The following table sets forth certain summarized financial data for the
Company's life insurance operations for the quarters ended March 31, 1997 and
1996.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1997 1996
--------- ---------
(Dollars in Millions)
<S> <C> <C>
Account values - Universal life and Annuities $ 346.7 $ 323.0
Life insurance in-force 15,195.2 15,543.2
Invested assets (at amortized cost) 470.4 448.5
Policy income $ 14.6 $ 14.5
Benefits and expenses 17.9 18.2
Net investment income 8.8 8.6
Realized loss on investments (.2) (.1)
Federal income tax expense 1.9 1.7
--------- ---------
Net income $ 3.4 $ 3.1
========= =========
</TABLE>
Policy income increased 0.7% or $0.1 million to $14.6 million in the first
quarter of 1997 from $14.5 million in the first quarter of 1996. Account
values at March 31, 1997 increased by 7.3% from March 31, 1996. Net investment
income increased 2.3% in the first quarter of 1997 compared to the first
quarter of 1996. The pre-tax yield on invested assets (excluding realized and
unrealized gains) was 7.5% and 7.8% for the first quarters of 1997 and 1996,
respectively. Net income for the first quarter of 1997 was $3.4 million
compared to $3.1 million for the first quarter of 1996.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of funds available to the Company and its Subsidiaries
are premiums, investment income and proceeds from the sale or maturity of
invested assets. Such funds are used principally for the payment of claims,
operating expenses, commissions, dividends, debt service and the purchase of
investments. Cash outflows can be variable because of the potential for large
losses either individually or in the aggregate. Accordingly, the Company
maintains investment programs generally intended to provide adequate funds to
pay claims without the forced sale of investments. Finally, as noted below,
the Company has a $200 million Line of Credit to augment its available
liquidity.
Invested Assets
Since a substantial portion of the Company's revenues are generated from
its invested assets, the performance, quality and liquidity of its investment
portfolio materially effects the Company's financial condition and results of
operations. The Company pursues a total return investment strategy which seeks
an attractive level of current income combined with long-term capital
appreciation. The following table details, at carrying value, the distribution
of the Company's investment portfolio at March 31, 1997 (dollars in millions):
<TABLE>
<S> <C> <C>
Fixed maturity securities:
Tax-exempt municipal $2,077.6 48.8%
US government 185.6 4.4
Mortgage-backed and asset-backed 291.6 6.9
Corporate and other 1,063.1 25.0
Redeemable preferred stock 71.3 1.7
Equities:
Perpetual preferred stock 186.7 4.4
Common stock 241.1 5.7
Mortgage loans 22.6 .5
Short-term investments 75.5 1.7
Other 39.0 .9
-------- -----
Total $4,254.1 100.0%
======== =====
</TABLE>
The total investment portfolio decreased $88.5 million in the first three
months of 1997. This decrease is primarily due to a decrease in unrealized
gains on securities available-for-sale.
The Company attempts to minimize the risk of loss due to default by the
borrower by maintaining a quality investment portfolio. As of March 31, 1997,
approximately 88% of the Company's bond portfolio is rated "A" or higher, or
was a U.S. government obligation, and only $34.0 million, or .9% of the
carrying value of the bond portfolio, was rated below investment grade (Ba and
below). Ratings are based on the ratings, if any, assigned by Moody's and/or
Standard & Poors. If ratings were split, the rating used is generally the
higher of the two. Approximately $258.6 million of securities are private
placements for which ratings have been assigned by the Company based generally
on equivalent ratings supplied by the National Association of Insurance
Commissioners.
The Company's fixed maturity securities are classified as
available-for-sale and accordingly, are carried at fair value. The difference
between amortized cost and fair value, less deferred income taxes, is reflected
as a component of shareholders' equity.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Cash Provided by (Used in) Operations
Net cash used in operating activities was $13.4 million for the first
three months of 1997 compared to net cash provided by operating activities of
$65.8 million for the first three months of 1996. The decrease in cash
provided by operating activities is primarily due to (i) the Company received
$61.5 million in conjunction with a settlement of policy liabilities assumed
during the first quarter of 1996, (ii) the Company, which is on a bi-weekly pay
cycle, paid an additional $10.0 million payroll during the first quarter of
1997, and (iii) the Company paid $7.0 million in debt service during the first
quarter of 1997.
Notes Payable and Debt due LNC
As disclosed in Note 4 to the Notes to Consolidated Financial Statements,
in the second quarter of 1996 the Company assumed $100 million of Assumed Debt
and issued a $200 million Term Note. The Company is obligated to make minimum
principal repayments totaling $66.7 million in 1997 and 1998, and $166.7
million in 1999. In addition, the Company is obligated to make interest
payments on this debt. Interest is payable on outstanding principle at a rate
of 7 1/8% per annum on the Assumed Debt, and at a variable rate (generally 50
basis points over three, two and one year U.S. Treasury obligations) on the
Term Note. The current rate on the Term Note is approximately 6.7%.
Line of Credit
On May 29, 1996, the Company entered the Line of Credit with third party
financial institutions under which the Company may borrow and repay amounts up
to a maximum of $200 million. Borrowings under the Line of Credit will bear
interest generally at variable rates tied to LIBOR, an adjusted certificate of
deposit rate or other short-term indices. The Company will use borrowings
under the Line of Credit to assist in funding short-term cash management
requirements. No debt was outstanding using this agreement at March 31, 1997.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the Notes to Consolidated Financial Statements - Contingencies regarding
pending and threatened litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
10.9 (1) Amendment to Section 4.1 of American States Financial Corporation
Employees' Savings and Profit Sharing Plan
10.26 Lincoln National Intercompany Agreement, dated January 1, 1997
between American States Insurance Company and Lincoln National
Corporation and its subsidiaries
11 Computations of Earnings Per Share
27 Financial Data Schedule
b) Reports on Form 8-K.
The Registrant filed a Form 8-K Current Report, dated March 27, 1997,
pertaining to the Registrant exploring a range of strategic options,
including the potential sale of 100 percent of the Company.
16
<PAGE> 17
SIGNATURE PAGE
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.
American States Financial Corporation
by: /s/ Thomas M. Ober
--------------------
Thomas M. Ober
Vice President, Secretary and General Counsel
/s/ Thomas R. Kaehr
--------------------
Thomas R. Kaehr
Vice President and Chief Accounting Officer
Date: May 14, 1997
------------
17
<PAGE> 18
AMERICAN STATES FINANCIAL CORPORATION
Exhibit Index for the Report on Form 10-Q
for the Quarter Ended March 31, 1997
Exhibit Page
Number Description Number
- - ------- ----------- ------
10.9 (1) Amendment to Section 4.1 of American
States Financial Corporation Employees'
Savings and Profit Sharing Plan 19
10.26 Lincoln National Intercompany Agreement, dated 20
January 1, 1997 between American States Insurance
Company and Lincoln National Corporation and its
subsidiaries and affiliates.
11 Computations of Earnings Per Share 26
27 Financial Data Schedule 27
18
<PAGE> 1
EXHIBIT 10.9 (1)
AMENDMENT TO SECTION 4.1 OF AMERICAN STATES FINANCIAL
CORPORATION EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
4.1 Amount of Employer Contributions. Subject to the terms and conditions
of the Plan, for each Plan Year, each Employer shall contribute an amount on
behalf of each Participant that, when added to the forfeitures and amounts from
a Suspense Account treated as Employer Contributions on the Participant's
behalf for that Plan Year under Subsections 8.4 and 10.1, provides
contributions in accordance with the following schedule:
(a) $0.25 for every $1.00 of that portion of a Participant's
Pre-tax Contribution that does not exceed 6% of the Participant's
Compensation shall be contributed.
(b) If the Combined Ratio of the Company over the Performance
Period ending with the Plan Year for which the Contribution is made is
better than the Average Performance Percentile for the Peer Group for
that Performance Period, an additional amount shall be contributed as
follows:
(i) If the Combined Ratio of the Company for the Performance
Period ending with the Plan Year is equal to or better than the
Superior Performance Percentile for the Peer Group, an additional
$0.75 shall be contributed for every $1.00 of that portion of a
Participant's Pre-tax Contribution that does not exceed 6% of the
Participant's Compensation.
(ii) If the Combined Ratio of the Company for the Performance
Period ending with the Plan Year is between the Average
Performance Percentile and the Superior Performance Percentile
for the Peer Group, the additional contribution shall be between
$0.00 and $0.75, as determined by straight-line interpolation,
for every $1.00 of that portion of the Participant's Pre-tax
Contribution that does not exceed 6% of the Participant's
Compensation.
(c) If the Combined Ratio of the Company over the Performance
Period ending with the Plan Year is 100% or less, then, in addition to
any amounts contributed for a Participant pursuant to Subsection (a)
and (b), another $0.50 shall be contributed for every $1.00 of that
portion of the Participant's Pre-tax Contribution that does not exceed
6% of the Participant's Compensation.
For purposes of this Section, the Combined Ratio for an applicable Performance
Period is the sum of (1) losses and loss adjustment expenses incurred divided
by earned premiums, plus (2) underwriting expenses and policyholder dividends
divided by premiums written. For any Performance Period, the terms Combined
Ratio, Peer Group, Average Performance Percentile, and the Superior Performance
Percentile shall be determined in accordance with the written guidelines
adopted by the Committee and set forth in an addendum to the Plan, and that
Addendum, as amended from time to time shall constitute part of this Plan.
19
<PAGE> 1
EXHIBIT 10.26
LINCOLN NATIONAL INTERCOMPANY AGREEMENT
This agreement is being executed to formalize the procedures involved
with the intercompany flow of dollars which result from Lincoln National
Corporation and its affiliated companies sharing common facilities and
services. The accompanying Exhibits considered to be a part of this
agreement are as follows:
<TABLE>
<S> <C>
Exhibit I - Procedures for Allocated Expenses/Usage Fees
Exhibit II - Procedures for Intercompany Receivables/Payables
Exhibit III - Specific Allocated Expenses/Usage Fees for Calendar Year 1997
Exhibit IV - Lincoln Investment Management - Service Fees for Calendar
Year 1997
</TABLE>
As duly authorized officers of Lincoln National Corporation or one of its
affiliated companies, we have reviewed the attached exhibits and find the
procedures and specific charges to be acceptable. Any changes to the
procedures or specific charges covered by this agreement will be formalized by
Lincoln National Life's Financial & Risk Management - Performance Management
Unit and will be duly authorized by obtaining signed amendments to this initial
agreement.
This agreement may be signed in one or more counterparts, each of which
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
Dated: January 1, 1997
<TABLE>
<S> <C>
- - ------------------------------------------- -------------------------------------------
Lincoln National Corporation Lincoln Life Improved Housing, Inc.
by: Ian M. Rolland, Chairman, CEO Ian M. Rolland, CEO
- - ------------------------------------------- -------------------------------------------
The Lincoln National Life Insurance Company Lincoln National (China) Inc.
Lincoln Financial Group, Inc. Stephen T. Meldrum, President
by: Jon A. Boscia, President, CEO
/s/ William J. Lawson
- - ------------------------------------------- -------------------------------------------
American States Insurance Company Lincoln National Investment Companies, Inc.
by: William J. Lawson, President Jeffrey J. Nick, President, CEO
- - ------------------------------------------- -------------------------------------------
LNC Equity Sales Corporation First Penn-Pacific Life Insurance Company
by: J. Michael Hemp, President by: Roland C. Baker, President, Director
- - ------------------------------------------- -------------------------------------------
The Richard Leahy Corporation Vantage Global Advisors, Inc.
by: Thomas W. Fitch, President, CEO by: T. Scott Wittman, President, Treasurer
- - -------------------------------------------
Lincoln Investment Management, Inc.
H. Thomas McMeekin, President
</TABLE>
20
<PAGE> 2
by: Lawrence T. Rowland for the following companies:
Lincoln National Reassurance Company, President
Lincoln National Health & Casualty
Insurance Company, President
LNC Administrative Services Corporation, CEO
Lincoln National Intermediaries, Inc., CEO
Lincoln National Management Services, Inc., CEO
Lincoln National Risk Management, Inc., CEO
Lincoln National Structured Settlement, Inc., CEO
Special Pooled Risk Administrators, Inc., CEO
Underwriters & Management Services, Inc., CEO
Lincoln National Reinsurance Co. Limited, CEO
Lincoln National Reinsurance Co
(Barbados) Ltd., CEO
Old Fort Insurance Company, Ltd, CEO
Lincoln National Underwriting Service, Ltd., CEO
- - ------------------------------------------------
Lynch & Mayer, Inc.
by: Edward J. Petner, President, Co-CEO
- - ------------------------------------------------
Delaware Management Holdings, Inc.
by: Wayne A. Stork, CEO
- - ------------------------------------------------
Lincoln National (UK) PLC
by: Gabriel L. Shaheen
- - ------------------------------------------------
Lincoln National Realty Corporation
by: Steven R. Brody, President, Director
21
<PAGE> 3
EXHIBIT I
ALLOCATED EXPENSE/USAGE FEE CURRENT PROCEDURES
The Lincoln affiliated companies utilize allocated expenses/usage fees as a
means of allocating costs among themselves. The procedures for developing,
reviewing, and recording the allocated expenses/usage fees are outlined below:
1. As a part of the budget preparation process each year, departments
wishing to utilize the allocated expense/usage fee method of allocating
costs develop how they will charge as well as the amount they will charge.
The "how" may be employee counts, item counts, hourly rates, etc. The
amount to be charged each area are determined based on the method of
charging, and the total to be recovered by the charging department
represents a percentage of their total budget. The percentage of recovery
varies by department and is determined by that department. In addition to
the above, a portion of the LNC parent company expenses are allocated to
the business units based on their equity employed as of June 30 each year
and is made through expense account 3943.
2. The LNL Financial & Risk Management - Performance Management unit
collects the allocated expense/usage fee data for the various
departments and compiles a report which details all departments
assessing allocated expenses/usage fees as well as the departments
being assessed the charges. Charged departments then have an
opportunity to review the charges for reasonableness. If the charges
are deemed unreasonable, they may be negotiated with the department
assessing the charges. Once the charges have been agreed upon, LNL
Financial & Risk Management - Performance Management unit prepares a
second version of the allocated expense/usage fee detailed report
which is presented to senior management for review. If changes are
again deemed necessary, the changes are incorporated into the final
version of the report.
3. Based on the final version of the allocated expense/usage fee
detailed report, monthly accounting entries are generated. Allocated
expense amounts are allocated equally each month throughout the year
whereas usage fee amounts are based on usage of services. The LNL
Financial & Risk Management - Performance Management unit is responsible
for initiating the accounting entries for the monthly allocated expenses.
The accounting entries for the monthly usage fees are initiated by the
department providing the services.
4. The LNL Financial & Risk Management - Performance Management Unit,
as well as the individual departments, are responsible for monitoring the
monthly expense reports to ensure that the actual charges being generated
compare favorably to the budgeted charges. Major differences are
researched to determine the reason for the variance and corrective action
is taken as necessary.
22
<PAGE> 4
EXHIBIT II
Page 1
INTERCOMPANY ACCOUNTS RECEIVABLES/PAYABLES USER PROCEDURES
The primary purpose for using the Intercompany Accounts Receivables/Payables
Account is to provide a clearing account to facilitate the simultaneous
recording of revenue/expense entries on the general ledgers of two or more Fort
Wayne based companies. Use of this account negates the need to transfer cash
among the Fort Wayne based companies every time an intercompany transaction is
initiated. Since the entries for all Fort Wayne based companies affected by
the transaction can be made simultaneously, the integrity of the consolidated
financial statements is enhanced because there is reasonable assurance that all
the accounting entries impacting the income statements and balance sheets have
been made. For an explanation of the procedures followed to record and settle
intercompany accounts receivables/payables with non-Fort Wayne based companies,
see Item 6.
The procedures for using this account are as follows:
1. The department initiating the accounting entries prepares journal entries
for all companies affected by the transaction. The proper revenue/expense
accounts make up half the accounting entry for each company, and the
intercompany accounts receivable/payable account is used as the offset
account in each company. These accounting entries are made throughout the
month.
2. After the end of each accounting month, reports are generated which list
all intercompany accounts receivable/payable entries grouped by matched
and unmatched entries between companies. LNC Controllers personnel are
responsible for the intercompany accounts receivable/payable cash
settlement process which includes reviewing the matched entries for
accuracy as well as reconciling the unmatched entries.
Once all unmatched entries have been reconciled, the amounts of cash to be
transferred among the Fort Wayne based companies can be determined. The
cash transfers are completed by no later than the 15th calendar day of
the month as settlement of the previous month's transactions. All
intercompany accounts receivables/payables balances are settled every
month.
3. Transfer of the cash for settlement of the intercompany accounts
receivables/ payables among the Fort Wayne based companies is accomplished
using Treasurers' CAPS (ACH) Wire Transfer System. The wire transfer
amounts are input into the CAPS (ACH) Wire Transfer System by LNC
Controllers personnel. Treasurers - Cash Management/Funds Transfer
personnel will then transfer the cash in accordance with the instructions
in the CAPS (ACH) Wire Transfer System.
23
<PAGE> 5
EXHIBIT II
Page 2
4. Unmatched entries will be researched by LNC Controllers personnel to
determine what corrective action is necessary. At the direction of LNC
Controllers personnel, correcting entries will be initiated by the
departments who made the original entries. All unmatched entries are
expected to be cleared within the month following the date of the original
entry.
5. If errors were made in assessing allocated expense/usage fee charges, LNL
Financial & Risk Management - Performance Management unit will serve as
the liaison to resolve the discrepancies identified by individual
departments during their review of the monthly expense management reports.
6. If a charge is to be assessed a non-Fort Wayne based company, a journal
entry will be made on the ledger of the Fort Wayne based company assessing
the charge to the non-Fort Wayne based company's intercompany accounts
receivable/payable account/analysis. After the end of each accounting
month, a report is generated which details the amounts to be collected
from the non-Fort Wayne based companies. Documentation supporting each
amount charged is gathered and an invoice for the total amount due from
each non-Fort Wayne based company is prepared. The invoices and
supporting documentation are then sent to each non-Fort Wayne based
company having incurred charges. Payment of the invoices are due upon
receipt. If any of the non-Fort Wayne based companies dispute a charge,
LNC Controllers serves as the liaison to resolve the question.
24
<PAGE> 6
EXHIBIT III
Page 1
1997 PROPOSED BUDGET REPORT
AMERICAN STATES INSURANCE COMPANY
(Non-Fort Wayne Based Affiliate)
<TABLE>
<CAPTION>
1997
ACCOUNT ACCOUNT TITLE PROPOSED BUDGET
------- --------------------------------------- ---------------
<S> <C> <C>
3169 Alloc Exp-LNL 401(K) Part/Plan Admin 130,104
3170 Alloc Exp-LNL 401(K) Asset Charge 274,812
3259 Usage Fee-LNL Print/Distribution Center 51
3943 Alloc Exp-LNC General Corporate 6,411,900
3951 Alloc Exp-LNL Human Resources 176,628
3964 Alloc Exp-LNL College Relations Program 17,976
3995 Usage Fee-LNC/LNL Law 4,236
3998 Usage Fee-LNL Data Center 4,349
---------
Total Allocated Expenses/Usage Fees 7,020,056
</TABLE>
25
<PAGE> 1
AMERICAN STATES FINANCIAL CORPORATION Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1997 1996
--------- ---------
(Dollars in Thousands,
Except Per Share Data)
<S> <C> <C>
Primary
-------
Shares outstanding, beginning and ending of period 60,050,515 50,000,000
=========== ===========
Net income $ 54,027 $ 46,913
=========== ===========
Net income per primary common share $ .90 $ .94
=========== ===========
Fully Diluted
-------------
Shares outstanding, beginning and ending of period 60,050,515 50,000,000
=========== ===========
Net income $ 54,027 $ 46,913
=========== ===========
Net income per fully diluted common share $ .90 $ .94
=========== ===========
</TABLE>
Note: The fully diluted calculation is submitted in accordance with Regulation
S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
26
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of American States Financial Corporation and
Subsidiaries and is qualified in its entirety by reference to such consolidated
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 3,689,243
<DEBT-MARKET-VALUE> 3,689,243
<EQUITIES> 427,766
<MORTGAGE> 22,609
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,254,089
<CASH> 15,797
<RECOVER-REINSURE> 178,252
<DEFERRED-ACQUISITION> 210,021
<TOTAL-ASSETS> 5,514,255
<POLICY-LOSSES> 2,862,150
<UNEARNED-PREMIUMS> 728,197
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 299,559
0
0
<COMMON> 304,493
<OTHER-SE> 1,023,455
<TOTAL-LIABILITY-AND-EQUITY> 5,514,255
423,276
<INVESTMENT-INCOME> 66,478
<INVESTMENT-GAINS> 9,687
<OTHER-INCOME> 2,463
<BENEFITS> 297,541
<UNDERWRITING-AMORTIZATION> 82,793
<UNDERWRITING-OTHER> 54,225
<INCOME-PRETAX> 67,345
<INCOME-TAX> 13,318
<INCOME-CONTINUING> 54,027
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,027
<EPS-PRIMARY> .90
<EPS-DILUTED> .90
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
