<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 1994 No. 1-1345
AMERICAN FINANCIAL ENTERPRISES, INC.
Incorporated under IRS Employer I.D.
the Laws of Connecticut No. 31-0996797
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2172
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
X X
X This Amendment is being filed to enhance the readability X
X of the Registrant's Form 10-K on the Edgar System originally X
X filed on March 31, 1995. For the convenience of the reader, X
X the entire document is being presented. X
X X
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
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AMERICAN FINANCIAL ENTERPRISES, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K/A
<TABLE>
<CAPTION>
<S> <C>
Part I Page
Item 1 - Business 1
Item 2 - Properties *
Item 3 - Legal Proceedings *
Item 4 - Submission of Matters to a Vote of Security Holders *
Part II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 2
Item 6 - Selected Financial Data 2
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 3
Item 8 - Financial Statements and Supplementary Data 6
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure *
Part III
Item 10 - Directors and Executive Officers of the Registrant 6
Item 11 - Executive Compensation 6
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 6
Item 13 - Certain Relationships and Related Transactions 6
Part IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K S-1
<FN>
* The response to this Item is "none".
</TABLE>
<PAGE>
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PART I
ITEM 1
Business
Introduction
American Financial Enterprises, Inc. ("AFEI") was
incorporated as a Connecticut corporation in August 1980. Its
address is One East Fourth Street, Cincinnati, Ohio 45202; its
phone number is (513) 579-2172. AFEI's assets consist primarily
of investments in equity securities of investee corporations.
AFEI employs fewer than ten people, all of whom currently spend a
significant portion of their time as employees of American
Financial Corporation ("AFC") and its subsidiaries. At
March 1, 1995, AFC and its subsidiaries owned approximately 83%
of AFEI's outstanding shares of Common Stock.
On March 23, 1995, shareholders of American Premier
Underwriters, Inc. ("American Premier") approved the merger of
AFC with a newly formed subsidiary of American Premier Group,
Inc. ("New American Premier"), another new company formed to own
100% of the common stock of both AFC and American Premier.
Consummation of the merger is pending receipt of a ruling from
the Internal Revenue Service which is expected at the end of
March or early April. In the transaction, Carl H. Lindner and
members of his family, who own 100% of the common stock of AFC,
will exchange that stock for approximately 55% of New American
Premier voting common stock. Shareholders of American Premier,
including AFEI, will receive shares of New American Premier on a
one-for-one basis. As a result of the merger, AFEI will own
10.0 million shares of the common stock of New American Premier
and New American Premier will beneficially own 83% of AFEI's
Common Stock. The shares of New American Premier owned by AFEI
(and AFC) generally will not be eligible to be voted as long as
these companies are owned by New American Premier.
Investment in Investees
At December 31, 1994, AFEI had investments in three
companies, all of which are accounted for as investees under the
equity method. Under this method, AFEI includes in its income
the portion of the net earnings of these companies attributable
to the common shares owned by AFEI, even though they might not be
received as dividends. See Note B to AFEI's Financial
Statements. The
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following table shows certain information concerning AFEI's
investments in investees (in millions):
<TABLE>
<CAPTION>
Additional AFEI's Investment
Ownership Carrying
AFEI Ownership by Affiliates Value at Market Value at
Investee Shares % Shares % 12/31/94 12/31/94 3/15/95
<S> <C> <C> <C> <C> <C> <C> <C>
American Premier Underwriters 10.0 22% 8.7 19% $341 $258 $231
American Annuity Group 3.9 10% 27.5 70% 21 37 39
Citicasters 1.2 13% 2.2 24% 25 29 35
$387 $324 $305
<FN>
Carrying value represents acquisition cost plus AFEI's equity in undistributed earnings and losses.
</TABLE>
American Premier operates businesses primarily in specialty
property and casualty insurance (see "Introduction" for
discussion of the merger). American Annuity is engaged in the
tax-deferred annuity business. Citicasters operates ten FM and
four AM radio stations along with two network-affiliated
television stations in major markets throughout the country.
AFEI purchased 1.2 million common shares of Citicasters for
$23.9 million cash in June 1994. Also in June 1994, AFEI sold
its investment in General Cable common stock to an unaffiliated
company for $21.6 million cash.
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PART II
ITEM 5
Market for Registrant's Common Equity
and Related Stockholder Matters
AFEI's Common Stock is listed on the Pacific and Chicago
Stock Exchanges under the symbols AFEP and AFEM, respectively.
The table below sets forth the high and low sales prices for the
Common Stock as reported on the Pacific Stock Exchange.
<TABLE>
<CAPTION>
1994 1993
Quarter Low High Low High
<S> <C> <C> <C> <C>
First $25.00 $26.88 $18.25 $21.25
Second 23.00 26.50 20.00 22.75
Third 22.00 24.00 21.75 25.00
Fourth 20.50 24.00 22.75 27.00
</TABLE>
The number of beneficial owners of AFEI's Common Stock at
March 1, 1995, was in excess of 500; registered holders numbered
approximately 280. In the fourth quarters of 1994 and 1993, AFEI
paid annual dividends of $.05 per common share. AFEI also paid a
special dividend of $.40 per common share in the fourth quarter
of 1994. During the first quarter of 1995, AFEI announced its
intent to begin paying quarterly dividends. A dividend of $.10
per common share was paid in March 1995.
ITEM 6
Selected Financial Data
The following financial data (in thousands, except per share
data) has been summarized from, and should be read in conjunction
with, AFEI's financial statements. Effective January 1, 1992,
two
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<PAGE>
investees recorded adjustments for cumulative effects of
accounting changes from the implementation of Financial
Accounting Standards Board Statements. See Note B to the
Financial Statements.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Earnings Statement Data:
Total Revenues $5,196 $78,773 $12,285 $9,605 $29,395
Earnings (Loss) Before Cumulative
Effect of Investee Accounting
Changes 4,210 42,674 (979) (5,845) 8,772
Net Earnings (Loss) 4,210 42,674 48,088 (5,845) 8,772
Earnings (Loss) Per Common Share:
Before Cumulative Effect of
Investee Accounting Changes $.32 $3.21 ($ .07) ($.44) $.66
Net Earnings (Loss) .32 3.21 3.62 (.44) .66
Cash Dividends Per Common Share .45 .05 .02 .02 .02
Balance Sheet Data:
Total Assets $390,396 $411,317 $487,137 $414,783 $412,982
Long-term Debt 16,000 15,000 161,500 152,500 142,500
Shareholders' Equity 338,235 352,206 303,797 255,975 262,086
Book Value Per Common Share 25.45 26.50 22.86 19.26 19.72
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ITEM 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
Following is a discussion and analysis of the financial
statements and other statistical data that management believes
will enhance the understanding of AFEI's financial condition and
results of operations. This discussion should be read in
conjunction with the financial statements beginning on page F-1.
AFEI's assets consist primarily of investments in the common
stock of American Premier, American Annuity and Citicasters.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Funds AFEI relies on dividends from its investees to
meet fixed charges and other operating expenses. At the current
indicated rate, $10 million in annual dividends from American
Premier is expected to be more than sufficient to cover such
charges. It is expected that AFEI will continue to receive
quarterly dividends following the American Premier merger
discussed in Note B. If, in the future, investee dividends are
insufficient to meet its fixed charges and debt maturities, AFEI
would be required to meet them through bank borrowings, sales of
investments, borrowings from AFC, or similar transactions.
In June 1994, AFEI sold its investment in General Cable for $21.6
million cash and repaid its bank debt. On June 30, 1994, AFEI
purchased 1.2 million shares of Citicasters common stock for
$23.9 million, using the balance of the proceeds from the General
Cable sale in addition to $13.5 million borrowed under its bank
revolver.
During the third quarter of 1993, AFEI sold a portion of its
holdings in American Premier common stock (see Note B) and used
the proceeds to repay most of its debt. In September 1993, AFEI
entered into a new $20 million revolving credit agreement on the
remaining portion of its bank debt.
In December 1994, AFEI paid dividends of $.45 per common share or
$6.0 million. During the first quarter of 1995, AFEI announced
its intent to begin paying quarterly dividends with the first
such dividend being a March payment of $.10 per share or $1.3
million.
Capital Requirements AFEI is not engaged in capital-intensive
businesses and therefore does not have significant capital
resource requirements. Since AFEI has a limited number of
employees, all of whom spend a significant portion of their time
as employees of AFC, there have been no direct expenditures for
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fixed assets or rentals.
-7-
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RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 1994
Investee Corporations Equity in net earnings and losses of
investees (companies in which AFEI owns a significant portion of
the voting stock) represents AFEI's proportionate share of the
investees' earnings and losses. Since AFEI's basis in certain
assets and liabilities of investees differs from amounts reported
by these investees, adjustments are made to AFEI's share of
investee earnings.
Equity in net earnings of investees decreased $67 million in
1994 compared to 1993. Included in 1994 is AFEI's share
(approximately $15 million) of American Premier's loss on the
sale of General Cable notes. Included in 1993 is AFEI's share
(approximately $35 million) of a tax benefit recorded by American
Premier. The following table presents the significant amounts
used in calculating AFEI's equity in net earnings (losses) of
investees (in millions):
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</TABLE>
<TABLE>
<CAPTION>
American Premier American Annuity
1994 1993 1992 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Investee earnings (losses)
before accounting changes $ 0.3 $232.0 $52.6 $36.1 $40.0 ($25.8)
AFEI's share of investee
earnings (losses) $ 0.1 $ 65.0 $16.5 $ 3.6 $ 4.1 ($5.6)
Basis adjustments, including
amortization of goodwill 0.1 1.2 10.2 - - -
Equity in net earnings (losses)
of investees as shown in Statement
of Earnings $ 0.2 $ 66.2 $26.7 $ 3.6 $ 4.1 ($ 5.6)
Citicasters General Cable(b)
1994(a) 1993 1992(c)
<S> <C> <C> <C>
Investee earnings (losses)
before accounting changes $59.7 ($57.6) ($53.3)
AFEI's share of investee
earnings (losses) $ 7.2 ($16.1) ($14.9)
Basis adjustments, including
amortization of goodwill (6.2) 17.3 6.0
Equity in net earnings (losses)
of investees as shown in Statement
of Earnings $ 1.0 $ 1.2 ($ 8.9)
<FN>
(a) Represents Citicasters' results since June 30, 1994, the date of AFEI's acquisition of Citicasters
shares.
(b) Equity accounting ceased as of December 31, 1993, pending the sale of General Cable shares.
(c) Represents General Cable's results for the six months ended December 31, 1992 following its spin-off.
</TABLE>
American Premier American Premier reported net income of
$300,000 in 1994, $232.0 million in 1993 and $305.4 million in
1992. Results for 1994 included a loss of $75.8 million on the
sale of General Cable notes. Results for 1993 included a tax
benefit of $132 million attributable to an increase in American
Premier's net deferred tax asset. American Premier's net income
for 1992 included a $252.8 million benefit attributable to the
cumulative effect of an accounting change due to the adoption of
SFAS No. 109, "Accounting for Income Taxes".
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As discussed in Note B, AFEI will receive shares of American
Premier Group, a new company formed to own both AFC and American
Premier, in exchange for its American Premier stock on a one-for-
one basis in late March or early April 1995. No gain or loss
will be recorded on the exchange of shares.
American Annuity American Annuity reported net income of
$36.1 million in 1994 and $40.0 million in 1993 and a net loss of
$28.9 million 1992. American Annuity's results for 1994 included
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aftertax realized losses of $100,000 compared to realized gains
of $23.1 million in 1993. Results for 1993 also included an
aftertax provision for relocation expenses of $5.2 million. The
loss in 1992 reflects substantial restructuring charges and loss
provisions related to the manufacturing businesses which have
been sold.
Citicasters Citicasters reported net income of $59.7 million
in the six months ended December 31, 1994. Citicasters' results
included a $50.1 million aftertax gain from the sale of four
television stations which, under accounting rules pertaining to
investee acquisitions, was excluded in determining AFEI's equity
in Citicasters' earnings.
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<PAGE>
General Cable General Cable reported a net loss of
$57.6 million in 1993 and a net loss of $53.3 million in the six
months ended December 31, 1992. General Cable's results for 1993
included a loss of $34.4 million on the sale of its equipment
manufacturing businesses. AFEI's share of this loss reduced
negative goodwill and was not included in AFEI's equity in
General Cable's earnings. General Cable's loss for 1992 included
$12 million in restructuring costs and a $10 million loss from
the anticipated sale of a subsidiary. Prior to its spin-off from
American Premier in July 1992, General Cable's earnings were
included in American Premier's.
Gains on Sales of Investees AFEI recognized a pretax gain of
$339,000 on the sale of its General Cable shares in June 1994 and
a pretax gain of $7.1 million on the sale of 4.5 million shares
of American Premier in August 1993.
Interest Expense Interest expense declined to $665,000 in 1994
from $11.3 million in 1993 and $17.0 million in 1992 due to
repayments of borrowings in 1993.
Administrative and General Expenses Administrative and general
expenses in 1994 included a $373,000 fourth quarter charge for
the settlement of litigation concerning the sale of General
Cable. In addition, administrative and general expenses included
charges of $320,000 in each of the years 1994, 1993 and 1992 for
accounting, legal, data processing, tax and investment services
provided by AFC. As a subsidiary of AFC, AFEI does not incur all
of the costs of operating as an independent entity. While it is
not practical to estimate all of the costs of operating as a
separate entity, management believes the above expense allocation
is reasonable.
Income Taxes Effective January 1, 1992, AFEI adopted SFAS
No. 109 which, excluding the effects from investees adopting this
standard, had no impact on AFEI's results of operations or
financial position. See Note E to the Financial Statements.
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<PAGE>
ITEM 8
Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
<S> <C>
Reports of Independent Auditors F-1
Balance Sheet:
December 31, 1994 and 1993 F-4
Statement of Earnings:
Years ended December 31, 1994, 1993 and 1992 F-5
Statement of Changes in Shareholders' Equity:
Years ended December 31, 1994, 1993 and 1992 F-6
Statement of Cash Flows:
Years ended December 31, 1994, 1993 and 1992 F-7
Notes to Financial Statements F-8
<FN>
"Selected Quarterly Financial Data" has been included in Note F to AFEI's
Financial Statements.
</TABLE>
PART III
The information required by the following Items will be
included in AFEI's definitive Proxy Statement which will be filed
with the Securities and Exchange Commission in connection with
the 1995 Annual Meeting of Shareholders and is incorporated
herein by reference.
<TABLE>
<S> <C>
ITEM 10 Directors and Executive Officers of the Registrant
ITEM 11 Executive Compensation
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management
ITEM 13 Certain Relationships and Related Transactions
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REPORTS OF INDEPENDENT AUDITORS
Board of Directors
American Financial Enterprises, Inc.
We have audited the accompanying balance sheets of American
Financial Enterprises, Inc. as of December 31, 1994 and 1993, and
the related statements of earnings, changes in shareholders'
equity, and cash flows for each of the three years in the period
ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits. The financial statements of American Premier
Underwriters, Inc. and General Cable Corporation (1993 and 1992)
have been audited by other auditors whose reports have been
furnished to us; insofar as our opinion on the financial
statements relates to data included for those corporations, it is
based solely on their reports.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits and the reports of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of other
auditors, the financial statements referred to above present
fairly, in all material respects, the financial position of
American Financial Enterprises, Inc. at December 31, 1994 and
1993, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in Note A to the financial statements, in 1992 the
Company changed its method of accounting for income taxes. Also,
as discussed in Note B to the financial statements and referred
to in the reports of other auditors whose reports have been
furnished to us, American Premier Underwriters, Inc. and General
Cable Corporation changed their method of accounting for income
taxes in 1992.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 24, 1995
F-1
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REPORT OF AMERICAN PREMIER'S INDEPENDENT AUDITORS
American Premier Underwriters, Inc.
We have audited the financial statements and the financial
statement schedules of American Premier Underwriters, Inc. and
Consolidated Subsidiaries listed in the Index to Financial
Statements and Financial Statement Schedules of American Premier
Underwriters, Inc.'s Form 10-K for the year ended
December 31, 1994 (included as Exhibit 99 herein). These
financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of American Premier
Underwriters, Inc. and Consolidated Subsidiaries at
December 31, 1994 and 1993 and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all
material respects the information shown therein.
As discussed in Note 7 to the financial statements, in 1992 the
Company changed its method of accounting for income taxes to
conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
February 15, 1995
(March 23, 1995 with respect to the
acquisition of American Financial
Corporation as discussed in Note 2 to
American Premier's financial statements)
F-2
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REPORT OF GENERAL CABLE'S INDEPENDENT AUDITORS
General Cable Corporation:
We have audited the consolidated financial statements and related
schedules of General Cable Corporation and subsidiaries listed in
Item 14(a) of the Annual Report on Form 10-K of General Cable
Corporation for the year ended December 31, 1993 (not presented
separately herein). These consolidated financial statements and
related schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and related schedules based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
General Cable Corporation and subsidiaries at December 31, 1993
and 1992 and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1993
in conformity with generally accepted accounting principles.
Also, in our opinion, such consolidated financial statement
schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all
material respects the information shown therein.
As discussed in Notes 1 and 10 to the consolidated financial
statements, in 1992 General Cable Corporation changed its method
of accounting for income taxes to conform with Statements of
Financial Accounting Standards No. 109.
DELOITTE & TOUCHE
Cincinnati, Ohio
February 18, 1994
F-3
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AMERICAN FINANCIAL ENTERPRISES, INC.
BALANCE SHEET
(Dollars in Thousands)
</TABLE>
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Assets
Cash and short-term investments $ 275 $ 392
Investment in investees:
American Premier Underwriters, Inc. 341,276 359,775
American Annuity Group, Inc. 21,461 27,314
Citicasters Inc. 24,882 -
General Cable Corporation - 21,289
Other assets 2,502 2,547
$390,396 $411,317
Liabilities and Shareholders' Equity
Accounts payable, accrued expenses and
other liabilities $ 1,027 $ 618
Payable to American Financial Corporation 35,134 43,493
Long-term debt - payable to bank 16,000 15,000
52,161 59,111
Shareholders' Equity:
Preferred Stock, none issued - -
Common Stock, $1 par value
- 20,000,000 shares authorized
- 13,291,117 shares outstanding 13,291 13,291
Capital surplus 114,106 114,106
Retained earnings 216,638 218,409
Equity in investees' net unrealized
gains (losses) on marketable securities,
net of deferred income taxes (5,800) 6,400
Total Shareholders' Equity 338,235 352,206
$390,396 $411,317
<FN>
See notes to financial statements.
</TABLE>
F-4
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AMERICAN FINANCIAL ENTERPRISES, INC.
STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Income:
Equity in net earnings (losses) of investees:
American Premier Underwriters, Inc. $ 158 $66,161 $26,653
American Annuity Group, Inc. 3,578 4,053 (5,554)
Citicasters Inc. 1,030 - -
General Cable Corporation - 1,158 (8,900)
Gains on sales of investees 339 7,095 -
Interest income 91 306 86
5,196 78,773 12,285
Costs and Expenses:
Interest charges on borrowed money 665 11,300 17,008
Administrative and general expenses 2,080 1,549 1,574
2,745 12,849 18,582
Earnings (loss) before federal income taxes and
cumulative effect of investee accounting changes 2,451 65,924
(6,297)
Provision (credit) for federal income taxes (1,759) 23,250 (5,318)
Earnings (loss) before cumulative effect
of investee accounting changes 4,210 42,674 (979)
Cumulative effect of investee accounting changes,
net of federal income taxes of $25,277 - - 49,067
Net Earnings $4,210 $42,674 $48,088
Average number of common shares 13,291 13,291 13,291
Earnings (loss) per common share:
Before cumulative effect of investee accounting
changes $.32 $3.21 ($ .07)
Cumulative effect of investee accounting changes - - 3.69
Net earnings $.32 $3.21 $3.62
Cash dividends per common share $.45 $.05 $.02
<FN>
See notes to financial statements.
</TABLE>
F-5
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AMERICAN FINANCIAL ENTERPRISES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Common Stock:
Balance at Beginning and End of Period $ 13,291 $ 13,291 $ 13,291
Capital Surplus:
Balance at Beginning and End of Period $114,106 $114,106 $114,106
Retained Earnings:
Balance at Beginning of Period $218,409 $176,400 $128,578
Net earnings 4,210 42,674 48,088
Cash dividends paid (5,981) (665) (266)
Balance at End of Period $216,638 $218,409 $176,400
Equity in Investees' Net Unrealized
Gains (Losses) on Marketable Securities,
Net of Deferred Income Taxes:
Balance at Beginning of Period $ 6,400 $ - $ -
Change during period (12,200) 6,400 -
Balance at End of Period ($ 5,800) $ 6,400 $ -
<FN>
See notes to financial statements.
</TABLE>
F-6
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AMERICAN FINANCIAL ENTERPRISES, INC.
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Operating Activities:
Net earnings $ 4,210 $42,674 $48,088
Adjustments:
Cumulative effect of investee
accounting changes - - (74,344)
Equity in net earnings of investees (4,766) (71,372) (12,199)
Gains on sales of investees (339) (7,095) -
Cash dividends from investees 8,991 11,367 11,728
Decrease (increase) in other assets 342 270 (411)
Increase (decrease) in payable to AFC (1,759) 23,250 19,959
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 409 (4,479) (1,211)
7,088 (5,385) (8,390)
Investing Activities:
Sales of investees 21,628 150,610 -
Purchase of investee (23,852) - -
(2,224) 150,610 -
Financing Activities:
Additional long-term borrowings 18,500 3,000 11,000
Reduction of long-term debt (17,500) (149,500) (2,000)
Cash dividends paid (5,981) (665) (266)
(4,981) (147,165) 8,734
Net Increase (Decrease) In Cash
and Short-term Investments (117) (1,940) 344
Cash and short-term investments at
beginning of period 392 2,332 1,988
Cash and short-term investments at
end of period $ 275 $ 392 $ 2,332
<FN>
See notes to financial statements.
</TABLE>
F-7
<PAGE>
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
A. Basis of Presentation American Financial Enterprises, Inc.
("AFEI") became a subsidiary of American Financial
Corporation ("AFC") in 1980 as a result of the reorganization
of The New York, New Haven and Hartford Railroad Company. At
December 31, 1994, AFC and its subsidiaries owned 10,980,129
shares (83%) of AFEI's outstanding Common Stock. Certain
reclassifications have been made to prior years to conform to
the current year's presentation.
Income Taxes AFEI files consolidated federal income tax
returns with AFC. Effective January 1, 1992, AFEI
implemented Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". AFEI's
investees also adopted SFAS No. 109 effective January 1,
1992. Excluding the effects from investees adopting this
standard, implementing SFAS No. 109 had no impact on AFEI's
results of operations or financial position. Under SFAS
No. 109, deferred income tax assets and liabilities are
determined based on differences between financial reporting
and tax bases and are measured using enacted tax rates.
Current and deferred tax assets and liabilities are
aggregated with other amounts receivable from or payable to
AFC.
Statement of Cash Flows For cash flow purposes, "investing
activities" are defined as making and collecting loans and
acquiring and disposing of debt or equity instruments and
property and equipment. "Financing activities" include
obtaining resources from owners and providing them with a
return on their investments, borrowing money and repaying
amounts borrowed. All other activities are considered
"operating". Short-term investments having original
maturities of three months or less when purchased are
considered to be cash equivalents for purposes of the
financial statements.
B. Investment in Investees AFEI's and AFC's combined ownership
of the common stock of American Premier Underwriters, Inc.
("American Premier"), American Annuity Group, Inc. and
Citicasters Inc. exceeds 20%. Accordingly, these investments
are accounted for under the equity method. Under this
method, AFEI includes in its income the portion of the net
earnings of these companies attributable to the common shares
owned by AFEI, even though they might not be received as
dividends. Included in AFEI's balance sheet is its portion
of investees' unrealized gains and losses on marketable
securities.
Since AFEI's basis in certain assets and liabilities of
investees differs from amounts reported by these investees,
adjustments are made to their reported earnings in
<PAGE>
<PAGE>
calculating AFEI's share of investee earnings. Included in
AFEI's retained earnings at December 31, 1994, was
$116 million applicable to its equity in undistributed net
earnings of investees.
Investment in American Premier AFEI owned approximately
10.0 million shares of American Premier common stock at
December 31, 1994, representing 22% of its outstanding
shares. American Premier is a property and casualty
insurance company. The market value of AFEI's investment in
American Premier was $258 million and $322 million at
December 31, 1994 and 1993, respectively, and $231 million at
March 15, 1995.
F-8
<PAGE>
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
In connection with a merger approved by American Premier
shareholders on March 23, 1995, AFEI will receive shares of
American Premier Group, Inc., a new company formed to own
both AFC and American Premier, in exchange for its American
Premier stock on a one-for-one basis. No gain or loss will
be recorded on the exchange of shares.
In August 1993, AFEI sold 4.5 million shares of American
Premier in a secondary public offering, realizing a pretax
gain of $7.1 million.
Summarized financial information for American Premier follows
(in millions):
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Cash and Investments $2,721 $2,579
Other Assets 1,473 1,471
Insurance Claims and Reserves 1,674 1,426
Debt 507 523
Minority Interest 6 15
Shareholders' Equity 1,549 1,722
Revenues $1,767.4 $1,763.3 $1,424.9
Income from Continuing Operations 0.8 242.7 50.9
Discontinued Operations (0.5) (10.7) 1.7
Cumulative Effect of Accounting Change - - 252.8
Net Income 0.3 232.0 305.4
</TABLE>
In 1994, American Premier recorded a $75.8 million loss on
notes receivable from General Cable which American Premier
sold back to General Cable at a discount in June. Results
for 1993 included a tax benefit of $132 million attributed to
an increase in American Premier's net deferred tax asset.
American Premier's 1992 cumulative effect of accounting
change was due to the implementation of SFAS No. 109,
"Accounting for Income Taxes". AFEI recorded its share of
the benefit when it implemented SFAS No. 109.
Investment in American Annuity Group AFEI owned
approximately 3.9 million shares of American Annuity common
stock at December 31, 1994, representing 10% of its
outstanding shares. American Annuity is engaged in the tax-
deferred annuity business. The market value of AFEI's
investment in American Annuity was $37 million and
$39 million at December 31, 1994 and 1993, respectively, and
$39 million at March 15, 1995.
F-9
<PAGE>
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Summarized financial information for American Annuity follows
(in millions):
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Cash and Investments $4,898 $4,756
Other Assets 192 158
Annuity Policyholders' Funds Accumulated 4,618 4,257
Notes Payable 183 226
Stockholders' Equity 204 250
Revenues $ 371.2 $ 387.2 $3.6
Income (Loss) from Continuing Operations 40.9 53.0 (9.0)
Discontinued Operations (2.6) (9.6) (16.8)
Extraordinary Items (1.7) (3.4) -
Cumulative Effect of Accounting Changes (0.5) - (3.1)
Net Income (Loss) 36.1 40.0 (28.9)
</TABLE>
American Annuity's results for 1992 included $24.5 million of
charges related to discontinued operations and transaction
fees of $7.3 million related to its acquisition of Great
American Life Insurance Company.
Investment in Citicasters AFEI purchased 1.2 million shares
of Citicasters common stock for $23.9 million cash in June
1994. These shares represented 13% of Citicasters'
outstanding shares at December 31, 1994. Citicasters
operates 14 radio stations, including ten FM and four AM
stations, along with two network-affiliated television
stations in major markets throughout the country. The market
value of AFEI's investment in Citicasters was $29 million at
December 31, 1994 and $35 million at March 15, 1995.
Summarized financial information for Citicasters follows (in
millions):
1994
Contracts, Broadcasting Licenses
and Other Intangibles $275
Other Assets 128
Long-term Debt 122
Shareholders' Equity 151
Net Revenues $197.0
Operating Income 51.6
Net Earnings 63.1
<PAGE>
<PAGE>
Included in Citicasters' net earnings for the year ended
December 31, 1994, is a net gain of $50.1 million from the
sale of four television stations which, under generally
accepted accounting principles, was excluded in determining
AFEI's equity in Citicasters' earnings.
Investment in General Cable In July 1992, American Premier
distributed to its shareholders approximately 88% of the
stock of General Cable Corporation, a company formed to own
American Premier's wire and cable and heavy equipment
manufacturing businesses. In June 1994, AFEI sold its
investment in General Cable common stock to an unaffiliated
company for $21.6 million cash. AFEI realized a $339,000
pretax gain on the sale.
F-10
<PAGE>
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
C. Long-Term Debt In August 1993, AFEI used the proceeds from
the sale of American Premier common stock to redeem, at par,
all of its $102.5 million principal amount of 13-7/8% notes
and to pay most of its bank debt. AFEI has a revolving
credit agreement under which it may borrow a maximum of
$20 million through December 1997, $16 million of which was
outstanding at December 31, 1994. Loans under the line of
credit bear interest at rates approximating prime and are
collateralized by a pledge of American Premier common stock
having a market value of two times the amount borrowed under
the line. The lender charges an annual fee of 1/4% of the
unused portion of the line of credit. At December 31, 1994,
the estimated fair value of AFEI's long-term debt
approximated carrying value.
AFEI paid cash interest totalling $634,000, $15.2 million and
$17.3 million in 1994, 1993 and 1992, respectively.
D. Shareholders' Equity AFEI's authorized capital includes
5.5 million shares of $1 Par, Non-voting Cumulative Preferred
Stock and 1.5 million shares of $1 Par, Voting Cumulative
Preferred Stock.
Between 1985 and 1989, AFEI granted nonqualified stock
options to certain officers and directors at the fair value
of the underlying AFEI Common Stock (ranging from $19.88 -
$22.50 per share) at the date of grant. The options became
exercisable at the rate of 20% per year commencing one year
after grant, and expire ten years after grant or 90 days
after the holder ceases to be an officer or director of AFEI,
whichever occurs first. No options have been exercised. At
December 31, 1994, options for 462,500 shares were
outstanding and exercisable.
F-11
<PAGE>
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
E. Income Taxes AFEI utilized a substantial portion of its net
operating loss carryforwards ("NOLs") for tax return purposes
to offset its gain on the sale of American Premier stock in
August 1993. At December 31, 1994 AFEI had NOLs for tax
return purposes of approximately $45 million which are
scheduled to expire from 2000 to 2003.
The following is a reconciliation of federal income taxes at
the "statutory" rate of 35% (34% in 1992) and as shown in the
Statement of Earnings (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Earnings (loss) before income taxes
and cumulative effect of investee
accounting changes $2,451 $65,924 ($ 6,297)
Cumulative effect of investee
accounting changes - - 74,344
Earnings before income taxes 2,451 65,924 68,047
Income taxes at statutory rate 858 23,073 23,136
Effect of dividends received deductions (2,617) - (3,177)
Other - 177 -
Total provision (1,759) 23,250 19,959
Less amount applicable to cumulative
effect of investee accounting changes - - (25,277)
Provision (credit) for federal income
taxes as shown in the Statement of
Earnings ($1,759) $23,250 ($ 5,318)
</TABLE>
The dividends received deductions relate to dividends
received or accrued on the stocks of investees.
AFEI's tax agreement with AFC calls for payments to (or
benefits from) AFC based on book taxable income without
regard to temporary differences (differences between the book
basis and the tax basis of assets or liabilities that will
result in future taxable income or deductions). The
following were effects of temporary differences and NOLs at
December 31, (in millions):
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Investment in investees $81.3 $89.0
Tax return NOL (15.7) (3.4)
Other separate company NOL (28.8) (40.5)
</TABLE>
F-12
<PAGE>
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
F. Quarterly Operating Results (Unaudited) The following table
presents quarterly results of operations for the years ended
December 31, 1994 and 1993 (in thousands, except per share
data):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
1994
Revenues $ 4,644 ($10,835) $ 6,581 $ 4,806 $ 5,196
Net earnings (loss) 3,229 (6,738) 4,409 3,310 4,210
Net earnings (loss)
per common share .24 (.51) .33 .26 .32
1993
Revenues $11,761 $24,035 $28,725 $14,252 $78,773
Net earnings 5,940 14,212 17,373 5,149 42,674
Net earnings per
common share .45 1.07 1.31 .38 3.21
See Note B for effects of significant items recognized in individual quarters.
</TABLE>
F-13
<PAGE>
<PAGE>
PART IV
ITEM 14
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements are included in Part II, Item 8.
2. Financial Statement Schedules:
A. Selected Quarterly Financial Data is included in Note
F to AFEI's Financial Statements.
B. The Annual Reports on Form 10-K of American Premier
Underwriters, Inc. (File No. 1-1569) and American
Annuity Group, Inc. (File No. 1-11632) for the period
ended December 31, 1994, are hereby incorporated by
reference.
Copies of these Annual Reports on Form 10-K and all
subsequent reports filed pursuant to Section 13 of the
Securities Exchange Act of 1934 may be obtained from
the Commission's principal office at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of the fees prescribed by the rules and
regulations of the Commission or may be examined
without charge at Room 1024 of the Commission's public
reference facilities at the same address. Copies of
material filed with the Commission may also be
inspected at the following regional offices: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661;
and 7 World Trade Center, Suite 1300, New York, New
York 10048.
C. All other schedules for which provisions are made in
the applicable regulation of the Securities and
Exchange Commission have been omitted as they are not
applicable, not required, or the information required
thereby is set forth in the Financial Statements or
the notes thereto.
3. Exhibits - see Exhibit Index on page E-1.
(b) Reports on Form 8-K filed during the fourth quarter of
1994: None
S-1
<PAGE>
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, American Financial Enterprises, Inc. has
duly caused this Report to be signed on its behalf by the
undersigned, duly authorized.
American Financial Enterprises, Inc.
Signed: March 29, 1995 By: Carl H. Lindner
Carl H. Lindner, Chairman of the
Board and President
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
s/CARL H. LINDNER Chairman of the Board March 29, 1995
Carl H. Lindner
s/JULIUS S. ANREDER Director* March 29, 1995
Julius S. Anreder
s/JAMES E. EVANS Director* March 29, 1995
James E. Evans
s/RONALD F. WALKER Director March 29, 1995
Ronald F. Walker
s/FRED J. RUNK Director, Vice President March 29, 1995
Fred J. Runk and Treasurer (principal financial
and accounting officer)
<FN>
* Member of the Audit Committee
</TABLE>
<PAGE>
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Exhibit Description
<S> <C> <C>
3(a) The Amended and Restated Certificate Incorporated by reference to
of Incorporation Registrant's Annual Report on
Form 10-K for December 31, 1993.
3(b) By-Laws Incorporated by reference to
Registrant's Annual Report on
Form 10-K for December 31, 1993.
4 Credit Agreement dated as of Incorporated by reference to
September 30, 1993 between AFEI and Registrant's Quarterly Report
The First National Bank of Boston on Form 10-Q for September 30,
1993.
10 Management Contract: Stock Option Incorporated by reference to
Agreement Registrant's Annual Report on
Form 10-K for December 31, 1993.
27 Financial Data Schedule (*)
99 Form 10-K of American Premier
Underwriters, Inc. for the
year ended December 31, 1994
99(a) Form 10-K of American Annuity
Group, Inc. for the year ended
December, 31, 1994
<FN>
(*) Copy included in Report filed electronically with the Securities and Exchange Commission.
</TABLE>
E-1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN
FINANCIAL ENTERPRISES, INC. 10-K FOR THE YEAR ENDED DECEMBER 31, 1994 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 275
<SECURITIES> 387,619<F1>
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 390,396
<CURRENT-LIABILITIES> 0
<BONDS> 16,000
<COMMON> 13,291
0
0
<OTHER-SE> 324,944
<TOTAL-LIABILITY-AND-EQUITY> 390,396
<SALES> 0
<TOTAL-REVENUES> 5,196<F2>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,080
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 665
<INCOME-PRETAX> 2,451
<INCOME-TAX> (1,759)
<INCOME-CONTINUING> 4,210
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,210
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<FN>
<F1>"Marketable securities" represents AFEI' investments in investees which are
accounted for under the equity method.
<F2>Included in "Total revenues" is equity in net earnings of investees of $4.8
million.
</FN>
</TABLE>
- ---------------------------------------------------------------
- --
- -----------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
<TABLE>
<CAPTION>
<S> <C>
For the fiscal year ended December 31, 1994 Commission file Number 1-1569
</TABLE>
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
American Premier Underwriters, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-6000765
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One East Fourth Street
Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513)579-6600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, $1 par value. . . . . . . . New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
At March 23, 1995, the aggregate market value of the regis-
trant's voting stock held by non-affiliates was $552 million.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date.
Class Outstanding at March 23, 1995
----- ----------------------------
Common Stock, $1 par value 41,668,536 shares*
The following document has been incorporated by reference
into the Parts of this Report indicated:
Proxy statement involving the election of directors
which the registrant or its successor intends to file
with the Commission within 120 days after December 31,
1994 (Part III)
- ----------------------------
* As of March 23, 1995, 1,374,745 additional shares of
Common Stock remained to be distributed pursuant to the
registrant's 1978 Plan of Reorganization.
- -----------------------------------------------------------------
- -----------------------------------------------------------------
PAGE
<PAGE>
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . 1
Introduction. . . . . . . . . . . . . . . . . 1
Description of Businesses . . . . . . . . . . 2
Insurance . . . . . . . . . . . . . . . 3
Non-Insurance Assets. . . . . . . . . . 13
General . . . . . . . . . . . . . . . . . . . 14
Employees . . . . . . . . . . . . . . . . . . 15
Item 2. Properties. . . . . . . . . . . . . . . . . . 15
Item 3. Legal Proceedings . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . 20
Executive Officers of the Registrant. . . . . . . . . . . 20
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . 22
Item 6. Selected Financial Data . . . . . . . . . . . 23
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . 25
Item 8. Financial Statements and Supplementary Data . 39
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . 39
PART III
Item 10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . 39
Item 11. Executive Compensation. . . . . . . . . . . . 39
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . 39
Item 13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . 39
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . 40
PAGE
<PAGE>
PART I
Item 1. Business
INTRODUCTION
American Premier Underwriters, Inc. (the "Company"), the
Registrant, was incorporated in the Commonwealth of Pennsylvania
in 1846. In March 1994, the Company changed its name from The
Penn Central Corporation to American Premier Underwriters, Inc.
in order to better reflect its identity as a property and
casualty insurance specialist.
The Company's principal operations are conducted by a group
of non-standard private passenger automobile insurance companies
(the "NSA Group") and by Republic Indemnity Company of America
("Republic Indemnity"), a California workers' compensation
insurance company. See "Description of Businesses--Insurance."
On March 23, 1995, the Company's shareholders approved the
Company's acquisition (the "Acquisition") of all of the common
stock of American Financial Corporation ("AFC"). Consummation of
the Acquisition is pending receipt of a private letter ruling
from the Internal Revenue Service regarding the continuation of
the Company's federal income tax consolidated group. Upon
consummation of the Acquisition, the Company will become a wholly
owned subsidiary of American Premier Group, Inc. ("New American
Premier"), a new holding company formed by the Company for the
purpose of acquiring all of the common stock of AFC. Pursuant to
the terms of the Acquisition, (a) the Company will merge with a
subsidiary of New American Premier and each of the 41.7 million
shares of the Company's common stock expected to be then
outstanding will be converted into one share of New American
Premier common stock, (b) AFC will merge with another subsidiary
of New American Premier and each share of AFC common stock will
be converted into 1.435 shares of New American Premier common
stock (after giving effect to a litigation settlement) and (c)
the Company and AFC will become wholly owned subsidiaries of New
American Premier.
The 28.3 million common shares of New American Premier to be
issued in the Acquisition to the common shareholders of AFC,
consisting of Carl H. Lindner, members of his family and trusts
for their benefit, will constitute approximately 55.2% of the
common stock of New American Premier expected to be then
outstanding. Mr. Lindner is Chairman of the Board and Chief
Executive Officer of both the Company and AFC and will continue
in that role with New American Premier. AFC beneficially owns
approximately 18.7 million shares (or approximately 44.8% of the
outstanding shares) of the Company's common stock, which in
effect will be acquired by New American Premier upon consummation
of the Acquisition. Accordingly, the net increase in outstanding
shares resulting from the Acquisition will be 9.6 million shares.
The Acquisition was approved by the Company's Board of Directors
based on the recommendation of a special committee of the
Company's independent directors. In making its recommendation,
the Special Committee relied on an opinion of Furman Selz
Incorporated that the number of New American Premier shares to be
issued to the shareholders of AFC was fair to the shareholders of
the Company (other than AFC) from a financial point of view.
1
PAGE
<PAGE>
AFC is engaged principally in multi-line property and
casualty insurance businesses through its wholly-owned Great
American Insurance Group. Approximately 54% of the Great
American Insurance Group's net written premiums for 1994 came
from specialty lines, with the balance being produced by
commercial and personal lines. AFC also owns 80% of American
Annuity Group, Inc., which through its Great American Life
Insurance Company subsidiary sells tax-deferred annuities
principally to employees of educational institutions. AFC's
assets also include a 46% interest in Chiquita Brands
International, Inc., a world-wide marketer and producer of
bananas and other food products, and a 37.5% interest in
Citicasters Inc., which owns a group of radio and television
broadcast stations.
Largely due to its divestitures of non-insurance assets over
the past two years, the Company had $658.5 million of cash,
short-term investments and marketable securities (other than
those held by its insurance operations) at February 28, 1995.
One of the strategic objectives of the Acquisition was to provide
an opportunity to redeploy most of these Parent Company assets to
produce a higher rate of return than has been available on the
instruments in which they have been invested. This objective is
expected to be achieved through the utilization of up to
approximately $625 million of such assets for the early
retirement of relatively expensive AFC and Company debt. Any
such assets used to retire AFC debt are expected to be provided
for such purpose principally in the form of interest-bearing
loans by the Company to AFC or New American Premier.
In June 1994, the Company sold its last major remaining
non-insurance asset, consisting of notes and stock issued by
General Cable Corporation ("General Cable") that the Company had
retained in its 1992 spin-off of General Cable stock to the
Company's shareholders, for $176.7 million as part of the
acquisition of all of General Cable's stock by Wassall PLC. See
Note 3 of the Notes to Financial Statements of the Company and
its subsidiaries in Item 8 of this Report ("Notes to Financial
Statements").
Between January 1, 1994 and February 13, 1995, the Company
purchased 5,359,297 shares of its common stock for approximately
$135.3 million in open market and privately negotiated
transactions. As a result of the Acquisition, all of the
Company's outstanding common stock will be owned by New American
Premier.
Management expects that the Company's 1994 consolidated
Federal income tax return will report a remaining net operating
loss carryforward currently estimated at $505 million, which will
expire at the end of 1996 unless previously utilized, and
remaining capital loss carryforwards estimated at $325 million,
which will expire in various amounts between 1995 and 1999 unless
previously utilized. See Note 7 of the Notes to Financial
Statements.
DESCRIPTION OF BUSINESSES
Set forth below is a narrative description of the business
operations of the Company's Insurance segment, which is the only
reportable industry segment for which financial information is
presented in the financial statements in Item 8 of this Report.
In addition, information is presented with respect to the
Company's "Non-Insurance Assets."
2
<PAGE>
<PAGE>
Insurance
Introduction
The Company's principal operations are conducted through
specialty property and casualty insurance subsidiaries that
underwrite and market non-standard automobile and workers'
compensation insurance.
The Company's primary objective in its insurance operations
is to achieve underwriting profitability, in addition to earning
income from investment of premiums. The Company has met this
objective in each of the five full years that it has owned its
insurance operations. In 1994, these operations had an overall
generally accepted accounting principles ("GAAP") combined ratio
of 97.0% (representing a 3.0% underwriting profit). On a
statutory basis, the combined ratio was 98.5%, as compared with a
property and casualty statutory insurance average of 109.4% (as
estimated by A.M. Best Company ("A.M. Best")). The Company
experienced net earned premium growth of 22.3% in 1994 while
maintaining underwriting profitability. Management's philosophy
is to refrain from writing business that is not expected to
produce an underwriting profit even if it is necessary to limit
premium growth to do so.
The overall profitability of the Company's insurance
business is a function of both its underwriting profitability and
the performance of its investment portfolio. See "Liquidity and
Capital Resources--Investing and Financing Activity" and
"Analysis of Continuing Operations--Insurance" in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of this Report ("Management's Discussion
and Analysis") and Note 4 of the Notes to Financial Statements
for information regarding investments and investment income of
the Company's Insurance segment.
Non-Standard Automobile Insurance
General. The NSA Group is engaged in the writing of
insurance coverage on private passenger automobile physical
damage and liability policies for "non-standard risks." The NSA
Group has four principal operating units comprised of Atlanta
Casualty Company, Windsor Insurance Company, Infinity Insurance
Company and Leader National Insurance Company and their
respective subsidiaries ("Atlanta Casualty", "Windsor",
"Infinity" and "Leader National", respectively) and includes a
total of thirteen domestic insurance companies. Atlanta
Casualty, Windsor, Infinity and Leader National are rated A+
(Superior), A+ (Superior), A (Excellent) and A- (Excellent),
respectively, by A.M. Best, which rates insurance companies based
upon factors of concern to policyholders.
Non-standard risks are those individuals who are unable to
obtain insurance through standard market carriers due to factors
such as age, record of prior accidents, driving violations,
particular occupation or type of vehicle. Premium rates for
non-standard risks are generally higher than for standard risks.
Total private passenger automobile insurance premiums written by
insurance carriers in the United States in 1994 have been
estimated by A.M. Best to be approximately $98 billion. Because
it can be viewed as a residual market, the size of the
non-standard private passenger automobile insurance
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market changes with the insurance environment and grows when
standard coverage becomes more restrictive. Although this
factor, as well as industry differences in the criteria which
distinguish standard from non-standard insurance, make it
difficult to make estimates of non-standard market size, NSA
Group management believes that the voluntary non-standard market
has accounted for approximately 12% to 16% of total private
passenger automobile insurance premiums written in recent years.
State "assigned risk" plans also service this market as an
alternative to voluntary private insurance.
The NSA Group's net written premiums increased from $902
million in 1993 to $1,154 million in 1994. The NSA Group
attributes its premium growth in recent years primarily to entry
into additional states, increased market penetration in its
existing states, overall growth in the non-standard market and
the purchase of Leader National. Management of the Company
believes the non-standard market has experienced growth in recent
years as standard insurers have become more restrictive in the
types of risks they will write. The NSA Group writes business in
41 states and holds licenses to write policies in 48 states and
the District of Columbia. See "Results of Operations--Insurance
- --NSA Group" in Management's Discussion and Analysis regarding
conditions which arose in 1994 which may affect the rate of the
NSA Group's future premium growth.
The U.S. geographic distribution of the NSA Group's gross
written premiums in 1994 compared to 1993, which includes Leader
National's gross written premiums from its May 1993 date of
acquisition by the Company, was as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
(Dollars in millions)
<S> <C> <C> <C> <C>
Texas ..................... $ 145.2 13.1% $ 96.5 10.7%
Georgia ................... 128.5 11.6 110.7 12.3
Florida ................... 126.0 11.4 121.1 13.5
California ................ 72.0 6.5 54.0 6.0
Arizona ................... 63.3 5.7 53.7 6.0
Tennessee ................. 60.4 5.4 41.3 4.6
Indiana ................... 45.2 4.1 29.3 3.3
Alabama ................... 44.2 4.0 34.2 3.8
Oklahoma .................. 38.9 3.5 28.1 3.1
Mississippi ............... 38.7 3.5 28.4 3.2
All Other U.S. ............ 346.5 31.2 301.3 33.5
TOTAL...................... $1,108.9 100.0% $898.6 100.0%
</TABLE>
In addition, the Company owns 51% of the stock of a 1993 start-up
insurance company in the United Kingdom which specializes in
non-standard automobile insurance. During 1994, this company had
gross written premiums of $63.1 million ($23.7 million in 1993),
of which $26.6 million ($9.8 million in 1993) was assumed by one
of the Company's wholly owned insurance subsidiaries.
The NSA Group management believes that it has achieved
underwriting success over the past several years as compared to
the automobile insurance industry as a whole due, in part, to the
refinement of various risk profiles,
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thereby dividing the consumer market into more defined segments
which can either be excluded from coverage or priced properly.
The NSA Group also generally writes policies of short duration
which allow more frequent rating evaluations of individual risks,
providing management greater flexibility in the ongoing
assessment of the business. In addition, the NSA Group has
implemented cost control measures both in the underwriting and
claims handling areas. See "Results of Operations--Insurance--
NSA Group" in Management's Discussion and Analysis for
information regarding the underwriting profitability of the NSA
Group over the past three years.
Marketing. Each of the four principal units in the NSA
Group is responsible for its own marketing, sales, underwriting
and claims processing. Sales efforts are primarily directed
toward independent agents to convince them to select an NSA Group
insurance company for their customers. These units each write
policies through approximately 5,000 to 12,000 independent
agents.
Of the approximately 1,010,000 NSA Group policies in force
at December 31, 1994, approximately 11% had policy limits in
excess of $50,000 per occurrence. Most NSA Group policies are
written for policy periods of six months or less, and some are as
short as one month.
Reinsurance. Due in part to the limited exposure on
individual policies, none of the insurance carriers in the NSA
Group is involved to a material degree in reinsuring risks with
third party insurance companies. Risks written by NSA Group
companies in excess of certain limits are in some cases reinsured
with a major reinsurance company. In general, the risk retained
by the NSA Group companies is $500,000 of ultimate net loss for
each occurrence and certain portions of ultimate net losses in
excess of such limits. Reinsurance premiums paid by the NSA Group
in 1994 amounted to less than 1% of net written premiums of the
NSA Group for the period. See Notes 4 and 15 of the Notes to
Financial Statements for further information regarding
reinsurance.
Competition. A large number of national, regional and local
insurers write non-standard private passenger automobile
insurance coverage. Insurers in this market generally compete on
the basis of price (including differentiation on liability
limits, variety of coverages offered and deductibles), geographic
availability and ease of enrollment and, to a lesser extent,
reputation for claims handling, financial stability and customer
service. NSA Group management believes that sophisticated data
analysis for refinement of risk profiles has helped the NSA Group
to compete successfully on the basis of price without negatively
affecting underwriting profitability. The NSA Group attempts to
provide selected pricing for a wider spectrum of risks and with a
greater variety of payment options, deductibles and limits of
liability than are offered by many of its competitors. The NSA
Group does not issue any participating policies and does not pay
dividends to policyholders, except for Leader National, which
paid policyholders $31,000 in dividends in 1994 pursuant to
certain commercial vehicle programs.
Regulation. Like all insurance companies, including
Republic Indemnity discussed below under "Workers' Compensation
Insurance," the NSA Group insurance companies are subject to
regulation in the jurisdictions in which they do business. In
general, the insurance laws of the various states
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establish regulatory agencies with broad administrative powers
governing, among other things, premium rates, solvency standards,
licensing of insurers, agents and brokers, trade practices, forms
of policies, maintenance of specified reserves and capital for
the protection of policyholders, deposits of securities for the
benefit of policyholders, investment activities and relationships
between insurance subsidiaries and their parents and affiliates.
Material transactions between insurance subsidiaries and their
parents and affiliates generally must be disclosed and prior
approval of the applicable insurance regulatory authorities
generally is required for any such transaction which may be
deemed to be extraordinary. In addition, while regulations
differ from state to state, they typically restrict the maximum
amount of dividends that may be paid by an insurer to its
shareholders in any twelve-month period without advance
regulatory approval. Such limitations are generally based on
earnings or statutory surplus. Under applicable restrictions,
the maximum amount of dividends that may be paid by the NSA Group
to the Company during 1995 without seeking regulatory clearance
is $40.1 million.
Most states have created insurance guarantee associations to
provide for the payment of claims for which insolvent insurers
are liable but which cannot be paid out of such insolvent
insurers' assets. In applicable states, insurance companies,
including the NSA Group companies, are subject to assessment by
such associations, generally to the extent of such companies' pro
rata share of such claims based on premiums written in the
particular line of business in the year preceding the assessment,
and subject to certain ceilings on the amount of such assessments
in any year. In 1994, the NSA Group companies paid assessments
to such associations aggregating approximately $800,000.
In addition, many states have created "assigned risk" plans,
joint underwriting associations and other similar arrangements to
provide state mandated minimum levels of automobile liability
coverage to drivers whose driving records or other relevant
characteristics make it difficult for them to obtain insurance in
the voluntary market. Automobile liability insurers in those
states are required to sell such coverage to a proportionate
number (generally based on the insurer's share of the automobile
liability insurance market in such state) of those drivers
applying for placement as assigned risks. Assigned risks
accounted for less than 1% of net written premiums of the NSA
Group companies in 1994. Premium rates for assigned risk
business are established by the regulators of the particular
state plan and are frequently inadequate in relation to the risks
insured, resulting in underwriting losses.
In 1994, the NSA Group received approximately $72.0 million
in net written premiums from California. Prior to 1989,
automobile insurance rates in California, other than assigned
risk rates discussed above, were not subject to approval by any
governmental agency and generally were determined by competitive
market forces. In November 1988, Proposition 103 was approved by
the California voters. It mandated important changes in the
California insurance market, including the requirement that
insurance companies roll back automobile insurance rates to 80%
of the November 1987 levels, maintain those rates for one year
and obtain prior approval of rates beginning in 1989. The
Company's acquisition of the NSA Group in 1990 was structured to
protect the Company against the consequences of any rate rollback
applied to the acquired operations. As for the prior approval
requirements, the company through which
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the NSA Group obtained the majority of its net written premiums
in California increased its rates in August 1989; disposition of
its applications for additional rate increases had, as with other
companies, been suspended pending adoption of regulations
implementing Proposition 103. However, current legislation in
California generally provides that applications for rate
increases made on or after July 1, 1993 will be deemed approved
after 180 days unless disapproved by the Department of Insurance.
The Company is unable to predict whether or at what level future
rate increases, when applied for, may be approved. Over time, the
failure to receive appropriate rate increases could result in
reduced underwriting profitability in California for the NSA
Group. In addition, the Company could experience loss of premium
volume in California as a result of actions it would take to
maintain such profitability.
The operations of the NSA Group are dependent on the laws
and regulations of the states in which its insurance companies
are domiciled or licensed or otherwise conduct business, and
changes in those laws and regulations have the potential to
materially affect the revenues and expenses of the NSA Group.
The Company is unable to predict whether or when Proposition
103-type initiatives or similar laws or regulations may be
adopted or enacted in other states or what the impact of such
developments would be on the future operations and revenues of
its insurance businesses in such states.
Workers' Compensation Insurance
General. Republic Indemnity is engaged in the sale of
workers' compensation insurance in California. It also began
writing in Arizona in 1993 and obtained approximately 1% of its
gross written premiums from that state in 1994. Republic
Indemnity is currently rated A+ (Superior) by A.M. Best.
Workers' compensation insurance policies provide coverage
for workers' compensation and employer's liability. The workers'
compensation portion of the coverage provides for statutorily
prescribed benefits that employers are required to pay to
employees who are injured in the course of employment including,
among other things, temporary or permanent disability benefits,
death benefits, medical and hospital expenses and expenses of
vocational rehabilitation. The benefits payable and the duration
of such benefits are set by statute, and vary with the nature and
severity of the injury or disease and the wages, occupation and
age of the employee. The employer's liability portion of the
coverage provides protection to an employer for its liability for
losses suffered by its employees which are not included within
the statutorily prescribed workers' compensation coverage.
Republic Indemnity generally issues policies for one-year periods.
Workers' compensation insurance operations are affected by
employment trends in their markets, litigation activities, legal
and medical costs, use of vocational rehabilitation programs and
the provision of benefits for traditionally non-occupational
injuries, such as stress and trauma claims. While higher claims
costs are ultimately reflected in premium rates, there
historically has been a time lag of varying periods between the
incurrence of higher claims costs and premium rate adjustments,
which may unfavorably affect underwriting results.
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See "Results of Operations--Insurance--Republic Indemnity"
in Management's Discussion and Analysis for information regarding
the underwriting profitability of Republic Indemnity over the
past three years.
Marketing. Republic Indemnity writes insurance through
approximately 630 independent property and casualty insurance
brokers. In 1994, none of these produced more than 4.4% of total
premiums. The largest three of these produced approximately 9%
of total premiums. Republic Indemnity has in excess of 12,650
policies in force, the largest of which represents less than
1% of net premiums written.
Reinsurance. In its normal course of business and in
accordance with industry practice, Republic Indemnity reinsures a
portion of its exposure with other insurance companies so as to
limit its maximum loss arising out of any one occurrence.
Reinsurance does not legally discharge the original insurer from
primary liability. Republic Indemnity retains the first $1.5
million of each loss, the next $1.5 million of each loss is
reinsured with a major reinsurance company, the next $2 million
of each loss is shared equally by Republic Indemnity and the
reinsurance company and the remaining $145 million of each loss
is covered by reinsurance provided by a group of more than 50
reinsurance companies. Premiums for reinsurance ceded by
Republic Indemnity in 1994 were 0.9% of net written premiums for
the period. Republic Indemnity does not assume reinsurance,
except as an accommodation to policyholders who have a small
percentage of their employees outside the state of California.
See Notes 4 and 15 of the Notes to Financial Statements for
further information on reinsurance.
Competition. Republic Indemnity competes with both the
California State Compensation Insurance Fund (the "State Fund")
and over 275 other companies writing workers' compensation
insurance in California. In 1993, the State Fund wrote
approximately $1.7 billion in direct written premiums, which was
approximately 19.0% of the insured workers' compensation market
in California. In addition, many employers are self-insured.
According to published sources, no other company wrote in excess
of $545 million in direct written premiums in 1993. Republic
Indemnity wrote $469 million in statutory direct written premiums
in 1993. With a market share of approximately 5.2% in 1993, not
including risks self-insured by employers, Republic Indemnity
believes that it is currently the third largest writer of
workers' compensation insurance in California, including the
State Fund.
Approximately 89% of net premiums written by Republic
Indemnity in 1994 were from the sale of policies that provide for
the discretionary payment of dividends to policyholders as a
refund of premiums paid when Republic Indemnity's experience with
such policyholders has been more favorable than certain specified
levels and Republic Indemnity has had favorable financial
results.
Prior to the repeal of the California workers' compensation
insurance minimum rate law effective January 1, 1995 discussed
under "--Regulation" below, competition was based primarily on an
insurer's reputation for paying dividends to policyholders.
Management believes that Republic Indemnity's record and
reputation for paying relatively high policyholder dividends have
enhanced its competitive position in the past. With the repeal
of the minimum rate law effective January 1, 1995, the premium
rate levels offered by an insurer, rather than its reputation for
paying policyholder dividends, have
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become the most important factor affecting competition. For
further discussion of the impact of such repeal on Republic
Indemnity, see "Results of Operations--Insurance--Republic
Indemnity" in Management's Discussion and Analysis.
Other competitive factors include loss control services,
claims service, service to brokers and commission schedules.
While many companies, including certain of the largest writers,
specialize in the writing of California workers' compensation
insurance, Republic Indemnity believes it has a competitive
advantage over certain other companies offering all lines of
insurance in that its specialization in the workers' compensation
field enables it to concentrate on that business with a favorable
effect upon operations. Republic Indemnity may be at a
competitive disadvantage when businesses that purchase general
property and casualty insurance are encouraged by other insurers
to place their workers' compensation insurance as part of an
overall insurance package. Although Republic Indemnity is one of
the largest writers of workers' compensation insurance in
California, certain of its competitors are larger and/or have
greater resources than Republic Indemnity.
Regulation. Republic Indemnity's insurance activities are
regulated by the California Department of Insurance for the
benefit of policyholders. The Department of Insurance has broad
regulatory, supervisory and administrative powers along the lines
of those promulgated by most states relating to the activities of
their domestically incorporated insurers and the conduct of all
insurance business within their respective jurisdictions, as
described more fully under "Non-Standard Automobile Insurance"
above. Prior to January 1, 1995, minimum premium rates for
workers' compensation insurance were determined by the California
Insurance Commissioner (the "Insurance Commissioner") based in
part upon recommendations of the Workers' Compensation Insurance
Rating Bureau of California.
In July 1993, California enacted legislation (the "Reform
Legislation") effecting an immediate overall 7% reduction in
workers' compensation insurance premium rates and replacing the
workers' compensation insurance minimum rate law, effective
January 1, 1995, with a procedure permitting insurers to use any
rate within 30 days after filing it with the Insurance
Commissioner unless the rate is disapproved by the Insurance
Commissioner. On December 1, 1993, the Insurance Commissioner
ordered an additional 12.7% minimum premium rate decrease
effective January 1, 1994 for new and renewal policies entered
into on and after January 1, 1994. On September 21, 1994, the
Insurance Commissioner approved an additional 16% minimum premium
rate decrease effective October 1, 1994 for all new and renewal
policies with anniversary dates on or after October 1, 1994 as
well as the unexpired portion of policies incepting on or after
January 1, 1994. See "Results of Operations--Insurance
- --Republic Indemnity" in Management's Discussion and Analysis for
a discussion of the impact on Republic Indemnity of these rate
reductions and the repeal of the minimum rate law.
As a result of the Reform Legislation's provisions
permitting employers to require injured workers to obtain medical
services from "managed" health care organizations under
prescribed circumstances, several health care organizations have
become affiliated, contractually and otherwise, with certain
workers' compensation insurers. During 1994, Republic Indemnity
entered into a managed care arrangement with a health care
organization. The
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Company continues to evaluate the implications of these
provisions, as well as the resulting affiliations, but is unable
to predict their ultimate impact on its workers' compensation
insurance operations.
While Republic Indemnity has operated on a profitable basis,
no assurances can be given that it could continue to do so in the
face of adverse conditions in the California workers'
compensation market.
Shareholder dividends paid within any twelve-month period
from a California property and casualty insurance company to its
parent without regulatory approval cannot exceed the greater of
10% of the insurer's statutory policyholders' surplus as of the
preceding December 31, or 100% of its net income for the
preceding calendar year, a limitation during 1995 of $42.2
million in the aggregate for Republic Indemnity.
Due to the existence of the State Fund, California does not
require licensed insurers to participate in any involuntary pools
or assigned risk plans for workers' compensation insurance.
California has guarantee regulations to protect policyholders of
insolvent insurance companies. In California, an insurer cannot
be assessed an amount greater than 1% of its premiums written in
the preceding year, and the full amount is required to be
recovered through a mandated surcharge to policyholders.
Premiums written under workers' compensation policies are subject
to assessment only with respect to covered losses incurred by the
insolvent insurer under workers' compensation policies. There
were no such assessments for policy year 1994.
Proposition 103, which is described more fully under
"Non-Standard Automobile Insurance" above, does not affect
workers' compensation insurance as directly as other lines of
business principally because its rate rollback feature does not
apply to workers' compensation insurance.
Reinsurance Subsidiary
Penn Central Reinsurance Company, a subsidiary of the
Company, commenced the writing of reinsurance in 1990. Earned
premiums in 1994 and 1993 were approximately $2.2 million and
$10.7 million, respectively.
Liability for Property-Casualty Losses and Loss Adjustment
Expenses
The consolidated financial statements of the Company and its
subsidiaries in Item 8 of this Report include the estimated
liability for unpaid losses and loss adjustment expenses ("LAE")
of the Company's insurance subsidiaries. The liabilities for
losses and LAE are determined using actuarial and statistical
procedures and represent undiscounted estimates of the ultimate
net cost of all unpaid losses and LAE incurred through December
31 of each year. These estimates do not represent an exact
calculation of liabilities but rather involve actuarial
projections at a given time of what the Company expects the
ultimate settlement and administration of claims will cost based
on facts and circumstances then known, estimates of incurred but
not reported losses, predictions of future events, estimates of
future trends in claims' severity and judicial theories of
liability as well as other factors such as inflation and are
subject to the effect of future trends on claim settlement.
These estimates are continually reviewed and adjusted as
experience develops and new information becomes known. In light
of present facts and current legal
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interpretations, management believes that adequate provision has
been made for loss and LAE reserves. However, establishment of
appropriate reserves is an inherently uncertain process, and
there can be no certainty that currently established reserves
will prove adequate in light of subsequent actual experience.
Future loss development could require reserves for prior periods
to be increased, which would adversely impact earnings in future
periods.
Increases in claim payments are caused by a number of
factors that vary with the individual types of policies written.
Future costs of claims are projected based on historical trends
adjusted for changes in underwriting standards, policy
provisions, the anticipated effect of inflation and general
economic trends. These anticipated trends are monitored based on
actual development and are reflected in estimates of ultimate
claim costs.
The following table provides an analysis of changes in the
estimated liability for losses and LAE over the past three years,
net of all reinsurance activity, in accordance with GAAP:
<TABLE>
<CAPTION>
1994 1993 1992
(Dollars in millions)
<S> <C> <C> <C>
Balance at beginning of year, net of
reinsurance......................... $ 916.3 $763.5 $663.9
Provision for losses and LAE
occurring in the current year....... 1,169.5 914.7 706.8
Net decrease in provision for claims
occurring in prior years............ (78.8) (57.8) (20.2)
1,090.7 856.9 686.6
Payments for losses and LAE occurring during:
Current year........................ 553.6 413.0 294.7
Prior years ........................ 386.5 345.1 292.3
940.1 758.1 587.0
Loss and LAE reserves of subsidiaries
purchased .......................... 13.1 54.0 --
Balance at end of year, net of
reinsurance......................... 1,080.0 916.3 763.5
Reinsurance receivable on unpaid
losses and LAE at end of year (1)... 50.9 45.1 --
Balance at end of period, gross of
reinsurance receivable (1) ........ $1,130.9 $961.4 $763.5
- ------------------------
(1) New accounting rules effective in 1993 require that
insurance
liabilities be reported without deducting reinsurance
amounts.
See Note 1 of Notes to Financial Statements.
</TABLE>
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The decreases in the provision for claims occurring in prior
years result from reductions in the estimated ultimate losses and
LAE related to such claims.
The difference between the liability for losses and LAE
reported in the annual statements filed with the state insurance
departments in accordance with statutory accounting principles
and that reported in the consolidated financial statements in
Item 8 of this Report in accordance with GAAP is $62.5 million at
December 31, 1994, which is comprised of a $50.9 million
reinsurance receivable on unpaid losses and LAE at December 31,
1994 plus an $11.6 million liability for losses and LAE (net of
$4.2 million of reinsurance) of a consolidated foreign subsidiary
at December 31, 1994.
The following table presents the development of the
liability for losses and LAE net of reinsurance for 1989 (the
year the Company acquired its first insurance subsidiary) through
1994. The top line of the table shows the estimated liability
for unpaid losses and LAE recorded at the end of the indicated
years. The second line shows the liability as re-estimated at
December 31, 1994. The remainder of the table presents
development as percentages of the estimated liability. The
development results from additional information and experience in
subsequent years. The middle line shows a cumulative redundancy
which represents the aggregate percentage decrease in the
liability initially estimated. The lower portion of the table
indicates the cumulative amounts paid as of successive periods as
a percentage of the original liability.
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid
losses and LAE:
As originally estimated $369.1 $601.7 $663.9 $763.5 $916.3 $1,080.0
As re-estimated at
December 31, 1994 $312.6 $539.1 $600.2 $671.1 $837.5
Liability re-estimated
as of:
One year later ..... 97.0% 96.5% 97.0% 92.4% 91.4%
Two years later .... 89.7% 93.0% 93.4% 87.9%
Three years later .. 85.7% 91.0% 90.4%
Four years later ... 85.5% 89.6%
Five years later ... 84.7%
Cumulative Redundancy.. 15.3% 10.4% 9.6% 12.1% 8.6% N/A
Cumulative paid as of:
One year later ..... 19.5% 43.0% 44.1% 40.6% 40.9%
Two years later .... 49.1% 64.4% 64.5% 59.3%
Three years later .. 64.6% 75.2% 74.2%
Four years later ... 71.4% 79.8%
Five years later ... 75.1%
</TABLE>
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The preceding table does not present accident or policy year
development data. As indicated in the preceding table, the
Company has developed redundancies for all periods presented.
These redundancies were offset, in part, by deficiencies related
to workers' compensation in the 1990 and 1991 accident years.
Furthermore, in evaluating the re-estimated liability and
cumulative redundancy, it should be noted that each percentage
includes the effects of changes in amounts for prior periods.
For example, a redundancy related to losses settled in 1994, but
incurred in 1989, would be included in the re-estimated liability
and cumulative redundancy percentage for each of the years 1989
through 1993. Conditions and trends that have affected
development of the liability in the past may not necessarily
exist in the future. Accordingly, it is not appropriate to
extrapolate future redundancies based on this table.
Non-Insurance Assets
Businesses Divested
During 1994 and 1995, the Company completed the divestiture
of all of its non-insurance subsidiaries.
In March 1994, the Company sold its Sperry Rail unit, which
provided track testing services for the railroad industry, for
$9.8 million in cash. In May 1994, the Company sold its Marathon
Power Technologies Company unit, which manufactured vented-cell
nickel-cadmium aircraft batteries, for $10.6 million in cash plus
a $2.5 million note. In June 1994, the Company sold its 53.5%
common stock interest in DI Industries, Inc., which provided
onshore contract oil and gas well drilling services, for $14.5
million in cash. In February 1995, the Company sold its
Apparatus unit, which manufactured aerial lift trucks, for $7.3
million in cash plus an $8.5 million note, subject to a post-
closing adjustment.
See Note 3 of Notes to Financial Statements for information
with respect to the revenues, operating income and carrying value
of the businesses sold.
Other
Coal Properties. The Company and a subsidiary own fee
interests in coal properties in Illinois, Ohio and Pennsylvania.
Most of these properties are leased at various royalty rates to
coal mining companies under long-term arrangements, including
fixed-term leases with renewal options and exhaustion leases.
The Company does not produce, prepare or sell coal or conduct
mining operations.
Eight mines operated by lessees of the leased coal
properties supply steam coal for electrical utilities or
industrial customers. The future level of royalties above
certain minimum and advance royalties from the reserves presently
under lease will depend upon the rate of mining, the change in
certain price indices and, in some instances, the sales price of
the coal. During 1994, the leased coal properties produced
royalties of $6.2 million.
GCT and Related Development Rights. Subsidiaries of the
Company own Grand Central Terminal ("GCT") in New York City and
rights (the "Development
13
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<PAGE>
Rights") to develop or transfer approximately 1.7 million square
feet of floor space in the GCT area. The Development Rights are
derived from such subsidiaries' ownership of the land upon which
GCT is constructed. Utilization or transfer of such rights
requires the approval of certain New York City agencies. If
required governmental approvals are obtained, the floor space may
be developed on certain sites in the vicinity of GCT, in each
case subject to the requirements of applicable law.
The Company leases GCT (but not the Development Rights) and
its related Harlem and Hudson rail lines to the Metropolitan
Transportation Authority of the State of New York (the "MTA").
In April 1994, the Company agreed to extend the end of the term
lease from the year 2032 to 2274 and to grant an option to the
MTA to purchase the leased property in 25 years. In return, the
Company received consideration having an estimated present value
of $55 million, consisting principally of a $5 million cash
payment and an increase in future rental payments to the Company
of approximately $2 million per year. Under the agreement with
the MTA, the Company relinquished its right to construct an
office building over GCT. However, the Company retained its
rights to transfer the Development Rights from GCT to other sites
in the surrounding area.
The Company has been party to a contract, originally entered
into in 1983, for the sale of 1.5 million square feet of
Development Rights to a partnership controlled by The First
Boston Corporation (the "Partnership") for use at one or more
sites neighboring GCT. Litigation brought by the Partnership
challenging the New York City Planning Commission's denial of a
special permit to transfer a portion of such Development Rights
to a particular site was dismissed in 1991. That dismissal
became final in May 1994 and, as a result, the contract will
expire in accordance with its terms in May 1995.
Real Estate. Subsidiaries of the Company own certain land
and rights associated with the potential development of areas
adjacent to, and above, the rail line at the Scarsdale, New York
commuter railroad station. The Village of Scarsdale has
designated a subsidiary of the Company as preferred developer for
the construction of a residential and retail use project adjacent
to such station. Pursuant to the agreement with the MTA
discussed above under "GCT and Related Development Rights," in
April 1994, subsidiaries of the Company transferred all other
rights to develop areas adjacent to, or above, the Harlem and
Hudson rail lines to the MTA.
The Company also has a program for the sale of real estate
assets that relate to its former rail operations and other
surplus land and facilities.
Oil and Gas Properties. The Company owns certain oil and
gas properties, located primarily in Oklahoma.
Management Company. Buckeye Management Company, a
subsidiary of the Company, manages as the sole general partner
of, and owns a 2% economic interest in, Buckeye Partners, L.P.,
which owns and operates refined petroleum products and crude oil
pipelines in the northeast and midwestern United States.
GENERAL
Compliance with federal, state and local environmental
protection laws
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<PAGE>
during 1994 had no material effect upon the Company's capital
expenditures, earnings or competitive position, and management
anticipates no such material effects resulting from compliance
during 1995. However, certain claims are pending against the
Company relating to environmental conditions allegedly
attributable to the railroad operations of its predecessor, Penn
Central Transportation Company, as described below under Item
3--"Legal Proceedings."
EMPLOYEES
As of February 28, 1995, the approximate number of employees
of the Company and its consolidated subsidiaries was:
Insurance ....................................... 3,600
Non-Insurance ................................... 600
Corporate........................................ 100
Total ........................................... 4,300
Approximately 170 of these employees, all in Non-Insurance
businesses, are covered by collective bargaining agreements.
Item 2. Properties
The Company's operations are conducted principally within
the United States, and the Company believes that its principal
facilities, all of which are owned unless otherwise noted, are
maintained in good operating condition and are adequate for the
present needs of its operations.
The principal facilities by reportable industry segment and
other operations are as follows:
Insurance
Non-Standard Automobile
The NSA Group's principal offices are leased facilities
located in Birmingham, Alabama (68,000 square feet), Atlanta
(81,000 square feet) and Norcross (147,000 square feet), Georgia
and Independence, Ohio (43,000 square feet). These leases expire
in 2005, 1998, 2000 and 1998, respectively.
Workers' Compensation
Republic Indemnity leases office space in Encino (72,000
square feet), San Francisco (57,000 square feet), San Diego
(11,000 square feet) and Sacramento (9,000 square feet),
California, and Phoenix, Arizona (3,000 square feet) under
agreements expiring in 1996, 2001, 1998, 1996 and 2000,
respectively.
Non-Insurance Assets
Coal Properties
The Company and a subsidiary own fee interests in
approximately 161,000 acres of coal properties in Illinois, Ohio
and Pennsylvania. Approximately
15
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<PAGE>
105,000 acres of these properties remain leased at various
royalty rates to coal mining companies under long-term
arrangements, including fixed-term leases with renewal options
and exhaustion leases.
GCT and Related Development Rights
Subsidiaries of the Company own GCT and rights to develop
floor space in the Grand Central Terminal area of New York City,
as discussed under Item 1--"Description of Business--Non-
Insurance Assets--GCT and Related Development Rights."
Real Estate
The Company's real estate inventory at December 31, 1994
included approximately 13,000 acres of real estate (including
approximately 50 acres with surplus facilities formerly used in
divested operations) spread throughout 13 states.
Oil and Gas Properties
All of the Company's oil and gas properties are located in
the United States. As of December 31, 1994, the Company had
interests in 56 gross (27 net) producing oil wells and 4 gross (1
net) producing gas wells and 4,800 gross (2,238 net) developed
and 12,007 gross (2,929 net) undeveloped acres.
Item 3. Legal Proceedings
Pre-Reorganization Matters
The following matters arose out of railroad operations
disposed of by the Company's predecessor, Penn Central
Transportation Company ("PCTC"), prior to its bankruptcy
reorganization in 1978 and, accordingly, any ultimate liability
arising therefrom in excess of previously established loss
accruals would be attributable to pre-reorganization events and
circumstances. In accordance with the Company's pre-
reorganization accounting policy, any such ultimate liability
will reduce the Company's capital surplus and shareholders'
equity, but will not be charged to income. See Note 1 of the
Notes to Financial Statements. This accounting policy will not
be available to New American Premier, which is the Company's
parent as a result of the Acquisition described under
Item 1--"Business--Introduction," in its consolidated financial
statements.
USX Litigation
In May 1994, USX Corporation ("USX") and its former
subsidiary, Bessemer and Lake Erie Railroad Company ("B&LE"),
filed actions (the "Actions") in the U.S. District Court for the
Western District of Pennsylvania in Pittsburgh and in the Ohio
State Court of Common Pleas for Cuyahoga County, Ohio against the
Company, as successor to the railroad business operated by PCTC
prior to 1976. In both Actions, USX and B&LE seek
indemnification and contribution for all or a portion of the
approximately $600 million that USX paid on B&LE's behalf in
satisfaction of a judgment entered in 1991 against B&LE (the
"B&LE Judgment")
16
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<PAGE>
in certain litigation (the "Iron Ore Litigation") before the U.S.
District Court for the Eastern District of Pennsylvania in
Philadelphia that has been upheld on appeal and become final.
The B&LE Judgment was rendered against B&LE for its participation
in an unlawful antitrust conspiracy among certain railroads
commencing in the 1950's and continuing through the 1970's to
deny competitive rail rates for the transportation of iron ore
from certain lower Lake Erie docks to steel producing areas in
the Midwest. USX and B&LE allege in both Actions that B&LE's
liability for the B&LE Judgment was attributable to PCTC's
alleged activities in furtherance of the conspiracy.
The Company believes that both Actions are without merit.
The Company was originally, like B&LE, a co-defendant in the Iron
Ore Litigation. However, all claims against the Company in the
Iron Ore Litigation were dismissed in the 1980's based on rulings
that PCTC could not be held liable for such claims because (1)
any liability based on PCTC's activities prior to October 24,
1978 was discharged by the consummation order in PCTC's
bankruptcy reorganization proceedings (the "Bankruptcy
Consummation Order") and (2) there was no evidence that PCTC or
the Company engaged in any activities in furtherance of the
alleged conspiracy during the period following October 24, 1978.
The Company believes that, as a matter of law, USX and B&LE
cannot avoid the effect of that dismissal by bringing its actions
for indemnification and contribution, and that the Actions will
also be dismissed. In addition, the Company has other
substantial defenses which it believes are independent bases for
dismissal of the Actions, including the jury findings in the Iron
Ore Litigation that B&LE's participation in the alleged
conspiracy was intentional, which the Company believes would bar
any claims for indemnification or contribution against the
Company.
In June 1994, the Company petitioned the U.S. District Court
for the Eastern District of Pennsylvania for an order directing
USX and B&LE to dismiss the Actions because they violate the
Bankruptcy Consummation Order, which contains an injunction
against the assertion of claims against the Company based on
PCTC's pre-consummation conduct.
In October 1994, the District Court enjoined USX and B&LE
from continuing the Actions against the Company, ruling that
their claims are barred by the Bankruptcy Consummation Order.
USX and B&LE have appealed the District Court's ruling to the
U.S. Court of Appeals for the Third Circuit.
Environmental Matters
The Company is a party or named as a potentially responsible
party in a number of proceedings and claims by regulatory
agencies and private parties under various environmental
protection laws, including the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), seeking to
impose responsibility on the Company for hazardous waste
remediation costs at certain railroad sites formerly owned by
PCTC and at certain other sites where hazardous waste allegedly
generated by PCTC's railroad operations is present. It is
difficult to estimate the Company's liability for remediation
costs at these sites for a number of reasons, including the
number and financial resources of other potentially responsible
parties involved at a given site, the varying availability of
evidence by which to allocate responsibility among such parties,
the wide range of costs for possible remediation alternatives,
changing technology and the period of time over which these
matters develop. Nevertheless, the Company believes that its
previously established loss
17
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<PAGE>
accruals for potential pre-reorganization environmental
liabilities at such sites (including those established as a
result of the Special Court decision discussed below) are
adequate to cover the probable amount of such liabilities, based
on the Company's estimates of remediation costs and related
expenses at such sites and its estimates of the portions of such
costs that will be borne by other parties. Such estimates are
based on information currently available to the Company and are
subject to future change as additional information becomes
available. Such estimates do not assume any recovery from the
Company's insurance carriers, although the Company does intend to
seek reimbursement from certain insurers for such remediation
costs as the Company incurs.
In August 1994, the Special Court created by the Regional
Rail Reorganization Act of 1973 (the "Rail Act") ruled, in a
decision that has become final, that CERCLA claims against the
Company with respect to the railroad sites it transferred to
Consolidated Rail Corporation ("Conrail") in 1976 pursuant to the
Rail Act are not barred by the terms of the transfer or by the
settlement of the valuation proceedings related to the transfer.
In terms of potential liability to the Company, the most
significant of the sites affected by the Special Court decision
is the railyard at Paoli, Pennsylvania ("Paoli Yard") formerly
owned by PCTC. A Record of Decision issued by the U.S.
Environmental Protection Agency in 1992 presented a final
selected remedial action for clean-up of polychlorinated
biphenyls ("PCB's") at Paoli Yard having an estimated cost of
approximately $28 million. As a result of the Special Court
decision, the Company has accrued a substantial portion of such
estimated clean-up costs in its financial statements (in addition
to related expenses) but has not accrued the entire amount
because it believes it is probable that other parties, including
Conrail, will be responsible for substantial percentages of the
clean-up costs by virtue of their operation of electrified
railroad cars at Paoli Yard that discharged PCB's at higher
levels than discharged by cars operated by PCTC.
In management's opinion, the outcome of the foregoing
environmental claims and contingencies will not, individually or
in the aggregate, have a material adverse effect on the financial
condition of the Company. In making this assessment, management
has taken into account previously established loss accruals in
its financial statements and probable recoveries from third
parties.
Other Matters
AFC (which owns approximately 44.8% of the Company's
outstanding common stock), the Company and the Company's
directors are defendants in nine actions (the "Actions") filed by
shareholders of the Company shortly following the December 12,
1994 public announcement of the definitive agreement for the
proposed Acquisition described under Item 1--"Business--
Introduction." Of the Actions, six are class actions and one is
a derivative action pending in the Court of Common Pleas of
Hamilton County, Ohio, and two are class actions pending in the
Court of Common Pleas of Philadelphia County, Pennsylvania. The
Actions generally allege that the Acquisition would result in
self-dealing transactions which dilute the equity interests of
the Company's shareholders, and involve the purchase of AFC at a
price which is excessive and unfair to the Company's public
shareholders. Prior to the Settlement described below, the
Actions sought to (1) enjoin preliminarily and permanently the
Acquisition until full disclosure of all material facts has been
made; (2) establish an
18
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<PAGE>
independent special committee to evaluate the terms of the
proposed Acquisition and employ appropriate procedural safeguards
to protect the interests of the Company's public shareholders;
(3) rescind the Acquisition or pay unspecified rescissory
damages; and (4) recover unspecified compensatory and rescissory
damages and court costs and attorneys' fees.
As a result of negotiations between counsel for plaintiffs
and representatives of defendants, the parties have executed a
memorandum of understanding which settles all of the claims in
all of the Actions, subject to court approval and confirmatory
discovery (the "Settlement"). The defendants in the Actions deny
any liability, that they acted or failed to act in any manner
that could rise to a claim of breach of fiduciary duty, or that
they have violated any law. The defendants have agreed to the
Settlement solely to avoid the burden and expense of further
litigation and to facilitate the consummation of the Acquisition,
which they believe is in the best interests of the Company's
public shareholders. The Settlement requires that Carl H.
Lindner and the members of his family (who collectively own all
of AFC's outstanding common stock) reduce the number of shares of
New American Premier common stock that they will receive in the
Acquisition by 290,000 shares and required certain revisions to
the Proxy Statement/Prospectus mailed to the Company's
shareholders in connection with the Acquisition. The Company's
public shareholders will benefit from the Settlement because
there will be fewer shares of New American Premier common stock
outstanding. The defendants have agreed not to oppose the
application of plaintiffs' counsel to the Court for up to
$2,000,000 in fees and up to $100,000 in costs to be paid by New
American Premier.
On January 18, 1995, an Information was filed against
Buckeye Pipe Line Company ("Buckeye") in the U.S. District Court
for the Western District of Pennsylvania by the U.S. Government
charging Buckeye with two misdemeanor violations of environmental
laws. Buckeye is a subsidiary of the Company which operates
refined petroleum products pipelines. The charges arose from an
incident on March 30, 1990 in which a landslide in western
Pennsylvania ruptured one of Buckeye's pipelines, and petroleum
products flowed into a tributary of the Allegheny River. The
Information alleges violation of the strict liability provisions
of the Rivers and Harbors Act and negligence under the Clean
Water Act. This matter is not considered material to the
Company's financial condition or results of operations, but is
included herein to comply with Securities and Exchange Commission
rules requiring disclosure of environmental proceedings brought
by governmental entities involving potential sanctions exceeding
$100,000.
19
<PAGE> <PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
The persons named below are executive officers of the
Company who have been elected to serve in the capacities
indicated at the pleasure of the Company's Board of Directors.
Name, Age and Principal Business Affiliations
Positions with the Company During Past Five Years
Carl H. Lindner, 75 Mr. Lindner has been Chairman
Chairman of the Board and of the Board and Chief Execu-
Chief Executive Officer tive Officer of the Company
for more than five years and is
Chairman of the Board and Chief
Executive Officer of New
American Premier, which will be
the Company's parent. During
the past five years, Mr.
Lindner has been Chairman of
the Board and Chief Executive
Officer of AFC. He is also
a director of American Annuity
Group, Inc., American Financial
Enterprises, Inc., Chiquita
Brands International, Inc. and
Citicasters Inc. Mr. Lindner
is Carl H. Lindner III's
father.
Carl H. Lindner III, 41 Mr. Lindner has been President
President and Chief Operating and Chief Operating Officer of
Officer and a Director the Company since February 1992
and is President and Chief
Operating Officer and a direc-
tor of New American Premier.
He served as Vice Chairman of
the Board of the Company from
October 1991 to February 1992.
During the past five years, Mr.
Lindner has been President of
Great American Insurance
Company, a property and casu-
alty insurance company owned by
AFC.
Neil M. Hahl, 46 Mr. Hahl has been Senior Vice
Senior Vice President President of the Company for
and a Director more than five years and is
Senior Vice President and a
director of New American
Premier. He is also a director
of Buckeye Management Company.
Robert W. Olson, 49 Mr. Olson has been Senior Vice
Senior Vice President, President, General Counsel and
General Counsel and Secretary of the Company for
Secretary and a Director more than five years and is
Senior Vice President, General
Counsel and Secretary and a
director of New American
Premier.
20
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<PAGE>
Name, Age and Principal Business Affiliations
Positions with the Company During Past Five Years
Robert F. Amory, 49 Mr. Amory has been Vice Presi-
Vice President and Controller dent and Controller of the
Company for more than five
years and is Vice President and
Controller of New American
Premier.
R. Bruce Brumbaugh, 42 Mr. Brumbaugh has been Vice
Vice President -- Risk President -- Risk Management of
Management the Company for more than five
years.
Richard A. Carlson, 43 Mr. Carlson was elected Vice
Vice President and President in February 1994 and,
Assistant General Counsel prior thereto, had been Staff
Vice President since January
1990 and Assistant General
Counsel since April 1988.
Michael L. Cioffi, 42 Mr. Cioffi was elected Vice
Vice President and President in February 1993
Assistant General Counsel and, prior thereto, had been
Staff Vice President since
January 1990 and Assistant
General Counsel since February
1988.
Robert E. Gill, 48 Mr. Gill has been Vice Presi-
President--Taxes dent--Taxes of the Company for
more than five years.
Philip A. Hagel, 50 Mr. Hagel has been Vice Presi-
Vice President and Treasurer dent and Treasurer of the
Company for more than five
years.
Michael D. Krause, 42 Mr. Krause has been President
President - Non-Standard of the Company's Non-Standard
Automobile Insurance Group Automobile Insurance Group
since October 1994. Mr. Krause
has been President of Windsor
Insurance Company, a non-
standard automobile insurance
subsidiary of the Company, for
more than five years. Mr.
Krause is deemed to be an
"executive officer" of the
Company, as that term is
defined in Rule 3b-7 of the
Securities Exchange Act of
1934, because of the nature of
his responsibilities as an
officer of subsidiaries of the
Company.
21
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock is listed and traded principally on
the New York Stock Exchange. On March 23, 1995, there were
approximately 15,624 holders of record of the Company's Common
Stock.
During each of the first three quarters of 1993, the Company's
Board of Directors declared dividends of $.21 per share, and during
the fourth quarter of 1993 declared a dividend of $.22 per share.
The Board declared dividends of $.22 per share in each of the first
three quarters of 1994, $.25 per share in the fourth quarter of
1994, the latter of which was paid in January 1995, and $.25 per
share in the first quarter of 1995, payable in April 1995.
The following table sets forth the high and low stock prices
of the Company's Common Stock for the last two years, as reported
on the New York Stock Exchange Composite Tape.
1994 1993
High Low High Low
First Quarter $33 1/4 $23 3/8 $28 5/8 $23 1/2
Second Quarter 30 23 3/4 33 7/8 25 1/2
Third Quarter 27 5/8 23 3/4 39 3/4 30 3/8
Fourth Quarter 27 21 5/8 34 1/8 29
The Company's policy is to pay quarterly dividends on its
common stock in amounts determined by its Board of Directors. It
is expected that New American Premier will adopt this policy. The
ability of New American Premier to pay dividends will be dependent
upon, among other things, the availability of dividends and
payments under intercompany tax allocation agreements from its
insurance company subsidiaries.
22<PAGE>
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
(Dollars in millions, Except Per Share Amounts and Ratios)
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Income Statement Data:(1)
Net Written Premiums $1,635.5 $1,378.9 $1,067.3 $ 864.6 $ 345.1
Insurance Revenues:
Premiums Earned $1,557.9 $1,273.6 $ 998.7 $ 845.6 $ 342.0
Net Investment Income 129.9 114.7 105.0 97.9 51.6
Net Realized Gains
(Losses) - 17.5 23.6 26.5 (9.0)
Loss on Sale of General Cable
Corporation Securities (75.8) - - - -
Other Revenues 155.4 357.5 297.6 305.4 395.3
Total Revenues $1,767.4 $1,763.3 $1,424.9 $1,275.4 $ 779.9
Income from Continuing Operations
before Income Taxes:
Insurance Operations $ 164.7 $ 167.4 $ 143.5 $ 144.5 $ 36.8
Other Operations (123.5) 22.7 (59.4) (65.1) 58.8
$ 41.2 $ 190.1 $ 84.1 $ 79.4 $ 95.6
Income from Continuing
Operations(2) $ .8 $ 242.7 $ 50.9 $ 50.2 $ 62.9
Income from Continuing Operations
Per Share(2) $ .02 $ 5.03 $ 1.08 $ 1.03 $ 1.03
Balance Sheet Data
(at year-end):(1)
Investments Held by Insurance
Operations $1,870.6 $1,602.7 $1,304.2 $1,121.9 $ 997.2
Cash, Short-term Investments and
Marketable Securities Other
Than Those of Insurance
Operations 758.0 611.2 395.1 537.3 458.6
Total Assets 4,194.0 4,049.6 3,486.2 3,330.0 3,280.1
Unpaid Losses and Loss Adjustment
Expenses, Policyholder Dividends
and Unearned Premiums 1,673.5 1,425.5 1,069.0 889.5 823.4
Debt 507.3 523.2 656.1 665.9 516.2
Common Shareholders' Equity 1,548.7 1,722.3 1,502.8 1,479.0 1,634.2
Book Value Per Share of
Common Stock 33.46 36.30 32.40 31.23 31.00
Total Debt to Total Capital 25% 23% 30% 31% 24%
Certain Financial Ratios
and Other Data:
Cash Dividends Declared Per Share
of Common Stock $ .91 $ .85 $ .81 $ .71 $ .53
Statutory Surplus of Insurance
Operations(3) $ 643.6 $ 567.3 $ 453.6 $ 392.9 $ 345.0
Statutory Net Written Premiums to
Statutory Surplus(3,4) 2.5x 2.4x 2.3x 2.3x 2.2x
GAAP Combined Ratio 97.0% 96.2% 97.5% 97.0% 99.9%
Statutory Combined Ratio(3) 98.5% 94.0% 96.5% 98.5% 100.1%
Industry Statutory Combined
Ratio for Property and
Casualty Insurers(5) 109.4%est. 106.9% 115.8% 108.8% 109.6%
</TABLE>
23PAGE
<PAGE>
(1) The Company's principal non-standard automobile insurance
operations were acquired on December 31, 1990 in a business
acquisition accounted for as a purchase. Results of
operations of the acquired businesses are included from the
effective date of the acquisition and the net assets of the
acquired companies are included as of December 31, 1990.
Year-to-year comparisons are also affected by business
dispositions and by restructuring provisions and certain
unusual charges. See Note 3 of Notes to Financial Statements
and "Management's Discussion and Analysis - Results of
Operations" for further information.
(2) The 1993 results include a $132 million, or $2.74 per share,
tax benefit attributable to an increase in the Company's net
deferred tax asset. See Note 7 of Notes to Financial
Statements and "Management's Discussion and Analysis - Results
of Operations".
(3) Statutory information is based on domestic insurance
operations only.
(4) For 1990, the writings to surplus ratio is based on statutory
surplus of Republic Indemnity only, excluding the statutory
surplus of the NSA Group which was acquired on December 31,
1990, and a reinsurance subsidiary which had insignificant
written premiums.
(5) Industry information was derived from Best Week
Property/Casualty Supplement (January 11, 1995 edition).
24<PAGE>
<PAGE>
Item 7.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Discussion and Analysis discusses the Company's
financial condition and results of operations for each of the three
years in the period ended December 31, 1994. The following is a
description of the Company's Insurance segment and other
operations. Amounts presented in the discussion and analysis
relate only to continuing operations unless otherwise indicated.
On March 23, 1995, the Company's shareholders approved the
acquisition of all of the common stock of American Financial
Corporation ("AFC"). Consummation of the acquisition is pending
receipt of a private letter ruling from the Internal Revenue
Service regarding the continuation of the Company's federal income
tax consolidated group. Upon consummation of the acquisition, the
Company will become a wholly owned subsidiary of American Premier
Group, Inc. ("New American Premier"), a new corporation formed by
the Company for the purpose of acquiring all of the common stock of
AFC. As part of such acquisition (the "Acquisition"), (a) each
outstanding share of Company Common Stock will be converted into
one share of New American Premier common stock and each outstanding
share of AFC common stock will be converted into 1.435 shares of
New American Premier common stock and (b) the Company and AFC will
become subsidiaries of New American Premier. See Note 2 of Notes
to Financial Statements.
INSURANCE
The Insurance segment consists primarily of a group of
non-standard private passenger automobile insurance companies (the
"NSA Group") and a business which sells workers' compensation
insurance principally in California ("Republic Indemnity"). The
non-standard automobile insurance companies insure risks not
typically accepted for standard automobile insurance coverage
because of the applicant's driving record, type of vehicle, age or
other criteria.
NON-INSURANCE OPERATIONS
These operations included the manufacture of a variety of
industrial products and the providing of other industrial services
as well as energy and real estate operations. In connection with
the Company's previously announced divestiture effort, all of the
industrial businesses have been sold. Two were sold during 1993,
two in 1994 and one in February of 1995. Also during 1994, the
Company sold its majority interest in operations which provided
onshore oil and gas contract drilling and well workover services.
These businesses did not comprise reportable industry segments of
the Company and, accordingly, are not reportable as discontinued
operations.
25<PAGE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's management believes the following information
may be useful in understanding the liquidity and capital resources
of the Company.
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts)
As of and for the years ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Cash, Parent Company short-term investments
and Parent Company fixed maturity
securities $838.5 $669.2 $498.8
Deduct items not readily available for
corporate purposes:
Cash held by the insurance operations (36.3) (23.2) (26.8)
Securities held in bank escrow accounts (21.2) (20.2) (65.5)
Private placement notes (23.0) (14.6) (11.4)
Cash, short-term investments and marketable
securities $758.0 $611.2 $395.1
Total debt as a percentage of total capital 25% 23% 30%
Book value per share of Common Stock $33.46 $36.30 $32.40
Net cash provided by continuing operating
activities $307.6 $304.1 $217.9
</TABLE>
The $146.8 million increase during 1994 in the cash, short-
term investments and marketable securities included in the
preceding table was principally attributable to the sale for $176.7
million of the Company's General Cable Corporation ("General
Cable") subordinated notes ("General Cable Notes") and General
Cable common stock to Wassall PLC ("Wassall"). See Note 3 of Notes
to Financial Statements for additional information on the General
Cable transaction. The Company also received aggregate proceeds of
$34.9 million from the divestiture of three of its non-insurance
businesses. These increases in cash, short-term investments and
marketable securities were partially offset by purchases of shares
of Company Common Stock for $47.7 million and the Company's
redemption of all of its outstanding 9 1/2 percent subordinated
debentures for $16.2 million plus accrued interest. During the
period subsequent to December 31, 1994 through February 13, 1995,
the Company purchased 3.3 million shares of its Common Stock for
$82.8 million.
One of the strategic objectives of the Acquisition of AFC is
to provide an opportunity to redeploy most of the Company's
substantial Parent Company investment assets to produce a higher
rate of return than has been available on the short-term fixed
maturity instruments in which they have been invested. This
objective is expected to be achieved through the utilization of up
to approximately $625 million of the Parent Company investment
portfolio to retire relatively expensive AFC and Company long-term
debt. Any such assets used to retire AFC debt are expected to be
provided for such purpose principally in the form of interest-
bearing loans by the Company to AFC or New American Premier.
26PAGE
<PAGE>
The Company's Federal income tax loss carryforward is
available to offset taxable income and, as a result, the Company's
requirement to currently pay Federal income tax is substantially
eliminated. It is expected that the 1994 consolidated Federal
income tax return will report a remaining net operating loss
carryforward currently estimated at approximately $505 million,
which will expire at the end of 1996 unless previously utilized.
After the Acquisition, it is anticipated that the Company's federal
income tax consolidated group will continue to exist, but will not
include any companies not presently in the group, except for New
American Premier. Accordingly, it is expected that the Company's
Federal income tax loss carryforward will continue to offset
taxable income of members of the continuing group through 1996, if
not fully utilized prior thereto.
Net Cash Provided by Continuing Operating Activities
During each of the three years in the period ended December
31, 1994, the Company's continuing operations provided significant
financial resources and sufficient cash flow to meet its operating
requirements. Management expects that the Company's operating cash
flow and financial resources will continue to be adequate to meet
its operating needs in the short-term and long-term (i.e., more
than twelve months) future. If funds generated from operations,
including dividends from subsidiaries, are insufficient to meet
debt service charges and other corporate expenses in any period,
the Company would be required to meet such charges through short-
term bank borrowings or sales of assets. Cash flows of the Company
may be influenced by a variety of factors, including changes in the
property and casualty insurance industry, the insurance regulatory
environment and general economic conditions. Operating cash flow
of the insurance operations is dependent primarily on the growth of
written premiums, the requirements for claim payments and the rate
of return achieved on the insurance investment portfolio.
Cash provided by operating activities in 1994 was $3.5 million
higher than in 1993. This increase resulted primarily from an
increase of $13.8 million in the insurance operations' operating
cash flow. While the NSA Group and Republic Indemnity continued to
experience growth in written premiums during 1994, the favorable
impact of such growth on the operating cash flow has been partially
offset by an increase in claims payments at the NSA Group resulting
from business expansion in previous periods and by an increase in
policyholder dividend payments at Republic Indemnity resulting from
favorable loss development. Also contributing to the favorable
operating cash flow comparison are higher interest receipts on the
Parent Company investment portfolio and lower interest payments due
to debt reductions in 1993. In addition, in connection with the
Company's sale of its General Cable Notes and common stock, the
Company received a $19.2 million payment from Wassall in
consideration of assuming responsibility for certain actual and
potential liabilities. For further information regarding such
liabilities, see Note 11 of Notes to Financial Statements. These
favorable variances were partially offset by lower operating cash
flow from the Company's non-insurance operations. Operating cash
flow for 1993 also included net proceeds of $15.6 million resulting
from the settlement of certain litigation relating to a previously
owned subsidiary which was included in the Company's 1992 spin-off
to its shareholders of substantially all of the Company's General
Cable stock (the "General Cable Spin-off") and $26.0 million from
payment of a note relating to the prior sale of an offshore
drilling rig.
During 1994 and 1993, the insurance operations generated
operating cash flow of $341.6 million and $327.8 million,
respectively, of which approximately 92 percent and 66 percent,
respectively, was reinvested in the insurance operations to support
underwriting activities. The remaining amount, net of capital
contributions
27PAGE
<PAGE>
where applicable, was paid to the Parent Company through dividends
and intercorporate tax allocation payments. The increase in the
amount of operating cash flow retained by the insurance operations
in 1994, as compared with 1993, is attributable to higher 1994
capital requirements to support net written premium growth in the
NSA Group and variations in the timing of intercorporate tax
allocation payments. The Company's insurance subsidiaries are
restricted as to the amount of stockholder dividends they can pay
to the Company without prior regulatory approval. Under these
restrictions, the maximum amount of dividends which can be paid to
the Company during 1995 by these subsidiaries is $83.8 million.
Cash provided by operating activities in 1993 was $86.2
million higher than in 1992. This increase was primarily due to an
increase in the insurance operations' operating cash flow at
Republic Indemnity and, to a lesser extent, at the NSA Group.
Proceeds from payment of the note relating to the prior sale of an
offshore drilling rig and the previously mentioned litigation
settlement relating to a former subsidiary which was included in
the General Cable Spin-off, as well as lower interest payments due
to the redemption of the Company's 11 percent subordinated
debentures in July 1993, also contributed to the improved operating
cash flow. These favorable variances were partially offset by a
settlement payment resulting from the termination of a reinsurance
contract, lower operating cash flow from the Company's industrial
operations and lower interest receipts on the Parent Company
investment portfolio.
Investing and Financing Activity
During 1994, the Company's insurance operations made net
purchases of investments of $275.4 million and net purchases of
investments for the Parent Company investment portfolio totalled
$129.1 million. The Company also used $47.7 million for purchases
of shares of Company Common Stock, $40.6 million for the payment of
Common Stock dividends, $22.1 million for capital expenditures,
$16.2 million to redeem all of its outstanding 9 1/2 percent
subordinated debentures and $13.9 million for the purchase of two
small insurance companies. During this same period, the Company
received $176.7 million from the sale of its General Cable Notes
and stock to Wassall, $34.9 million from the sale of three of its
non-insurance businesses and $19.1 million for shares of Company
Common Stock issued pursuant to the exercise of employee stock
options.
At December 31, 1994, the Parent Company investment portfolio
held unrated or less than investment grade corporate debt
securities with carrying values of $27.2 million. At that date, the
Company's insurance operations held $129.1 million of such unrated
or less than investment grade debt securities and preferred stocks.
As a group, unrated or less than investment grade investments may
be expected to generate higher average yields than investment grade
securities. However, the risk of loss from default by the borrower
may be greater with respect to such securities because these
issuers usually have higher levels of indebtedness and may be more
sensitive to adverse economic conditions than are investment grade
issuers. In addition, there is only a thinly traded secondary
market for such securities and market quotations are available from
a limited number of dealers. In order to manage its risk
associated with these investments, the Company limits its
investment in unrated or less than investment grade securities of
any one issuer and regularly monitors the condition of the issuers
and their industries. At December 31, 1994, the largest investment
of the Company and its insurance operations in such securities of
any one issuer totalled $37.5 million.
28<PAGE>
<PAGE>
During 1993, sales of the Parent Company's shares of common
stock of Tejas Gas Corporation ("Tejas")and limited partnership
units of Buckeye Partners L.P. ("Buckeye Units"), sales of the
Company's defense services operations and two of the Company's
industrial businesses and payment by General Cable of its short-
term note, issued in connection with the General Cable Spin-off,
provided approximately $294 million in the aggregate. In addition,
the Company received $24.0 million from the sale of shares of
Company Common Stock pursuant to the exercise of employee stock
options. During this same period, the Company used $133.3 million
to redeem all of its outstanding 11 percent subordinated
debentures, $52.8 million for the payment of the purchase price
contingency relating to the acquisition of the NSA Group and $38.0
million to acquire Leader National Insurance Company ("Leader
National"). The Company also used $38.2 million for the payment of
Common Stock dividends, $17.5 million for capital expenditures and
$4.5 million for the purchase of an investment in an insurance
company located in the United Kingdom. The Company's insurance
operations made net purchases of investments of $179.9 million
during 1993 and the Company used approximately $165.5 million for
net purchases of investments for the Parent Company investment
portfolio.
The Company's principal source of cash from investing and
financing activities during 1992 was maturities of the Parent
Company investment portfolio (net of purchases of investments)
which provided $113.2 million. In addition to $25 million
transferred to General Cable as part of the General Cable Spin-off,
the Company used cash of $36.8 million for Common Stock dividends,
$36.8 million for purchases of shares of Company Common Stock,
$14.6 million for capital expenditures and $13.1 million for the
repayment of debt. The Company's insurance operations made net
purchases of investments totalling $164.3 million.
During each of the three years in the period ended December
31, 1994, the Company's continuing operations did not have large
capital spending requirements. The Company presently has no plans
or commitments for material capital expenditures.
Borrowing Facilities and Debt Obligations
Because of the Company's balances of cash and short-term
investments and its positive cash flow from operating activities,
the current borrowing requirements for the Company's existing
businesses are not significant. At December 31, 1994, the
Company's total debt to total capital ratio was 25 percent as
compared with 23 percent at year-end 1993. After taking into
consideration the Company's purchases of its Common Stock which
have been made subsequent to December 31, 1994, the Company's total
debt to total capital ratio at December 31, 1994 would be 26
percent. Total capital as defined for this ratio consists of debt,
minority interests in subsidiaries and common shareholders' equity.
The Company is in compliance with all of its debt covenants, none
of which are materially restrictive.
Under certain circumstances, the holders of the Company's
outstanding subordinated notes (see Note 6 of Notes to Financial
Statements) can require the Company to purchase all or part of such
notes at par plus accrued interest (the "Put Right"). The
Acquisition of AFC, if followed by a ratings downgrade by either of
two rating agencies, would trigger the Put Right. Both agencies
have placed the notes under review for possible ratings downgrade
as a result of the Acquisition. The Company is unable to predict
whether either or both of these agencies will in fact downgrade the
notes or to what extent, if any, holders of the notes would
exercise their Put Right.
29<PAGE>
<PAGE>
Adjustments of Estimated Pre-reorganization Liabilities
During 1994, 1993 and 1992, the Company increased its accruals
for its net probable liability for claims and contingencies arising
from events and circumstances preceding the Company's 1978
reorganization. In 1994, the Company accrued $52.0 million
consisting of pre-reorganization environmental and occupational
injury and disease claims and related expenses offset by a credit
representing the net present value of installment payments to be
paid by Chicago Union Station ("CUSCO") to the Company resulting
from a judgment against CUSCO in favor of the Company. The
environmental claims consist of a number of proceedings and claims
seeking to impose responsibility on the Company for hazardous waste
remediation costs at certain railroad sites formerly owned by the
Company's railroad predecessor, Penn Central Transportation Company
("PCTC"), and at certain other sites where hazardous waste was
allegedly generated by PCTC's railroad operations. The occupational
injury and disease claims include pending and expected claims by
former employees of PCTC of injury or disease allegedly caused by
exposure to excessive noise or asbestos in the railroad workplace.
In 1993, the Company accrued $14.0 million for pre-reorganization
environmental claims and related expenses. In 1992, the Company
accrued $15.0 million for pre-reorganization occupational injury
and disease and environmental claims and related expenses.
Consistent with the Company's reorganization accounting policy,
such amounts were charged to capital surplus rather than income.
See Notes 1, 11 and 12 to Notes of Financial Statements.
There are a number of factors which affect the Company's
estimate of its liability for future environmental remediation
costs, including the number and financial resources of potentially
responsible parties at a given site, the varying availability of
evidence by which to allocate responsibility among such parties,
the wide range of costs for possible remediation alternatives,
changing technology and the period of time over which these matters
develop. Although it is difficult to estimate future environmental
liabilities, the Company believes that the accruals for potential
pre-reorganization environmental liabilities at December 31, 1994
are adequate based on the Company's estimates of remediation costs
and related expenses as well as its estimates of the portions of
those costs that will be borne by other parties.
The net probable liabilities for pre-reorganization
occupational injury and disease claims and related expenses are
based on the accumulation of estimates for reported claims,
estimates of unreported claims based on past experience, estimates
of probable recoveries from insurance carriers and estimates of
expenses for investigating such claims. These liabilities are
subject to the impact of changes in amounts required to settle
claims and frequency and other factors. The Company believes that
the amounts recorded at December 31, 1994 are adequate for pre-
reorganization occupational injury and disease liabilities.
The Company's estimates for environmental and occupational
injury and disease liabilities are based on information currently
available to the Company and are subject to change in future
periods as additional information becomes available.
30PAGE
<PAGE>
RESULTS OF OPERATIONS
Analysis of Continuing Operations
The Company reported income from continuing operations for
1994 of $.8 million, or $.02 per share, which includes a net
realized capital loss of $1.53 per share, principally comprised of
a $75.8 million loss from the disposal of the General Cable Notes
which were previously owned by the Company.
Income from continuing operations for 1993 was $242.7 million,
or $5.03 per share, which includes tax benefits of $132.0 million,
or $2.74 per share, attributable to increases in the Company's net
deferred tax asset and a net realized capital gain of $43.6
million, or $.90 per share, which included gains from the Company's
sales of its Tejas shares and Buckeye Units and provisions for
losses on the sales of certain non-insurance operations. Income
from continuing operations for 1992 was $50.9 million, or $1.08 per
share, which included a net realized capital gain of $12.3 million,
or $.26 per share.
The Company's 1994 after-tax results increased to $74.5
million, or $1.55 per share, excluding the net realized capital
loss, from $67.1 million, or $1.39 per share, for 1993, excluding
the unusual deferred tax benefits and net realized capital gain.
This increase primarily resulted from higher investment income from
the insurance operations' investment portfolio and lower interest
expense, partially offset by a reduction in interest and dividend
income from the Parent Company investment portfolio and lower
underwriting results. In 1993, the Company recognized approximately
$25.4 million of interest income on the General Cable Notes. The
Company's 1994 earnings do not include any interest income on the
General Cable Notes.
The 1993 income from continuing operations of $67.1 million,
or $1.39 per share, increased from $38.6 million, or $.82 per
share, reported in 1992, excluding the net realized capital gain.
The increase was principally due to improved operating results in
the Company's insurance operations and higher interest and dividend
income generated from the Parent Company investment portfolio. In
1992, the Company recognized approximately $12.7 million of
interest income on the General Cable Notes.
Insurance
Earned premiums of the insurance operations increased to
$1,557.9 million in 1994 as compared with $1,273.6 million for
1993. The increase was primarily due to an increase in earned
premiums at the NSA Group and, to a lesser extent, at Republic
Indemnity. Investment income before realized gains and losses on
sales of investments also increased due to higher average
investment balances primarily due to increased written premiums,
partially offset by a decrease in the average yield on the
insurance operations' investment portfolio. Operating income in
1994 was $165.4 million as compared with $167.4 million in 1993.
The 1993 results include net realized gains from sales of
investment securities of $17.5 million. There were no realized
gains from such sales in 1994. See Note 4 of Notes to Financial
Statements for further information regarding gross realized and
unrealized investment gains and losses. Excluding such gains, the
insurance operations experienced an increase in operating income of
$15.5 million primarily due to an increase in underwriting profit
at Republic Indemnity and higher investment income, partially
offset by lower underwriting profit at the NSA Group.
31PAGE
<PAGE>
Earned premiums of the insurance operations increased to
$1,273.6 million in 1993 as compared with $998.7 million for 1992
due to increases at both the NSA Group and Republic Indemnity.
Investment income before realized gains and losses on sales of
investments also increased due to higher average investment
balances, partially offset by a decrease in the average yield on
the insurance operations' investment portfolio. Operating income
in 1993 increased to $167.4 million from $143.5 million in 1992,
primarily due to improved underwriting results at Republic
Indemnity and higher investment income, partially offset by lower
net realized gains. Net realized gains from sales of investment
securities in the insurance operations' portfolio totaled $17.5
million for 1993 compared with $23.6 million for 1992.
Underwriting profitability of the insurance operations is
measured by the combined ratio which, on a generally accepted
accounting principles ("GAAP") basis, is calculated as the quotient
of (a) the sum of insurance losses and loss adjustment expenses
("LAE"), policyholder dividends and commissions and other insurance
expenses, excluding amortization of cost in excess of net assets
acquired, divided by (b) premiums earned, as reflected in the
accompanying financial statements. Underwriting results are
considered profitable when the combined ratio is under 100 percent.
The GAAP combined ratio was 97.0 percent in 1994, 96.2 percent in
1993 and 97.5 percent in 1992.
NSA Group
In general, automobile coverage written by the NSA Group is
sold to drivers who have not been accepted for coverage by a writer
of standard risks due to driving history, type of automobile, age
of insured or other factors. Because it can be viewed as a
residual market, the size of the non-standard private passenger
automobile insurance market changes with the insurance environment.
Management of the Company believes the non-standard market has
experienced growth in recent years as standard insurers
have become more restrictive in the types of risks they will write.
During the past three years, the NSA Group continued to obtain new
licenses to write business in additional jurisdictions. Total
number of licenses held by the NSA Group has grown by approximately
69 percent during this time period. Entering additional states,
increased market penetration in its existing states and the
purchase of Leader National have been primarily responsible for the
significant premium growth achieved by the NSA Group during the
last three years.
The NSA Group management believes it has achieved underwriting
success over the past several years as compared to the automobile
insurance industry as a whole due, in part, to the refinement of
various risk profiles, thereby dividing the consumer market into
more defined segments which can either be excluded from coverage or
priced properly. The NSA Group also generally writes policies of
short duration which allow more frequent rating evaluations of
individual risks, providing management greater flexibility in the
ongoing assessment of the business. In addition, the NSA Group has
implemented cost control measures both in the underwriting and
claims handling areas.
32PAGE
<PAGE>
The following table presents certain information with respect
to the NSA Group's insurance operations.
<TABLE>
<CAPTION> (Dollars in Millions)
Years Ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Net Written Premiums $1,154.1 $901.9 $660.4
Net Earned Premiums 1,071.9 $804.4 $594.8
Loss and LAE 813.7 575.8 414.8
Underwriting Expenses 256.3 204.4 156.7
Underwriting Profit $ 1.9 $ 24.2 $ 23.3
GAAP Ratios:
Loss and LAE Ratio 75.9% 71.6% 69.7%
Underwriting Expense
Ratio 23.9 25.4 26.4
Combined Ratio 99.8% 97.0% 96.1%
Statutory Ratios: (1)
Loss and LAE Ratio 76.0% 72.5% 69.7%
Underwriting Expense
Ratio 23.7 24.4 26.1
Combined Ratio 99.7% 96.9% 95.8%
Total Private Passenger Automobile
Insurance Industry Statutory
Combined Ratio(2) 102.7%est. 101.7% 102.0%
</TABLE>
(1) Based on domestic insurance operations only.
(2) Industry information was derived from Best Week
Property/Casualty Supplement (January 11, 1995 edition).
The comparison shown is to the private passenger
automobile insurance industry. Although the Company
believes that there is no reliable regularly published
combined ratio data for the non-standard automobile
insurance industry, the Company believes that such a
combined ratio would present a less favorable comparison
in that it would be lower than the private passenger
automobile industry average shown above.
Despite increasing competitive pressures from other insurers
during 1994, the NSA Group experienced growth in net written
premiums of approximately 28 percent as compared to 1993,
principally due to increased penetration within the NSA Group's
existing markets. The net written premium growth rate during the
latter half of 1994 was somewhat lower than that experienced during
the first six months of the year. Underwriting conditions in the
private passenger automobile insurance marketplace were affected by
competitive conditions and the pricing policies of insurers. Also,
improving economic conditions contributed to increased driving
activity resulting in an increase in the frequency of accidents and
severity of loss claims. These trends caused a deterioration in the
NSA Group's underwriting profit margins during 1994. Also
contributing to the decline in underwriting profit for 1994 were
losses resulting from hailstorm damage in Texas. These factors were
partially offset by underwriting profit from the Company's entry
into certain foreign and domestic markets, as well as improved
underwriting margins in several of the Company's markets where the
book of business has matured and a greater portion of written
premium is derived from renewal policies.
The underwriting expense ratio
33PAGE
<PAGE>
improved during 1994 as a result of cost containment measures and
reductions in commission rates.
In response to the declining underwriting margins, the NSA
Group began to increase premium rates in certain states in mid-1994
and has continued this action into 1995. Although such new rate
levels had little effect on earned premium and underwriting profit
during 1994, the higher rate levels should have an impact during
1995 as the premiums written under the new rates are earned.
However, the rate of written and earned premium growth during 1994
may not be sustained in the future as a result of such rate
increases coupled with competitive pressures in the non-standard
automobile insurance industry.
The growth in net written premiums of approximately 37 percent
during 1993 was principally due to the pursuit of business in new
markets and the acquisition of Leader National. The increase in
the combined ratio for 1993 was primarily caused by rate
adjustments which more favorably affected 1992 underwriting results
and an increase in losses in the 1993 first quarter resulting from
a more severe winter than in the prior period. Partially
offsetting these factors was a decrease in the underwriting expense
ratio as growth in earned premiums outpaced associated expenses.
Republic Indemnity
Republic Indemnity's workers' compensation insurance
operations are highly regulated by California state authorities.
In July 1993, California enacted significant changes in the
workers' compensation insurance system (the "Reform Legislation")
which have affected Republic Indemnity's results of operations. In
addition, these insurance operations are affected by employment
trends in their markets, litigation activities, legal and medical
costs, use of vocational rehabilitation programs and the provision
of benefits for traditionally non-occupational injuries, such as
stress and trauma claims. While changes in claims costs are
ultimately reflected in premium rates, there historically has been
a time lag of varying periods between the incurrence of higher or
lower claims costs and premium rate adjustments, which may result
in periods of unfavorable or favorable underwriting results.
Management believes that Republic Indemnity's stringent
underwriting standards, disciplined claims philosophy, expense
containment and reputation with insureds have combined to produce
superior underwriting results as compared to the industry in
general.
The Reform Legislation effected an immediate overall 7 percent
reduction in workers' compensation insurance premium rates and
replaced the workers' compensation insurance minimum rate law,
effective January 1, 1995, with a procedure permitting insurers to
use any rate within 30 days after filing it with the Insurance
Commissioner unless the rate is disapproved by the Insurance
Commissioner.
On December 1, 1993, the Insurance Commissioner ordered an
additional 12.7 percent minimum premium rate decrease effective
January 1, 1994 for new and renewal policies entered into on or
after January 1, 1994. On September 21, 1994, the Insurance
Commissioner approved an additional 16 percent minimum premium rate
decrease effective October 1, 1994 for all new and renewal policies
with anniversary dates on or after October 1, 1994 as well as the
unexpired portion of policies incepting on or after January 1,
1994.
The mandated premium rate reductions have already impacted
Republic Indemnity's results of operations. In addition, Republic
Indemnity has encountered extremely competitive pricing in the
marketplace as a result of the repeal of the
34PAGE
<PAGE>
workers' compensation minimum rate law effective January 1, 1995.
Management intends to maintain its stringent underwriting standards
and pricing discipline, which are likely to have at least a
temporary adverse effect on premium volume and profitability.
Historically, Republic Indemnity's policyholder dividends have been
among the highest in the industry. To meet future pricing
competition, Republic Indemnity has the option of quoting business
without indication of policyholder dividends. While this option
may serve to partially mitigate the adverse effects of these
developments, the Company is unable to predict their ultimate
impact on its workers' compensation insurance operations.
As a result of the Reform Legislation's provisions permitting
employers to require injured workers to obtain medical services
from "managed" health care organizations under prescribed
circumstances, several health care organizations have become
affiliated, contractually and otherwise, with certain workers'
compensation insurers. During 1994, Republic Indemnity entered
into a managed care arrangement with a health care organization.
The Company continues to evaluate the implications of these
provisions, as well as the resulting affiliations, but is unable to
predict their ultimate impact on its workers' compensation
insurance operations.
While Republic Indemnity has operated on a profitable basis,
no assurances can be given that it could continue to do so in the
face of adverse conditions in the California workers' compensation
market.
The following table presents certain information with respect
to Republic Indemnity's insurance operations.
<TABLE>
<CAPTION>
(Dollars in Millions)
Years Ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Net Written Premiums $479.5 $465.8 $397.0
Net Earned Premiums $483.8 $458.5 $394.1
Loss and LAE 276.7 270.2 261.8
Underwriting Expenses 88.3 70.6 63.3
Policyholder Dividends 75.7 93.2 67.5
Underwriting Profit $ 43.1 $ 24.5 $ 1.5
GAAP Ratios:
Loss and LAE Ratio 57.2% 59.0% 66.4%
Underwriting Expense Ratio 18.3 15.4 16.1
Policyholder Dividend Ratio 15.6 20.3 17.1
Combined Ratio 91.1% 94.7% 99.6%
Statutory Ratios:
Loss and LAE Ratio 57.2% 59.0% 69.1%
Underwriting Expense Ratio 18.3 15.4 16.0
Total Loss and Expense Ratio 75.5 74.4 85.1
Policyholder Dividend Ratio 20.4 13.7 11.6
Combined Ratio 95.9% 88.1% 96.7%
Total Workers' Compensation Insurance
Statutory Combined Ratio(1) 99.0%est.109.1% 121.5%
</TABLE>
(1) Industry information was derived from Best Week
Property/Casualty Supplement (January 11, 1995 edition).
35PAGE
<PAGE>
During 1994, Republic Indemnity experienced lower growth in
earned and net written premiums largely due to the aforementioned
mandatory premium rate reductions, and during the fourth quarter of
1994, Republic Indemnity experienced a decline in net written
premiums of approximately 9.5 percent compared with the 1993
period. Nevertheless, the number of policies in force was
approximately 11 percent higher at December 31, 1994 than at the
end of 1993, reflecting Republic Indemnity's favorable competitive
position in the industry in 1994.
The decrease in Republic Indemnity's 1994 loss and LAE ratio
as compared with 1993 was mainly attributable to favorable loss
development relating to prior years' claims activity, partially
offset by an increase in the frequency of claims and the impact of
the 1994 rate reductions. The decrease in policyholder dividends
during 1994 was due in part to a decrease in net premiums written
by Republic Indemnity that were eligible for policyholder dividend
consideration as well as increases in commission rates. The sizes
of such rates are factors in the determination of potential
policyholder dividend payments. During 1994, the underwriting
expense ratio increased mainly due to higher commission expenses
coupled with the decline in the earned premium growth rate.
During 1993, the increase in both earned and net written
premiums of approximately 17 percent was primarily due to
improvement in the Company's relative competitive position in the
industry resulting in part from the withdrawal of several workers'
compensation carriers from the Los Angeles, California market. In
addition, the California State Fund, the largest writer of workers'
compensation insurance in California, reduced its policyholder
dividends during 1992 making its program less attractive to the
market. During this same period, Republic Indemnity's underwriting
results benefited from a decrease in the frequency and severity of
losses, in part due to a reduction in fraudulent claims, and a
lower underwriting expense ratio as compared with the prior year.
Interest and Dividend Income
Interest and dividend income of the Parent Company investments
decreased $15.0 million in 1994, as compared with 1993, due
primarily to the absence of interest income on the General Cable
Notes in 1994 as a result of their sale. In 1993, the Company
recognized approximately $25.4 million of interest income on the
General Cable Notes. For further information, see Note 3 of Notes
to Financial Statements. The decrease in interest income due to
the sale of the General Cable Notes was partially offset by higher
interest income on the Parent Company investment portfolio
attributable to an increase in both average investment balances and
average yields as compared with 1993.
Interest and dividend income of the Parent Company investments
increased $7.9 million in 1993, as compared with 1992, due
primarily to an increase in interest income on the General Cable
Notes largely attributable to the inclusion of a full year of
interest in 1993 as compared with 1992. The increase in interest
income due to the General Cable Notes was partially offset by lower
interest income on the Parent Company investment portfolio
attributable to a decrease in average yields as compared with 1992.
36PAGE
<PAGE>
Interest and Debt Expense
Interest and debt expense for 1994 decreased $9.6 million,
compared with 1993, due primarily to the Company's redemption of
all $133.3 million principal amount of its 11 percent subordinated
debentures during the 1993 third quarter.
Interest and debt expense for 1993 decreased $6.8 million
compared with 1992 due primarily to the above-mentioned redemption.
Other Expense (Income) - Net
Other expense (income) - net consists of the following:
<TABLE>
<CAPTION>
(In Millions)
For the Years Ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Settlement of claims and
contingencies, net $ .5 $ 6.3 $ 6.5
Minority interests in earnings
of consolidated subsidiaries .4 (1.5) (1.4)
Taxes other than income 7.2 6.7 6.7
Other 3.1 4.1 4.3
Total $ 11.2 $ 15.6 $ 16.1
</TABLE>
The component, "Settlement of claims and contingencies, net",
in the above table includes expense in 1993 which was primarily
attributable to a $2 million provision for environmental costs
relating to the Company's previously-owned petroleum products
pipeline operations and to certain litigation settlements.
The expense reported in such component in 1992 was primarily
attributable to a $4 million provision recorded in connection with
the settlement of post-reorganization environmental claims relating
to a previously-owned battery manufacturing facility.
Income Taxes
For 1994, the Company recorded income tax expense of $40.4
million as compared with an income tax benefit of $52.6 million for
1993 and income tax expense of $33.2 million for 1992. The 1993
benefit was attributable to an increase of $132.0 million in the
Company's net deferred tax asset due to revisions to the estimated
future taxable income during the Company's tax loss carryforward
period. For more information concerning these adjustments, see
Note 7 of Notes to Financial Statements.
As of December 31, 1994, the Company's gross deferred tax
asset was $481.2 million, which after a valuation allowance of
$213.5 million resulted in a net deferred tax asset of $267.7
million. The net deferred tax asset represents the portion of the
gross deferred tax asset which management believes is more likely
than not to be realized consistent with the recognition criteria as
set forth in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes".
Management believes that it is more likely than not that the
net deferred tax asset at December 31, 1994 will be realized
primarily through the generation of taxable income during the loss
carryforward period. This belief derives from an analysis of
estimated future taxable income based on certain assumptions
concerning future events during the loss carryforward period. The
estimate of future taxable
37PAGE
<PAGE>
income used in determining the net deferred tax asset is not
necessarily indicative of the Company's future results of
operations. As is the case with any estimate of future results,
there will be differences between assumed and actual economic and
business conditions of future periods. Moreover, the estimate may
also be affected by unpredictable future events, including but not
necessarily limited to changes in the Company's capital structure
and future acquisitions and dispositions. Therefore, the analysis
of estimated future taxable income will be reviewed and updated
periodically, and any required adjustments, which may increase or
decrease the net deferred tax asset, will be made in the period in
which the developments on which they are based become known.
38PAGE
<PAGE>
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company and
its subsidiaries and an index thereto are included on
pages F-1 through F-32 of this Report. Selected
quarterly financial data is included in Note 16 of the
Notes to Financial Statements.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Except to the extent included in Part I under the
caption "Executive Officers of the Registrant," the
information called for by Item 10 is incorporated by
reference to the definitive proxy statement involving
the election of directors which the Company or New
American Premier, as the Company's successor, intends
to file with the Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934 not later than
120 days after December 31, 1994.
Item 11. Executive Compensation
The information called for by Item 11 is incorporated by
reference to the definitive proxy statement involving
the election of directors which the Company or New
American Premier, as the Company's successor, intends to
file with the Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934 not later than
120 days after December 31, 1994.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information called for by Item 12 is incorporated by
reference to the definitive proxy statement involving
the election of directors which the Company or New
American Premier, as the Company's successor, intends to
file with the Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934 not later than
120 days after December 31, 1994.
As a result of the Acquisition, Carl H. Lindner and
members of his family will own approximately 55.2% of
the outstanding common stock of New American Premier and
effectively control New American Premier and the
Company. Carl H. Lindner, Chairman of the Board and
Chief Executive Officer of the Company, is Chairman
of the Board and Chief Executive Officer of New American
Premier and AFC. See Item 1--"Introduction" and
"Executive Officers of the Registrant" in Part I.
Item 13. Certain Relationships and Related Transactions
The information called for by Item 13 is incorporated by
reference to the definitive proxy statement involving
the election of directors which the Company or New
American Premier, as the Company's successor, intends to
file with the Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934 not later than
120 days after December 31, 1994.
39
PAGE
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as a part of this
report:
(1) and (2) Financial Statements and Financial State
ment Schedules--see Index to Financial Statements
and Financial Statement Schedules appearing on
Page F-1.
(3) Exhibits:
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K)
(2) ---Agreement and Plan of Acquisition and *
Reorganization by and among American
Premier Group, Inc., the Company, American
Premier Sub, Inc., American Financial
Corporation and AFC Sub, Inc. dated as
of December 9, 1994, as amended, incor-
porated by reference to Exhibit 2 to the
Registration Statement on Form S-4
No. 33-56813 (effective February 17, 1995)
of American Premier Group, Inc.
(3) (i) ---Amended and Restated Articles of Incor- *
poration of the Company, as amended
effective March 25, 1994, incorporated by
reference to Exhibit (3)(i) to the Company's
Annual Report on Form 10-K for 1993.
(ii) ---By-Laws of the Company, as amended
February 15, 1995.
(4)(i) ---Order No. 3708 of the United States Dis- *
trict Court for the Eastern District of
Pennsylvania in In the Matter of Penn
Central Transportation Company, Debtor,
Bankruptcy No. 70-347 dated August 17,
1978 directing the consummation of the
Plan of Reorganization for Penn Central
Transportation Company, incorporated by
reference to Exhibit 4 to Form 8-K Current
Report of Penn Central Transportation
Company for August 1978.
(4)(ii) (a) ---(i) Indenture dated as of August 1, 1989 *
between the Company and Morgan Guaranty
Trust Company of
- -----------
* Asterisk indicates an exhibit previously filed with the
Securities and Exchange Commission and incorporated herein by
reference.
40
<PAGE>
<PAGE>
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K)
New York, as Trustee, regarding the
Company's Subordinated Debt Securities
(the "Indenture"), incorporated by
reference to Exhibit 4.1 to the Company's
Form 8-K Current Report dated August 10,
1989.
---(ii) Instrument of Resignation of Trustee *
and Appointment and Acceptance of Successor
Trustee and Appointment of Agent dated as
of November 15, 1991 among the Company,
Morgan Guaranty Trust Company of New York
as Resigning Trustee and Star Bank, N.A.
as Successor Trustee, incorporated by
reference to Exhibit (4)(ii)(d)(ii) to the
Company's Annual Report on Form 10-K for
1991.
---(iii) Officer's Certificate Pursuant to *
Sections 102 and 301 of the Indenture
relating to authentication and designation
of the Company's 9-3/4% Subordinated Notes
due August 1, 1999, to which is attached
the Form of Note, incorporated by reference
to Exhibit 4.2 to the Company's Form 8-K
Current Report dated August 10, 1989.
---(iv) Officer's Certificate Pursuant to *
Sections 102 and 301 of the Indenture
relating to authentication and designation
of the Company's 10-5/8% Subordinated Notes
due April 15, 2000, to which is attached
the Form of Note, incorporated by reference
to Exhibit 4.1 to the Company's Form 8-K
Current Report dated April 19, 1990.
---(v) Officer's Certificate Pursuant to *
Sections 102 and 301 of the Indenture
relating to authentication and designation
of the Company's 10-7/8% Subordinated Notes
due May 1, 2011, to which is attached the
Form of Note, incorporated by reference
to Exhibit 4.1 to the Company's Form 8
amendment dated May 8, 1991 to the Company's
Form 8-K Current Report dated May 7, 1991.
- -----------
* Asterisk indicates an exhibit previously filed with the
Securities and Exchange Commission and incorporated herein by
reference.
41
PAGE
<PAGE>
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K)
(10)(i) ---Stock Purchase Agreement, dated as of *
June 10, 1993, among the Company, PCC
Technical Industries, Inc. and Tracor,
Inc., incorporated by reference to
Exhibit (99) to the Company's Current
Report on Form 8-K dated May 26, 1993.
The following Exhibits (10)(iii)(a) through (10)(iii)(g) are
compensatory plans and arrangements in which directors or
executive officers participate:
(iii) (a) ---(i) The Company's Stock Option Plan, as *
amended March 25, 1992, incorporated by
reference to Exhibit (10)(iii)(a)(i) to
the Company's Annual Report on Form 10-K
for 1992.
---(ii) Amendment to the Company's Stock *
Option Plan adopted by the Company's
Board of Directors on March 24, 1993,
incorporated by reference to Exhibit
(10)(iii)(a)(ii) to the Company's Annual
Report on Form 10-K for 1992.
---(iii) Forms of stock option agreements *
used to evidence options granted under the
Company's Stock Option Plan to officers and
directors of the Company, incorporated by
reference to Exhibit (10)(iii)(a)(iii) to
the Company's Annual Report on Form 10-K
for 1992.
---(iv) The Company's Stock Option Loan Pro- *
gram, as amended February 8, 1991, incorpor-
rated by reference to Exhibit (10)(iii)(a)(v)
to the Company's Annual Report on Form 10-K
for 1990.
(b) ---The Company's Annual Incentive Compensa- *
tion Plan, as amended February 12, 1992,
incorporated by reference to Exhibit
(10)(iii)(b) to the Company's Annual Report
on Form 10-K for 1991.
(c) ---Description of the Company's retirement *
program for outside directors, as adopted
by the Company's Board of Directors on
March 23, 1983, incorporated by reference
to Exhibit (10)(iii)(i) to the Company's
Annual Report on Form 10-K for 1982.
- -----------
* Asterisk indicates an exhibit previously filed with the
Securities and Exchange Commission and incorporated herein by
reference.
42
PAGE
<PAGE>
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K)
(d) ---The Company's Employee Stock Redemption *
Program, as adopted by the Company's Board
of Directors on March 28, 1985, incorpor-
ated by reference to Exhibit (10)(iii)(j)
to the Company's Annual Report on Form 10-K
for 1984.
(e) ---(i) Severance Agreement dated March 29, *
1987 between the Company and Alfred W.
Martinelli, a director of the Company,
incorporated by reference to Exhibit
(10)(iii)(a)(i) to the Company's Form 10-Q
Quarterly Report for the Quarter Ended
March 31, 1987.
---(ii) Consulting Agreement dated as of *
March 29, 1987 between the Company and
Alfred W. Martinelli, incorporated by
reference to Exhibit (10)(iii)(a)(ii)
to the Company's Form 10-Q Quarterly
Report for the Quarter Ended March 31,
1987.
---(iii) Letter agreement amending the fore- *
going Consulting and Severance Agreements
dated December 9, 1991 between the Company
and Alfred W. Martinelli, incorporated by
reference to Exhibit (10)(iii)(e)(iii)
to the Company's Annual Report on Form 10-K
for 1991.
---(iv) Letter agreement amending the fore-
going Consulting and Severance Agreements
dated June 29, 1994 between the Company
and Alfred W. Martinelli.
(f) ---Letters dated April 9, 1987 from the Com- *
pany to each of Neil M. Hahl and Robert W.
Olson, officers of the Company, with
respect to severance arrangements, as
supplemented by letters dated June 26,
1987 to each such officer, incorporated by
reference to Exhibit (10)(iii)(a) to the
Company's Form 10-Q Quarterly Report for
the Quarter Ended June 30, 1987.
- -----------
* Asterisk indicates an exhibit previously filed with the
Securities and Exchange Commission and incorporated herein by
reference.
43
PAGE
<PAGE>
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K)
(g) ---(i) Excess of Loss Agreement, effective *
March 31, 1988, between Republic Indemnity
Company of America and Great American
Insurance Company, incorporated by refer-
ence to Exhibit (g)(1) to Amendment No. 1
to Schedule 13E-3, dated January 17, 1989,
relating to Republic American Corporation
filed by Republic American Corporation, the
Company, RAWC Acquisition Corp., American
Financial Corporation and Carl H. Lindner
(the "Schedule 13E-3 Amendment").
---(ii) First Amendment to Excess of Loss *
Agreement, effective March 31, 1988,
between Republic Indemnity Company of
America and Great American Insurance
Company, incorporated by reference to
Exhibit (g)(2) to the Schedule 13E-3
Amendment.
(h) ---(i) Business Assumption Agreement, *
effective as of December 31, 1990, between
Stonewall Insurance Company and Dixie
Insurance Company (now Infinity Insurance
Company), incorporated by reference to
Exhibit (10)(iii)(o)(i) to the Company's
Annual Report on Form 10-K for 1990.
---(ii) Quota Share Agreements, effective *
December 31, 1990, between Stonewall
Insurance Company and Dixie Insurance
Company (now Infinity Insurance Company),
incorporated by reference to Exhibit
(10)(iii)(o)(ii) to the Company's Annual
Report on Form 10-K for 1990.
---(iii) Management Agreement, effective as *
January 1, 1991, by and between Dixie
Insurance Company (now Infinity Insurance
Company) and Stonewall Insurance Company,
incorporated by reference to Exhibit
(10)(iii)(o)(iii) to the Company's Annual
Report on Form 10-K for 1990.
---(iv) Assumption and Bulk Reinsurance Agree-
ment, effective December 31, 1994, between
Stonewall Insurance Company and Infinity
Insurance Company.
- ------------
* Asterisk indicates an exhibit previously filed with the
Securities and Exchange Commission and incorporated herein by
reference.
44
PAGE
<PAGE>
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K)
(i) ---Excess of Loss Agreements, effective *
December 31, 1990, between Great American
Insurance Company and each of Atlanta
Casualty Company, Dixie Insurance Company
(now Infinity Insurance Company) and Windsor
Insurance Company, incorporated by reference
to Exhibit (10)(iii)(p) to the Company's
Annual Report on Form 10-K for 1990.
(j) ---Premium Payment Agreement, effective as *
of January 1, 1991, by and between Great
American Insurance Company and the Company,
incorporated by reference to Exhibit
(10)(iii)(q) to the Company's Annual Report
on Form 10-K for 1990.
(11) ---Supplemental information regarding computa-
tions of net income per share amounts.
(12) ---Calculation of ratio of earnings to fixed
charges.
(21) ---List of subsidiaries of the Company.
(23) ---Consent of Deloitte & Touche LLP.
(27) ---Financial data schedule. +
(28) ---Information from reports provided to state
regulatory authorities.
(b) Reports on Form 8-K filed during the quarter ended
December 31, 1994:
Current Report on Form 8-K (Items 5 and 7) dated
December 9, 1994.
- -----------
* Asterisk indicates an exhibit previously filed with the
Securities and Exchange Commission and incorporated herein by
reference.
+ Copy included in Report filed electronically with the
Securities and Exchange Commission.
45
PAGE
<PAGE>
For the purposes of complying with the amendments to the
rules governing Form S-8 (effective July 13, 1990) under the
Securities Act of 1933, the undersigned registrant hereby
undertakes as follows, which undertaking shall be incorporated by
reference into registrant's Registration Statement on Form
S-8 No. 2-81422 (filed January 20, 1983), registrant's Post-
Effective Amendment No. 1 to Registration Statement on Form S-8
No. 2-72453 (filed December 23, 1983), registrant's Registration
Statement on Form S-8 No. 33-34871 (filed May 11, 1990) and
registrant's Registration Statement on Form S-8 No. 33-48700
(filed June 17, 1992):
Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection
with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of
such issue.
46
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 PREMIER UNDERWRITERS, INC.
(Registrant)
By Carl H. Lindner
--------------------------------
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Date: March 29, 1995
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: March 29, 1995 By Theodore H. Emmerich
--------------------------------
Theodore H. Emmerich
Director
Date: March 29, 1995 By James E. Evans
--------------------------------
James E. Evans
Director
Date: March 29, 1995 By Neil M. Hahl
--------------------------------
Neil M. Hahl
Senior Vice President and a Director
(Principal Financial Officer)
Date: March 29, 1995 By Thomas M. Hunt
--------------------------------
Thomas M. Hunt
Director
Date: March 29, 1995 By Carl H. Lindner
--------------------------------
Carl H. Lindner
Chairman of the Board and Chief
Executive Officer and a Director
47
PAGE
<PAGE>
Date: March 29, 1995 By Carl H. Lindner III
--------------------------------
Carl H. Lindner III
Director
Date: March 29, 1995 By S. Craig Lindner
--------------------------------
S. Craig Lindner
Director
Date: March 29, 1995 By William R. Martin
--------------------------------
William R. Martin
Director
Date: March 29, 1995 By Alfred W. Martinelli
--------------------------------
Alfred W. Martinelli
Director
Date: March 29, 1995 By Robert W. Olson
--------------------------------
Robert W. Olson
Director
Date: March 29, 1995 By Robert F. Amory
--------------------------------
Robert F. Amory
Vice President and Controller
(Principal Accounting Officer)
48
PAGE
<PAGE>
AMERICAN PREMIER UNDERWRITERS, INC.
Index to Financial Statements and Financial Statement Schedules
Page Number
Independent Auditors' Report F-2
American Premier Underwriters, Inc. and
Consolidated Subsidiaries:
Statement of Income-
For the years ended December 31, 1994,
1993 and 1992 F-3
Balance Sheet-
December 31, 1994 and 1993 F-4
Statement of Cash Flows-
For the years ended December 31, 1994,
1993 and 1992 F-5
Notes to Financial Statements F-6
Schedule III - Condensed Financial Information of
Registrant S-1
Schedule VIII - Valuation and Qualifying Accounts S-3
Schedules other than those listed above are omitted because
they are either not applicable or not required or the information
is included in the consolidated financial statements or notes
thereto.
F-1<PAGE>
INDEPENDENT AUDITORS' REPORT
American Premier Underwriters, Inc.
We have audited the financial statements and financial
statement schedules of American Premier Underwriters, Inc. and
Consolidated Subsidiaries listed in the accompanying Index to
Financial Statements and Financial Statement Schedules. These
financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of American Premier
Underwriters, Inc. and Consolidated Subsidiaries at December 31,
1994 and 1993, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1994
in conformity with generally accepted accounting principles. Also,
in our opinion, such financial statement schedules, when considered
in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information shown
therein.
As discussed in Note 7 to the financial statements, in 1992
the Company changed its method of accounting for income taxes to
conform with Statement of Financial Accounting Standards No. 109.
Deloitte & Touche LLP
Cincinnati, Ohio
February 15, 1995
(March 23, 1995 with respect
to the acquisition of American
Financial Corporation as discussed
in Note 2 to the financial
statements)
F-2<PAGE>
<PAGE>
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
(In Millions, Except Per Share Amounts) 1994 1993 1992
<S> <C> <C> <C>
Net written premiums $1,635.5 $1,378.9 $1,067.3
Revenues
Insurance operations
Premiums earned $1,557.9 $1,273.6 $ 998.7
Net investment income 129.9 114.7 105.0
Net realized gains - 17.5 23.6
Other operations
Net sales 116.9 198.3 255.4
Interest and dividend income 38.4 53.4 45.5
Loss on sale of General Cable
Corporation securities (75.8) - -
Net realized gains (losses) .1 105.8 (3.3)
1,767.4 1,763.3 1,424.9
Expenses
Insurance operations
Losses 939.3 726.9 579.5
Loss adjustment expenses 151.4 130.0 107.1
Commissions and other insurance expenses 356.0 288.3 229.7
Policyholder dividends 75.7 93.2 67.5
Other operations
Cost of sales 70.1 88.9 143.8
Operating expenses 45.3 105.7 107.3
Corporate and administrative expenses 20.0 20.2 20.2
Interest and debt expense 53.2 62.8 69.6
Provision for loss on sale of subsidiaries
and asset impairment 4.0 41.6 -
Other expense (income), net 11.2 15.6 16.1
1,726.2 1,573.2 1,340.8
Income from continuing operations before
income taxes 41.2 190.1 84.1
Income tax (expense) benefit (40.4) 52.6 (33.2)
Income from continuing operations .8 242.7 50.9
Discontinued operations:
Income from discontinued operations - 2.8 1.7
Loss on disposal (.5) (13.5) -
Cumulative effect of accounting change - - 252.8
Net income $ .3 $ 232.0 $ 305.4
Earnings per share data:
Continuing operations $ .02 $ 5.03 $ 1.08
Discontinued operations (.01) (.22) .04
Cumulative effect of accounting change - - 5.36
$ .01 $ 4.81 $ 6.48
Weighted average number of common shares 48.0 48.2 47.2
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3PAGE
<PAGE>
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
(In Millions, Except Share Data) 1994 1993
<S> <C> <C>
Assets:
Investments held by insurance operations
Fixed maturity securities
Held for investment - stated at amortized
cost (market $1,244.5 and $1,173.0) $1,317.9 $1,113.0
Available for sale - stated at market
(cost $524.1 and $408.7) 501.0 432.8
Short-term investments 51.7 56.9
1,870.6 1,602.7
Parent Company investments
Fixed maturity securities
Held for investment - stated at amortized
cost (market $271.5 and $251.7) 279.3 248.9
Available for sale - stated at market
(cost $328.0 and $ - ) 323.4 -
Short-term investments 199.1 387.9
General Cable Corporation notes - 286.8
Equity in affiliates 11.7 20.1
813.5 943.7
Cash 36.7 32.4
Accrued investment income 46.6 43.4
Agents' balances and premiums receivable 343.8 289.9
Reinsurance receivable 52.7 47.6
Other receivables 42.2 51.4
Deferred policy acquisition costs 92.1 77.4
Cost in excess of net assets acquired 394.5 406.8
Deferred tax asset 267.7 295.8
Other assets 233.6 258.5
Total $4,194.0 $4,049.6
Liabilities And Common Shareholders' Equity:
Unpaid losses and loss adjustment expenses $1,130.9 $ 961.4
Policyholder dividends 102.4 111.8
Unearned premiums 440.2 352.3
Debt 507.3 523.2
Minority interests in subsidiaries 6.2 15.1
Accounts payable and other liabilities 458.3 363.5
Total liabilities 2,645.3 2,327.3
Common Stock, $1.00 par value - outstanding or
issuable 46,282,157 and 47,446,094 shares 46.3 47.4
Capital surplus 662.2 746.2
Retained earnings (from October 25, 1978) 867.5 912.3
Net unrealized gains (losses) on investments (27.3) 16.4
Total common shareholders' equity 1,548.7 1,722.3
Total $4,194.0 $4,049.6
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4PAGE
<PAGE>
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
(In Millions) 1994 1993 1992
<S> <C> <C> <C>
Cash flows of operating activities:
Income from continuing operations $ .8 $ 242.7 $ 50.9
Adjustments to reconcile income from continuing
operations to net cash provided by continuing
activities
Deferred Federal income tax 36.3 (57.9) 28.9
Depreciation, depletion and amortization 27.5 32.8 33.5
Net (gain) loss on disposals of businesses,
investments and property, plant and
equipment 76.9 (80.6) (19.2)
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures
of businesses
Increase in receivables (54.8) (96.9) (47.2)
(Increase) decrease in other assets (5.4) 6.7 8.3
Increase (decrease) in accounts payable and
other liabilities (7.0) 12.7 (16.9)
Increase in unpaid losses and loss adjustment
expenses 155.2 94.8 99.6
Increase (decrease) in policyholder
dividends (9.4) 30.4 11.7
Increase in unearned premiums 82.1 105.7 68.6
Litigation settlement - 15.6 -
Other, net 5.4 (1.9) (.3)
Net cash flows of operating
activities 307.6 304.1 217.9
Cash flows of investing activities:
Purchases of available for sale investments (508.8) (158.6) -
Maturities and sales of available for sale
investments 103.6 149.4 -
Purchases of held for investment securities (341.0) (576.9) -
Maturities of held for investment securities 144.0 548.0 -
Purchases of investments (263.4) (344.1) (1,401.1)
Sales and maturities of investments 318.5 278.4 963.7
Net (increase) decrease in short-term investments 142.6 (37.2) 361.3
Sale of General Cable Corporation securities 176.7 - -
Sales of businesses 31.6 89.7 -
Acquisitions of businesses, net of cash acquired (13.9) (95.3) -
Capital expenditures (22.1) (17.5) (14.6)
Other, net 10.2 (1.4) 2.0
Net cash flows of investing
activities (222.0) (165.5) (88.7)
Cash flows of financing activities:
Repayment of debt (17.5) (135.1) (13.1)
Common Stock dividends (40.6) (38.2) (36.8)
Exercise of stock options and conversion of Career
Shares 19.1 24.0 12.6
Purchases of Company Common Stock (47.7) (1.9) (36.8)
Issuance of debt 1.2 1.8 3.1
Other, net 4.2 (1.3) .2
Net cash flows of financing
activities (81.3) (150.7) (70.8)
Net cash flows from continuing operations 4.3 (12.1) 58.4
Net cash (to) from discontinued operations - 8.3 (36.6)
Increase (decrease) in cash 4.3 (3.8) 21.8
Cash - beginning of year 32.4 36.2 14.4
Cash - end of year $ 36.7 $ 32.4 $ 36.2
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5<PAGE>
<PAGE>
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All majority-owned subsidiaries are consolidated, with the
exception of the Company's defense services operations sold in
August 1993 and those businesses included in the 1992 Spin-off to
the Company's shareholders of the Company's principal manufacturing
operations which have been classified as discontinued operations.
The Company's only industry segment is specialty property and
casualty insurance. Intercompany transactions and balances are
eliminated. Certain amounts in the consolidated financial
statements for years prior to 1994 have been reclassified to
conform to the current presentation.
Revenue Recognition
Premiums are earned ratably over the terms of the insurance
policies, net of reinsurance ceded.
Earnings Per Share
For the years ended December 31, 1994 and 1993, earnings per
share are calculated on the basis of the weighted average number of
shares of common stock outstanding during the period and the
dilutive effect of assumed conversion of common stock equivalents
(stock options and Career Shares). For 1992, the assumed
conversion of common stock equivalents was not deemed dilutive and
is therefore not reflected in the earnings per share presentation
for that period.
Investments
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The adoption
of SFAS No. 115 did not have a material effect on the Company's
financial position or results of operations.
Investments in fixed maturity securities which will be held
for indefinite periods of time are classified as available for sale
and are stated at market value, with net unrealized gains or losses
(net of deferred income taxes) credited or charged to shareholders'
equity. Investments in fixed maturity securities which the Company
has both the intent and the ability to hold to maturity are stated
at cost, adjusted for amortization of discount or premium unless
there is an impairment of value which is determined to be other
than temporary, in which case they are carried at estimated net
realizable value. In certain limited circumstances, such as
significant individual issuer credit deterioration, a major
business combination or disposition or if required by insurance or
other regulators, the Company may
F-6PAGE
<PAGE>
dispose of such investments prior to their scheduled maturities.
Short-term investments are carried at amortized cost which
approximates market value. The Company uses the "specific
identification" method of determining the cost of investments sold.
For further information, see Notes 4 and 5.
Cost in Excess of Net Assets Acquired
The excess of the acquisition cost over the net assets of
businesses acquired ("Goodwill") is being amortized using the
straight-line method over periods not exceeding 40 years. At
December 31, 1994 and 1993, accumulated amortization of cost in
excess of net assets acquired totaled $52.7 million and $42.9
million, respectively.
The Company's management continually monitors whether
significant changes in certain industry and regulatory conditions
or prolonged trends of declining profitability have occurred which
would lead the Company to question the recoverability of the
carrying value of its Goodwill. The Company's evaluation of its
recorded Goodwill would be based primarily on estimates of future
earnings, as well as all other available factors which may provide
additional evidence relevant to the assessment of recoverability
of its Goodwill.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs applicable to unearned
premiums are computed on a basis which gives recognition to
underwriting expenses (commissions, premium taxes and certain other
underwriting costs), loss, loss adjustment expense and policyholder
dividend ratios and the anticipated expenses necessary to maintain
policies in force. The deferred costs are limited to the
difference between unearned premiums and expected related losses,
loss adjustment expenses and policyholder dividends, with
subsequent amortization to income occurring ratably over the terms
of the related policies. Limits on deferred costs are calculated
separately for significant lines of business without any
consideration for anticipated investment income.
Unpaid Losses and Loss Adjustment Expenses
The liabilities stated for unpaid losses and loss adjustment
expenses are based on (a) the accumulation of case estimates for
losses reported on the direct business written; (b) estimates
received from ceding reinsurers and insurance pools and
associations; (c) estimates of unreported losses based on past
experience, and (d) estimates of expenses for investigating and
adjusting claims based on experience. These liabilities are
subject to the impact of changes in claim amounts and frequency and
other factors. In spite of the variability inherent in such
estimates, management believes that the recorded liabilities for
unpaid losses and loss adjustment expenses are adequate. Changes
in estimates of the liabilities for unpaid losses and loss
adjustment expenses are included in income in the period in which
determined.
F-7<PAGE>
Policyholder Dividends
Dividends payable to policyholders represent management's
estimate of amounts payable on participating policies which share
in favorable underwriting results. The estimate is accrued during
the period in which the related premium is earned. Changes in
estimates are included in income in the period determined.
Policyholder dividends do not become legal liabilities unless and
until declared by the boards of directors of the insurance
companies.
Unearned Premiums
Unearned premiums represent that portion of premiums written
which is applicable to the unexpired terms of policies in force,
generally computed by the application of daily pro rata fractions.
On reinsurance assumed, unearned premiums are based on reports
received from the ceding reinsurers and insurance pools and
associations.
Reinsurance
Portions of the Company's policy coverages are reinsured under
contracts with various reinsurers. The more significant contracts
represent excess of loss treaties designed to limit the Company's
potential liability on significant policy coverages. Reinsurance
contracts do not relieve the Company from its obligations to
policyholders. Effective January 1, 1993, the Company adopted SFAS
No. 113, "Accounting and Reporting for Reinsurance of Short-
Duration and Long-Duration Contracts". This statement requires
ceding insurers to (a) report separately as assets estimated
reinsurance receivables arising from reinsurance contracts and
amounts paid to reinsurers relating to the unexpired portions of
such contracts and (b) include corresponding amounts in unpaid
losses and loss adjustment expenses on a gross basis. Prior to the
adoption of SFAS No. 113, assets related to reinsurance activities
were recorded as reductions to the liabilities stated for unpaid
losses and loss adjustment expenses and unearned premiums. The
adoption of SFAS No. 113 did not have a material impact on the
Company's results of operations. Financial statements of prior
periods have not been restated to reflect the provisions of this
statement.
Income on reinsurance contracts is recognized based on reports
received from ceding reinsurers and insurance pools and
associations.
Capital Surplus
Adjustments to claims and contingencies arising from events or
circumstances preceding the Company's 1978 reorganization are
reflected in capital surplus if the adjustments are not clearly
attributable to post-reorganization events or circumstances. Such
pre-reorganization claims and contingencies consist principally of
personal injury claims by former employees of the Company's
predecessor and claims relating to the generation, disposal or
release into the environment of allegedly hazardous substances
arising out of railroad operations disposed of prior to the 1978
reorganization.
F-8<PAGE>
Fair Value of Financial Instruments
Financial instruments are defined as cash, evidence of an
ownership interest in an entity, or contracts relating to the
receipt, delivery or exchange of financial instruments. The
estimated fair value amounts of the Company's financial instruments
have been determined by the Company using available market
information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting
market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in current market
transactions. The use of different market assumptions and/or
estimation methodologies may have a material effect on the
estimated fair value amounts. In addition, the fair value
estimates presented herein are based on pertinent information
available to management as of December 31, 1994. Although
management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements
since that date and, therefore, current estimates of fair value may
differ significantly from the amounts presented herein. The terms
"fair value" and "market value" are used interchangeably in the
financial statements and the notes thereto. Unless otherwise
denoted, stated values of financial instruments approximate fair
value.
2. SUBSEQUENT EVENT - ACQUISITION OF AMERICAN FINANCIAL
CORPORATION
On March 23, 1995, the Company's shareholders approved the
acquisition of all of the common stock of American Financial
Corporation ("AFC"). Consummation of the acquisition is pending
receipt of a private letter ruling from the Internal Revenue
Service regarding the continuation of the Company's federal income
tax consolidated group. Upon consummation of the acquisition, the
Company will become a wholly owned subsidiary of American Premier
Group, Inc. ("New American Premier"), a new corporation formed by
the Company for the purpose of acquiring all of the common stock of
AFC. Under the terms of the acquisition, (a) the Company will
merge with a subsidiary of New American Premier and each of the
41.7 million shares of Company Common Stock expected to be then
outstanding will be converted into one share of New American
Premier Common Stock, and (b) AFC will merge with another
subsidiary of New American Premier and each share of AFC Common
Stock will be converted into 1.435 shares of New American Premier
Common Stock (after giving effect to a litigation settlement). As
a result of the acquisition, the Company and AFC each will become
wholly owned subsidiaries of New American Premier and New American
Premier will be the Company's successor as the issuer of publicly
held common stock. AFC owns approximately 18.7 million shares of
the Company's common stock (representing 44.8 percent of the
outstanding shares), which will be treated as having been acquired
by New American Premier in the acquisition. Upon completion of the
acquisition, the former shareholders of AFC, consisting of Carl H.
Lindner, members of his family and trusts for their benefit, will
own 28.3 million of New American Premier common shares,
representing approximately 55.2 percent of the approximately 51.3
million New American Premier common shares expected to be then
outstanding. Accordingly, the net increase in outstanding shares
resulting from the acquisition will be approximately 9.6 million
shares. Mr. Lindner is chairman and chief executive officer of
both the Company and AFC and will continue in that role with New
American Premier. The acquisition was previously approved by the
Company's Board of Directors based on the recommendation of a
special committee of the Company's independent directors. In
making its recommendation, the special committee relied
F-9PAGE
<PAGE>
on an opinion of Furman Selz Incorporated that the number of New
American Premier shares to be issued to the shareholders of AFC was
fair to the shareholders of the Company (other than AFC) from a
financial point of view.
3. DIVESTITURES
Sale of Non-insurance Businesses
The intended divestitures of businesses announced in December
1992 included five small diversified industrial companies, four of
which were sold during 1993 and 1994 for aggregate proceeds of
$30.9 million. The remaining business was sold in February 1995
for cash and notes of $15.8 million, subject to a post-closing
adjustment. A provision of $4.0 million for the anticipated loss
on this sale was recorded in 1994. On June 2, 1994, the Company
sold its 53.5 percent interest in operations which provide onshore
oil and gas contract drilling and well workover services for $14.5
million in cash. No gain or loss was recognized on the
transaction. For 1994, the operations sold and to be sold had
aggregate sales of $94.8 million and a pre-tax loss of $9.4
million.
On November 9, 1993, the Company sold all of its 1,982,646
shares of the common stock of Tejas Gas Corporation ("Tejas") in an
underwritten public offering for net proceeds of $106.6 million.
The Company's pre-tax gain from the sale was approximately $80.0
million.
On August 25, 1993, the Company sold its defense services
operations, excluding certain real estate being retained for sale
by the Company, to Tracor, Inc. for $94 million in cash, subject to
a post-closing working capital adjustment. As a result of the
sale, the defense services operations have been classified as
discontinued operations for all periods presented.
On May 25, 1993, the Company sold all of its 2,308,900 limited
partnership units of Buckeye Partners, L.P. ("Buckeye Units") in an
underwritten public offering for net proceeds of $71.6 million, of
which $10.7 million was related to Buckeye Units held in the
insurance operations' investment portfolio and $60.9 million was
attributable to Buckeye Units held in the Parent Company investment
portfolio. The Company's pre-tax gain from the sale was
approximately $18.5 million. Of this amount, $2.8 million is
related to the insurance operations' investments and accordingly,
is included in "net realized gains" from insurance investments.
The balance of $15.7 million, attributable to the Parent Company
investments, is included in "net realized gains (losses)".
Spin-off of Principal Manufacturing Operations
On July 1, 1992, substantially all of the stock of the
Company's subsidiary, General Cable Corporation ("General Cable"),
which had been formed to own the Company's wire and cable,
materials handling machinery and equipment and marine equipment
manufacturing businesses (the "General Cable Businesses"), was spun
off to the Company's shareholders (the "Spin-off"). As a result of
the Spin-off, the General Cable Businesses were classified as
discontinued operations.
As part of the Spin-off, the Company retained a $255 million
9.98 percent subordinated note due 2007 issued by General Cable
(the "General Cable Note"), a
F-10PAGE
<PAGE>
$36.9 million short-term note of General Cable (the "Short-term
Note") and approximately 11.6 percent of the General Cable shares
("Retained Shares"). During 1993, General Cable paid the $31.8
million of interest due on the General Cable Note with additional
9.98 percent subordinated notes ("Interest Notes") in lieu of cash
and repaid the Short-term Note in full, together with accrued
interest, with cash on July 2, 1993.
On February 14, 1994, as a result of General Cable's sale of
its Marathon LeTourneau unit to a subsidiary of Rowan Companies,
Inc. ("Rowan"), General Cable delivered to the Company cash and
promissory notes issued by Rowan totalling $52.1 million as a
partial payment of the General Note and Interest Notes
(collectively, the "General Cable Notes"). As a result of these
receipts, the Company credited General Cable with $48.1 million of
principal and interest on the General Cable Notes.
On June 9, 1994, as part of an agreement for the purchase of
all of the outstanding shares of General Cable by Wassall PLC
("Wassall"), the Company sold to Wassall the then outstanding
$253.5 million principal amount of the General Cable Notes and the
Retained Shares for $169.8 million and $6.9 million, respectively.
Also as part of the agreement, the Company received a $19.2 million
payment from Wassall in consideration of assuming responsibility
for certain actual and potential environmental and other
liabilities (the "Indemnity Payment"). For further information
regarding such liabilities, see Note 11. Immediately prior to the
sale of General Cable to Wassall, AFC, which owned 40.5% of the
Company's common stock, also owned 45.6% of the outstanding common
stock of General Cable. The Chairman of the Board and Chief
Executive Officer of the Company was the Chairman of the Board of
General Cable. The transaction was approved by the Company's Board
of Directors based on the recommendation of a special committee of
the Company's independent directors. In making its recommendation,
the special committee relied on an opinion of Donaldson, Lufkin &
Jenrette Securities Corp. that the aggregate consideration to be
received by the Company in the transaction was fair to the Company
from a financial point of view. The Company recorded a loss of
approximately $75.8 million in 1994 for the disposition of the
General Cable Notes and Retained Shares, and the Company did not
accrue interest income on the General Cable Notes during 1994.
The principal pro forma effect on the Company's 1992 pre-tax
income from continuing operations, assuming the Spin-off had
occurred on January 1, 1991, is the inclusion of interest income
attributable to the General Cable Note and Short-Term Note for the
six months ended June 30, 1992. Assuming a prime rate of 6 percent
per annum for the Short-Term Note, such income would have added
$13.8 million, or $.18 per share, for 1992.
F-11<PAGE>
<PAGE>
Discontinued Operations
Discontinued operations includes the following:
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Revenues:
Defense services businesses $ - $274.8 $414.0
General Cable Businesses - - 469.3
$ - $274.8 $883.3
Pre-tax Income (Loss):
Defense services businesses $ - $ 4.8 $ 18.9
General Cable Businesses - - (19.5)
$ - $ 4.8 $ (.6)
Income (Loss) from
Discontinued Operations:
Defense services businesses $ (.5) $(10.7) $ 11.2
General Cable Businesses - - (9.5)
$ (.5) $(10.7) $ 1.7
Income (Loss) Per Share from
Discontinued Operations:
Defense services businesses $ (.01) $ (.22) $ .24
General Cable Businesses - - (.20)
$ (.01) $ (.22) $ .04
</TABLE>
The loss from discontinued operations in 1993 includes a loss
on disposal of the defense services businesses of $13.5 million, or
$.28 per share, primarily attributable to a reduction of deferred
tax assets. For 1992, results of the General Cable Businesses were
for the six months ended June 30, 1992, up to the Spin-off date.
F-12<PAGE>
<PAGE>
4. INSURANCE OPERATIONS
Investments of Insurance Operations
The insurance operations' investments in fixed maturity
securities at December 31, consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
1994 Cost Gains Losses Value
<S> <C> <C> <C> <C>
(In Millions)
Held for investment
Corporate securities $1,012.9 $ 3.1 $ 57.6 $ 958.4
Public utilities 207.5 .3 14.9 192.9
Mortgage-backed securities 80.9 .2 4.1 77.0
State and local obligations 8.0 .5 - 8.5
Foreign securities 8.6 - .9 7.7
Total held for investment 1,317.9 4.1 77.5 1,244.5
Available for sale
Corporate securities 310.4 1.6 16.1 295.9
Public utilities 16.8 - 1.1 15.7
Mortgage-backed securities 57.9 .1 3.1 54.9
U.S. government securities 81.7 .2 3.1 78.8
State and local obligations 2.8 - - 2.8
Foreign securities 52.6 - 1.6 51.0
Total available for sale 522.2 1.9 25.0 499.1
Total fixed maturity
securities $1,840.1 $ 6.0 $ 102.5 $1,743.6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
1993 Cost Gains Losses Value
<S> <C> <C> <C> <C>
(In Millions)
Held for investment
Corporate securities $ 826.7 $ 50.8 $ 2.6 $ 874.9
Public utilities 192.1 7.5 .5 199.1
Mortgage-backed securities 85.9 3.6 - 89.5
State and local obligations 8.3 1.2 - 9.5
Total held for investment 1,113.0 63.1 3.1 1,173.0
Available for sale
Corporate securities 267.2 17.4 1.8 282.8
Public utilities 22.1 1.1 .2 23.0
Mortgage-backed securities 62.1 4.2 .1 66.2
U.S. government securities 51.5 3.3 - 54.8
State and local obligations 5.7 .2 - 5.9
Total available for sale 408.6 26.2 2.1 432.7
Total fixed maturity
securities $1,521.6 $ 89.3 $ 5.2 $1,605.7
</TABLE>
F-13PAGE
<PAGE>
At December 31, 1994, the insurance operations' investments
included unrated or less than investment grade corporate securities
with a carrying value of $129.1 million (market value $127.6
million). Investments of insurance operations also include a net
receivable for securities sold but not settled of $1.9 million at
December 31, 1994 and $.1 million at December 31, 1993.
The amortized cost and market value of the insurance
operations' investments in fixed maturity securities at December
31, 1994 are shown below by contractual maturity. Expected
maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations.
(In Millions)
Amortized Market
Cost Value
Held for investment
Due in one year or less $ .4 $ .4
Due after one year through five years 270.2 265.7
Due after five years through ten years 778.0 727.8
Due after ten years 188.4 173.6
1,237.0 1,167.5
Mortgage-backed securities 80.9 77.0
Total held for investment 1,317.9 1,244.5
Available for sale
Due in one year or less 40.1 40.1
Due after one year through five years 132.6 129.2
Due after five years through ten years 238.8 223.8
Due after ten years 52.8 51.1
464.3 444.2
Mortgage-backed securities 57.9 54.9
Total available for sale 522.2 499.1
Total fixed maturity securities $1,840.1 $1,743.6
At December 31, 1994 and 1993, short-term investments
consisted principally of U.S. Treasury securities and commercial
paper.
Investment Income of Insurance Operations
Investment income consisted of the following:
(In Millions)
Years Ended December 31, 1994 1993 1992
Income from fixed maturity
securities $133.1 $117.4 $105.6
Income from equity securities - .5 2.1
Gross investment income 133.1 117.9 107.7
Investment expenses (3.2) (3.2) (2.7)
Net investment income $129.9 $114.7 $105.0
F-14<PAGE>
<PAGE>
Realized gains (losses) consisted of the following:
(In Millions)
Years Ended December 31, 1994 1993 1992
Gross realized gains on:
Fixed maturity securities $ 3.3 $ 15.6 $ 23.3
Equity securities - 2.8 1.5
Gross realized losses on:
Fixed maturity securities (3.3) (.9) (1.2)
Equity securities - - -
Net realized gains (losses) $ - $ 17.5 $ 23.6
Income from fixed maturity securities includes income from
short-term investments. Proceeds from sales of investments in
fixed maturity securities during 1994, 1993 and 1992, excluding
proceeds from sales at or near maturity, totaled $75.3 million,
$155.9 million and $409.4 million, respectively. During 1994,
$55.8 million of proceeds from these sales were from securities
classified as available for sale and $19.5 million were from
securities classified as held for investment. All such sales of
held for investment securities were made as a result of significant
deterioration in the issuers' credit rating. The gross realized
gains (losses) attributable to sales of fixed maturity securities,
excluding sales at or near maturity, were:
(In Millions)
1994
Available Held for
for Sale Investment
Gross realized gains $ 1.2 $ 1.6
Gross realized losses (2.6) (.2)
Net realized gains (losses) $ (1.4) $ 1.4
Restrictions on Transfers of Funds and Assets
The Company's insurance operations are subject to state
regulations which limit, by reference to specified measures of
statutory operating results and policyholders' surplus, the
dividends that can be paid to the Company without prior regulatory
approval. Under these restrictions, the maximum amount of
dividends which can be paid to the Company during 1995 by these
subsidiaries is $83.8 million. At December 31, 1994 and 1993,
statutory capital and surplus totalled $643.6 million and $567.3
million, respectively.
F-15<PAGE>
<PAGE>
Reinsurance
The insurance operations assume and cede a portion of their
written business with other insurance companies in the normal
course of business. To the extent that any reinsuring companies
are unable to meet their obligations under agreements covering
reinsurance ceded, the Company's insurance subsidiaries would
remain liable. Amounts deducted from insurance losses and loss
adjustment expenses ("LAE") and net written and earned premiums in
connection with reinsurance ceded to affiliates and non-affiliated
companies, as well as amounts included in net written and earned
premiums for reinsurance assumed from affiliates and non-affiliated
companies, were as follows:
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Reinsurance ceded:
Premiums written
Non-affiliates $20.4 $ 9.3 $ 5.9
Premiums earned
Non-affiliates 18.7 8.9 6.4
Incurred losses and loss adjustment
expenses
Affiliates (1.8) (2.5) (8.8)
Non-affiliates 15.9 3.8 4.4
Reinsurance assumed:
Premiums written
Affiliates 167.6 101.2 56.0
Non-affiliates 36.4 74.4 46.1
Premiums earned
Affiliates 139.4 78.2 56.1
Non-affiliates 50.1 60.1 36.4
</TABLE>
(In Millions)
December 31, 1994 1993
Reinsurance ceded:
Reserves for unpaid loss and
loss adjustment expenses
Affiliates $ 10.2 $ 14.0
Non-affiliates 40.7 29.1
The allowance for uncollectible reinsurance was $1.5 million
and $1.9 million, respectively, at December 31, 1994 and 1993.
F-16<PAGE>
Liability for Losses and Loss Adjustment Expenses
The following table provides an analysis of changes in the
estimated liability for losses and LAE, net of reinsurance
activity.
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Balance at beginning of year, net of
reinsurance $ 916.3 $ 763.5 $ 663.9
Provision for losses and LAE occurring
in the current year 1,169.5 914.7 706.8
Net decrease in provision for claims
occurring in prior years (78.8) (57.8) (20.2)
1,090.7 856.9 686.6
Payments for losses and LAE
occurring during:
Current year 553.6 413.0 294.7
Prior years 386.5 345.1 292.3
940.1 758.1 587.0
Loss and LAE reserves of subsidiaries
purchased 13.1 54.0 -
Balance at end of year, net of
reinsurance 1,080.0 916.3 763.5
Reinsurance receivable on unpaid losses
and LAE at end of year 50.9 45.1 -
Balance at end of period, gross of
reinsurance receivable $1,130.9 $ 961.4 $ 763.5
</TABLE>
The decreases in the provision for claims occurring in prior
years results from reductions in the estimated ultimate losses and
LAE related to such claims.
Other
Statutory net income for 1994, 1993 and 1992 was $74.0
million, $93.0 million and $81.6 million, respectively. Deferred
policy acquisition costs amortized to income were $292.3 million,
$243.8 million and $195.9 million for 1994, 1993 and 1992,
respectively.
At December 31, 1994 and 1993, reserves for uncollectible
premiums receivable were $5.9 million and $5.6 million,
respectively.
During 1994, 1993 and 1992, 89 percent, 95 percent and 95
percent, respectively, of net premiums written in the workers'
compensation insurance operations were for policies eligible for
policyholder dividend consideration.
F-17PAGE
<PAGE>
5. PARENT COMPANY INVESTMENTS
The Parent Company investments in fixed maturity securities at
December 31, consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
1994 Cost Gains Losses Value
<S> <C> <C> <C> <C>
(In Millions)
Held for investment
Corporate securities $ 205.4 $ - $ 6.4 $ 199.0
Public utilities 23.0 - .8 22.2
Mortgage-backed securities .4 - - .4
U.S. Government securities 50.5 - .6 49.9
Total held for investment 279.3 - 7.8 271.5
Available for sale
U.S. Government securities 328.0 - 4.6 323.4
Total fixed maturity
securities $ 607.3 $ - $ 12.4 $ 594.9
Gross Gross
Amortized Unrealized Unrealized Market
1993 Cost Gains Losses Value
(In Millions)
Held for investment
Corporate securities $ 189.6 $ 3.1 $ .3 $ 192.4
Public utilities 31.6 - - 31.6
U.S. Government securities 26.5 - - 26.5
Mortgage-backed securities 1.2 - - 1.2
Total fixed maturity
securities $ 248.9 $ 3.1 $ .3 $ 251.7
</TABLE>
At December 31, 1994, the carrying value of unrated or less
than investment grade corporate securities totalled $27.2 million
(market value $26.5 million).
Proceeds from sales of Parent Company investments during 1992,
excluding proceeds from sales at or near maturity totaled $5.3
million. No gains or losses were realized on such securities in
1992.
F-18<PAGE>
Amortized cost and market value of Parent Company investments in
fixed maturity securities at December 31, 1994 are shown below by
contractual maturity. Expected maturities may differ from
contractual maturities because certain borrowers have the right to
call or prepay obligations.
(In Millions)
Amortized Market
Cost Value
Held for investment
Due in one year or less $ 42.3 $ 41.8
Due after one year through five years 185.5 180.9
Due after five years through ten years 40.6 38.1
Due after ten years 10.5 10.3
278.9 271.1
Mortgage-backed securities .4 .4
Total held for investment 279.3 271.5
Available for sale
Due in one year or less 83.9 82.8
Due after one year through five years 242.6 239.1
Due after five years through ten years - -
Due after ten years 1.5 1.5
328.0 323.4
Mortgage-backed securities - -
Total available for sale 328.0 323.4
Total fixed maturity securities $ 607.3 $ 594.9
At December 31, 1994 and 1993, short-term investments
consisted principally of U.S. Treasury securities and commercial
paper.
F-19<PAGE>
6. DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
(In Millions)
1994 1993
Estimated Estimated
Carrying Fair Carrying Fair
December 31, Amount Value Amount Value
<S> <C> <C> <C> <C>
Subordinated notes, 10 7/8%, due 2011
(net of unamortized debt issue costs
of $1.1 in each period) $ 148.9 $ 159.3 $ 148.9 $ 189.0
Subordinated notes, 10 5/8%, due 2000
(net of unamortized debt issue costs
of $.8 and $1.0 respectively) 149.2 155.8 149.0 175.5
Subordinated notes, 9 3/4%, due 1999
(net of unamortized debt issue costs
of $.6 and $.8, respectively) 199.4 201.0 199.2 226.0
Subordinated debentures, 9 1/2%, due
2002 - - 16.2 16.2
Other 9.8 9.8 9.9 9.9
Total $ 507.3 $ 525.9 $ 523.2 $ 616.6
</TABLE>
On March 25, 1994, the Company redeemed all of the outstanding
$16.2 million principal amount of its 9 1/2 percent subordinated
debentures due August 1, 2002 at the redemption price of 100
percent of the principal amount of each debenture plus accrued
interest.
On July 30, 1993, the Company redeemed all $133.3 million
principal amount of its outstanding 11 percent subordinated
debentures due December 15, 1997 at the redemption price of 100
percent of the principal amount of each debenture plus accrued
interest to the redemption date.
Certain loan agreements contain several covenants and
restrictions, none of which significantly impacted the Company's
operations at December 31, 1994.
The 10 7/8, 10 5/8 and 9 3/4 percent notes (the "Notes") are
subordinated in right of payment to all debt of the Company
outstanding at any time, except for debt which is by its terms not
superior to the notes and debentures. Under certain circumstances,
the holders of the Notes can require the Company to purchase all or
part of such Notes at par plus accrued interest (the "Put Right").
The acquisition of AFC described in Note 2, if followed by a
ratings downgrade by either Standard & Poor's Corporation or
Moody's Investor Service Inc., would trigger the Put Right. Both
agencies have placed the Notes under review for possible ratings
downgrade as a result of the Acquisition. The Company is unable to
predict whether either or both of these agencies will in fact
downgrade the Notes or to what extent, if any, holders of the Notes
would exercise their Put Right.
F-20<PAGE>
Annual maturities of debt outstanding at December 31, 1994,
are as follows:
(In Millions)
1995 $ .7
1996 .8
1997 .8
1998 .9
1999 200.4
After 1999 303.7
At December 31, 1994, the Company had unutilized letter of
credit facilities totalling $43.7 million which, if drawn, will
bear interest at rates which approximate the prime rates offered by
various banks.
Estimated fair values for debt issues that are not quoted on
an exchange were calculated using interest rates that are currently
available to the Company for issuance of debt with similar terms
and remaining maturities.
7. INCOME TAXES
The Company has reported as of the beginning of its 1994 tax
year, an aggregate consolidated net operating loss carryforward for
Federal income tax purposes of approximately $638 million, which
will expire at the end of 1996 unless previously utilized, and a
$252 million capital loss carryforward, which will expire in
various amounts between 1995 and 1997, unless previously utilized.
The 1994 consolidated Federal income tax return will report a
remaining net operating loss carryforward currently estimated at
$505 million, which will expire at the end of 1996 unless
previously utilized, and remaining capital loss carryforwards
estimated at $325 million which will expire in various amounts
between 1995 and 1999, unless previously utilized. Also, as of
December 31, 1994, the Company has investment tax credit
carryforwards totalling approximately $8.8 million, which will
expire in various amounts between 1995 and 2000 unless previously
used, and alternative minimum tax credit ("AMT") carryforwards of
approximately $14 million.
During 1992, the Company elected to adopt SFAS No. 109,
"Accounting for Income Taxes", effective January 1, 1992, without
restating prior years' financial statements. SFAS No. 109 changed
the methods of accounting for income taxes and the criteria for
recognition of deferred tax assets. More specifically, a deferred
tax asset is recognized for those carryforwards and temporary
differences which will provide future tax benefits. A deferred tax
liability is recognized for temporary differences which will result
in taxable amounts in future years. The cumulative effect
resulting from adopting SFAS No. 109 as of January 1, 1992 was
income of $252.8 million, or $5.36 per share. As a result of
adopting SFAS No. 109, common shareholders' equity increased $300.8
million, or $6.38 per share, which amount includes $48.0 million,
or $1.02 per share, attributable to the tax effect of the pre-
reorganization net operating loss carryforward, as well as the
cumulative effect of accounting change.
F-21<PAGE>
Components of the provisions for income tax benefit (expense)
were as follows:
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Current
Federal $ (2.8) $(4.4) $ (2.8)
Foreign, state & local (1.3) (.9) (1.5)
Total current (4.1) (5.3) (4.3)
Deferred
Federal (36.3) 59.4 (28.9)
Foreign, state & local - (1.5) -
Total deferred (36.3) 57.9 (28.9)
Total $(40.4) $52.6 $(33.2)
</TABLE>
Consolidated income tax expense differs from the amount
computed using the United States statutory income tax rate for the
reasons set forth in the following table:
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Income before income taxes $ 41.2 $190.1 $ 84.1
Expected tax at U.S. statutory
income tax rate $(14.4) $(66.5) $ (28.6)
Amortization of goodwill (4.0) (3.8) (3.5)
Revision to valuation allowance - 132.0 -
Loss disallowance (21.4) (6.9) -
Other, net (.6) (2.2) (1.1)
Consolidated income tax $(40.4) $ 52.6 $ (33.2)
</TABLE>
The Company's substantial tax loss carryforwards and temporary
differences give rise to deferred tax assets. Based on an analysis
of the likelihood of realizing the Company's gross deferred tax
asset (taking into consideration applicable statutory carryforward
periods), the Company determined that the recognition criteria set
forth in SFAS No. 109 are not met for the entire gross deferred tax
asset and, accordingly, the gross deferred tax asset is reduced by
a valuation allowance. The analysis of the likelihood of realizing
the gross deferred tax asset is reviewed and updated periodically.
Any required adjustments to the valuation allowance are made in the
period in which the developments on which they are based become
known. Results for 1993 include tax benefits of $132 million
attributable to such adjustments.
F-22PAGE
<PAGE>
Carryforwards and temporary differences which give rise to the
deferred tax asset are as follows:
(In Millions)
Amount of Deferred Tax Assets
at Current Tax Rates
December 31,
1994 1993
Net operating loss carryforward $176.7 $213.5
Capital loss carryforwards 115.5 93.3
Insurance claims and reserves 93.4 114.0
Other, net 95.6 70.2
Gross deferred tax asset 481.2 491.0
Valuation allowance (213.5) (195.2)
Net deferred tax asset $267.7 $295.8
8. PENSION PLANS AND OTHER RETIREMENT BENEFITS
The Company provides retirement benefits, primarily through
contributory and noncontributory defined contribution plans, for
the majority of its regular full-time employees except those
covered by certain labor contracts. Company contributions under
the defined contribution plans sponsored by the Company
approximate, on average, five percent of each eligible employee's
covered compensation. In addition, the Company sponsors employee
savings plans under which the Company matches a specified portion
of contributions made by eligible employees.
Expense related to defined contribution plans for 1994, 1993
and 1992 totaled $5.8 million, $5.5 million and $6.0 million,
respectively. The Company also provides defined benefit pension
plan retirement benefits for certain employees. The related
amounts included in the accompanying financial statements are not
material to the Company's financial condition.
9. EMPLOYEE STOCK OPTION AND PURCHASE PLANS
Under the Company's Stock Option Plan, options to purchase
shares of Common Stock may be granted to officers and other key
employees, and to non-employee directors of the Company. The
exercise price may not be less than the fair market value of the
Common Stock at the date of the grant. The options granted to
officers and key employees generally become exercisable to the
extent of 20 percent of the shares covered each year, beginning one
year from the date of grant, and expire ten years from the date of
grant. The options granted to non-employee directors of the
Company generally become fully exercisable upon grant and expire
approximately ten years from the date of grant.
Under the now terminated Career Share Purchase Plan (the
"Career Share Plan"), officers and other key employees of the
Company purchased shares of the Company's Preference Stock
(designated Career Shares). Outstanding Career Shares are
F-23PAGE
<PAGE>
convertible, at the holder's option, into a specified number of
shares of Common Stock determined by reference to the fair market
value (as defined) of a share of Common Stock as of the date the
Career Shares were offered for purchase.
Career Shares are generally not entitled to vote; are entitled
to cumulative annual cash dividends per share (if declared by the
Board of Directors) equal to 9.3 percent of their purchase price
per share; are superior to the rights of holders of shares of
Common Stock with respect to dividends; and have no preference to
the rights of holders of shares of Common Stock in the event of
liquidation. Under certain conditions, holders of Career Shares
issued under the Career Share Plan are entitled to sell to the
Company any or all of their shares and the Company is entitled to
repurchase all outstanding Career Shares.
The number of common shares available with respect to the
Company's Stock Option and Career Share Plans and activity under
these Plans were as follows:
<TABLE>
<CAPTION>
Common Stock Equivalents
Available Exercise or
Under Conversion
Plans Outstanding Prices Per Share
<S> <C> <C> <C>
Balance at December 31, 1993 2,098,673 4,328,441 $15.80 - $31.38
Activity during 1994:
Stock options granted (235,137) 235,137
Stock options exercised (892,968) $15.80 - $24.06
Stock options terminated 275,256 (275,256)
Balance at December 31, 1994 2,138,792 3,395,354 $17.24 - $31.38
Exercisable or convertible (vested)
at December 31, 1994 2,429,430 $17.24 - $31.38
</TABLE>
The Company's Employee Stock Purchase Plan ("ESPP") provides
eligible employees with the opportunity to purchase from the
Company, through regular payroll deductions, shares of the
Company's Common Stock at 85 percent of its fair market value on
the purchase date. A maximum of 3,000,000 common shares can be
purchased under the ESPP, and through December 31, 1994, employees
had purchased 292,934 shares.
In connection with the acquisition of AFC described in Note 2,
each outstanding share of the Company's Common Stock will be
converted into a share of New American Premier Common Stock, each
outstanding Career Share will be converted into a share of New
American Premier preferred stock and each stock option outstanding
under the Company's Stock Option Plan will be converted into an
option to purchase New American Premier common stock. In addition,
New American Premier will succeed to the Company under all
provisions of the Option Plan, the Career Share Plan and the ESPP.
F-24<PAGE>
<PAGE>
10. CAPITAL STOCK
The Company is authorized to issue 23,090,274 shares of
Preference Stock, without par value, in one or more series. At
December 31, 1994 and 1993 there were 212,698 shares of Preference
Stock outstanding, all of which are designated Career Shares.
The Company is authorized to issue 200,000,000 shares of
Common Stock. At December 31, 1994, there were 46,282,157 shares
of Common Stock outstanding or issuable, including 1,375,162 shares
set aside for issuance to certain pre-reorganization creditors and
other claimants. Holders of Common Stock have one vote per share.
During 1994, the Company purchased 2,099,600 shares of its
Common Stock for $52.5 million paid or to be paid in cash. During
the period subsequent to December 31, 1994 through February 13,
1995, the Company purchased 3,259,697 shares for $82.8 million.
During 1993, the Company purchased 45,522 shares of its Common
Stock for $1.3 million. During 1992, the Company purchased
1,471,002 shares of its Common Stock for $30.2 million.
At December 31, 1994, the Company had reserved 5,534,146
shares of Common Stock for issuance in connection with the
Company's Stock Option Plan and Career Share Plan. If all stock
options outstanding at December 31, 1994 were exercised (whether or
not then exercisable) and all Career Shares outstanding at December
31, 1994 were converted, the total number of shares of Common Stock
outstanding or issuable at December 31, 1994 would have increased
from 46,282,157 to 49,657,511.
Upon completion of the acquisition of AFC described in Note 2,
the Company will have 47,000,000 shares of Common Stock
outstanding, all of which will be owned by New American Premier;
none of the remaining 153,000,000 authorized shares of Common Stock
will have been reserved for any purpose; and no shares of
Preference Stock will be outstanding.
<PAGE>
11. CONTINGENCIES
Pre-Reorganization Contingencies
The following matters arose out of railroad operations
disposed of by the Company's predecessor, Penn Central
Transportation Company ("PCTC"), prior to its bankruptcy
reorganization in 1978 and, accordingly, any ultimate liability
arising therefrom in excess of previously established loss accruals
would be attributable to pre-reorganization events and
circumstances. In accordance with the Company's pre-reorganization
accounting policy, any such ultimate liability will reduce the
Company's capital surplus and shareholders' equity, but will not be
charged to income.
USX Litigation
In May 1994, lawsuits were filed against the Company by USX
Corporation ("USX") and its former subsidiary, Bessemer and Lake
Erie Railroad Company ("B&LE"), seeking contribution by the
Company, as the successor to the railroad business conducted by
PCTC prior to 1976, for all or a portion of the approximately $600
million that USX paid in satisfaction of a judgment against B&LE
for its
F-25PAGE
<PAGE>
participation in an unlawful antitrust conspiracy among certain
railroads commencing in the 1950's and continuing through the
1970's. The lawsuits argue that USX's liability for that payment
was attributable to PCTC's alleged activities in furtherance of the
conspiracy. The Company believes that these lawsuits are without
merit. On October 13, 1994, the U.S. District Court for the
Eastern District of Pennsylvania enjoined USX and B&LE from
continuing their lawsuits against the Company, ruling that their
claims are barred by the 1978 consummation order issued by that
Court in PCTC's bankruptcy reorganization proceedings. USX and
B&LE have appealed the District Court's ruling to the U.S. Court of
Appeals for the Third Circuit.
Environmental Matters
The Company is a party or named as a potentially responsible
party in a number of proceedings and claims by regulatory agencies
and private parties under various environmental protection laws,
including the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), seeking to impose responsibility on
the Company for hazardous waste remediation costs at certain
railroad sites formerly owned by PCTC and at certain other sites
where hazardous waste allegedly generated by PCTC's railroad
operations is present. It is difficult to estimate the Company's
liability for remediation costs at these sites for a number of
reasons, including the number and financial resources of other
potentially responsible parties involved at a given site, the
varying availability of evidence by which to allocate
responsibility among such parties, the wide range of costs for
possible remediation alternatives, changing technology and the
period of time over which these matters develop. Nevertheless, the
Company believes that its previously established loss accruals for
potential pre-reorganization environmental liabilities at such sites
(including those established as a result of the Special Court decision
discussed below) are adequate to cover the probable amount of such
liabilities, based on the Company's estimates of remediation costs
and related expenses at such sites and its estimates of the portions
of such costs that will be borne by other parties. Such estimates
are based on information currently available to the Company and are
subject to future change as additional information becomes available.
Such estimates do not assume any recovery from the Company's insurance
carriers, although the Company does intend to seek reimbursement from
certain insurers for such remediation costs as the Company incurs.
In the third quarter of 1994, the Special Court created by the
Regional Rail Reorganization Act of 1973 (the "Rail Act") ruled, in
a decision that has become final, that CERCLA claims against the
Company with respect to the railroad sites it transferred to
Consolidated Rail Corporation ("Conrail") in 1976 pursuant to the
Rail Act are not barred by the terms of the transfer or by the
settlement of the valuation proceedings related to the transfer.
In terms of potential liability to the Company, the most
significant of the sites affected by the Special Court decision is
the railyard at Paoli, Pennsylvania ("Paoli Yard") formerly owned
by PCTC. A Record of Decision issued by the U.S. Environmental
Protection Agency in 1992 presented a final selected remedial
action for clean-up of polychlorinated biphenyls ("PCB's") at Paoli
Yard having an estimated cost of approximately $28 million. As a
result of the Special Court decision, the Company has accrued a
substantial portion of such estimated clean-up costs in its
financial statements (in addition to related expenses) but has not
accrued the entire amount because it believes it is probable that
other parties, including Conrail, will be responsible for
substantial percentages of the clean-up costs by virtue of their
operation of electrified railroad cars at Paoli Yard that
discharged PCB's at higher levels than discharged by cars operated
by PCTC. The amounts accrued by the Company for Paoli
F-26PAGE
<PAGE>
Yard and for other sites transferred to Conrail in 1976 are
included in the 1994 capital surplus charges discussed in Note 12.
In management's opinion, the outcome of the foregoing
environmental claims and contingencies will not, individually or in
the aggregate, have a material adverse effect on the financial
condition of the Company. In making this assessment, management
has taken into account previously established loss accruals in its
financial statements and probable recoveries from third parties.
Post-Reorganization Contingencies
In connection with the Company's sale on June 9, 1994 of its
General Cable Notes and common stock as described in Note 3, the
Company assumed responsibility for certain actual and potential
environmental and other liabilities principally associated with
General Cable's recent sales of Marathon LeTourneau Company and
Indiana Steel and Wire Company, in consideration of the payment to
the Company of an Indemnity Payment of $19.2 million. On June 30,
1994, the Company established a loss accrual in that amount in its
financial statements. Although it is difficult to estimate future
environmental remediation costs accurately for the reasons
discussed above, the Company believes that the Indemnity Payment
will provide sufficient funds to permit the Company to discharge
such liabilities as they become payable over time.
F-27<PAGE>
<PAGE>
12. CHANGES IN COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION> Unrealized
Gains
(Losses)
Common Stock Capital Retained On Invest-
(Dollars in Millions) Shares Amount Surplus Earnings ments Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991 47,360,956 $47.4 $ 727.5 $705.1 $ (1.0) $1,479.0
Portion of deferred tax
asset attributable to
pre-reorganization net
operating loss carryforward 48.0 48.0
Net income 305.4 305.4
Dividends declared on
Common Stock (38.1) (38.1)
Exercise of stock options
and conversion of Career
Shares 397,015 .4 5.6 6.0
Purchases of Company
Common Stock (1,472,495) (1.5) (28.7) (30.2)
Issuance of Common Stock
under ESPP 96,694 .1 1.9 2.0
Adjustment of estimated net pre-
reorganization liabilities (15.0) (15.0)
Distribution of equity to
shareholders from spin-off
of General Cable
Corporation (264.5) (264.5)
Change in net unrealized gains
(losses) on investments 11.5 11.5
Other, net (.4) (.9) (1.3)
Balance, December 31, 1992 46,382,170 $46.4 $ 738.9 $707.0 $ 10.5 $1,502.8
Net income 232.0 232.0
Dividends declared on
Common Stock (40.0) (40.0)
Exercise of stock options
and conversion of Career
Shares 1,072,397 1.1 21.8 22.9
Purchases of Company
Common Stock (45,522) (1.3) (1.3)
Issuance of Common Stock
under ESPP 37,049 1.1 1.1
Adjustment of estimated net pre-
reorganization liabilities (14.0) (14.0)
Adjustment to the distribution
of equity to shareholders
from spin-off of General
Cable Corporation 13.3 13.3
Change in net unrealized gains
(losses) on investments 5.9 5.9
Other, net (.1) (.3) (.4)
Balance, December 31, 1993 47,446,094 $47.4 $ 746.2 $912.3 $16.4 $1,722.3
F-28<PAGE>
Net income .3 .3
Dividends declared on
Common Stock (42.9) (42.9)
Exercise of stock options
and conversion of Career
Shares 892,968 .9 17.5 18.4
Purchases of Company
Common Stock (2,099,600) (2.1) (50.4) (52.5)
Issuance of Common Stock
under ESPP and employee
stock bonus 42,695 1.1 1.1
Adjustment of estimated net pre-
reorganization liabilities (52.0) (52.0)
Adjustment to the distribution
of equity to shareholders
from spin-off of General
Cable Corporation (2.2) (2.2)
Change in net unrealized gains
(losses) on investments (43.7) (43.7)
Other, net .1 (.2) (.1)
Balance, December 31, 1994 46,282,157 $46.3 $ 662.2 $867.5 $ (27.3)$1,548.7
</TABLE>
During 1994, the Company increased its accruals for its net
probable liability for claims and contingencies arising from events
and circumstances preceding the Company's 1978 reorganization. Of
these accruals, $47.8 million was for pre-reorganization
environmental liabilities established principally as a result of the
1994 Special Court decision referred to in Note 11 in respect of
Paoli Yard and other sites transferred by the Company to Conrail in
1976. The environmental accrual also includes increases in the
estimated costs to the Company, based on information which became
available to it in 1994, related to remediation of environmental
conditions allegedly caused or contributed to by PCTC at certain
other sites. The remainder of the accruals consists of increases in
the estimated cost to the Company, based on information which became
available to it during 1994, for pending and expected claims by
former PCTC employees of injury or disease allegedly caused by
exposure to excessive noise or asbestos in the railroad workplace.
Such increase in the accrual for occupational injury or disease
claims is net of probable insurance recoveries related thereto. The
foregoing estimates are based on information currently available to
the Company and are subject to future change as additional
information becomes available. Offsetting these accruals was a $13.8
million credit representing the net present value of installment
payments to be paid by Chicago Union Station ("CUSCO") to the
Company resulting from a judgment against CUSCO in favor of the
Company. In accordance with the Company's reorganization accounting
policy, the Company recorded a net charge of $52.0 million to capital
surplus to reflect the net effect of the foregoing accruals which the
Company believes will be adequate based on information currently
available to it.
Also during 1994, the Company settled a dispute with former
employees of a business that was acquired in 1990 and subsequently
included in the General Cable Spin-off in July 1992.
During 1993 the Company settled a lawsuit it had brought against
the former owner of a business that was acquired by the Company in
1990 and was included in the General Cable Businesses spun-off to
shareholders in July 1992. After the General Cable Spin-off, the
Company retained the right to receive any amounts recovered in the
lawsuit. The net amount of cash received by the Company in the
settlement (net of a provision for certain obligations and associated
litigation expense) was accounted for as an
F-29PAGE
<PAGE>
adjustment to the distribution of equity to shareholders resulting
from the General Cable Spin-off.
13. COMMITMENTS
The Company has agreed to guarantee several third party
obligations which are not material individually or in the aggregate.
The Company has also entered into various operating lease agreements
related principally to certain administrative and manufacturing
facilities and transportation equipment. Future minimum rental
payments required under noncancelable lease agreements at December
31, 1994 were as follows: 1995--$20.3 million, 1996--$16.9 million,
1997--$8.2 million, 1998--$5.7 million, 1999--$3.8 million and $5.0
million thereafter, before deduction of minimum sublease income of
$12.3 million, in the aggregate, from January 1, 1995 through the
expiration of the leases. Rental expense recorded under operating
leases was $12.9 million in 1994, and $13.3 million in both 1993 and
1992.
14. STATEMENT OF CASH FLOWS
For purposes of this Statement, the Company considers only cash
on hand or in banks to be cash or cash equivalents. For the years
ended December 31, 1994 and 1993, amounts included in Purchases of
investments and Sales and maturities of investments consist of
activity for Short-term investments with original maturities greater
than three months.
For the years ended December 31, 1994, 1993 and 1992, income
taxes paid were $6.4 million, $4.8 million and $5.5 million,
respectively. For the same periods interest paid totaled $52.7
million, $62.7 million and $68.9 million, respectively.
On February 14, 1994, General Cable delivered to the Company
$10.4 million in cash and $41.7 million in promissory notes as a
partial payment of the General Cable Notes. The non-cash portion of
this transaction is not included in the statement of cash flows.
During 1993, General Cable elected to pay the $31.8 million of
interest due on the General Cable Note with Interest Notes in lieu of
cash. These non-cash transactions, which increased the Parent
Company investments and decreased accrued investment income, are not
included in the Statement of Cash Flows.
In December 1992, the Company received a note for approximately
$11.0 million in consideration of the sale of G & H Technology, Inc.
This transaction was a non-cash investing transaction which is not
included in the Statement of Cash Flows.
On June 30, 1992, in consideration of the transfer of the
General Cable Businesses and the advance of $25.0 million in cash,
the Company received the $255.0 million General Cable Note. To the
extent of $230.0 million, this transaction was a non-cash investing
transaction which is not included in the Statement of Cash Flows.
F-30<PAGE>
<PAGE>
15. RELATED PARTY TRANSACTIONS
The Chairman of the Board, Chief Executive Officer and principal
shareholder of AFC, which beneficially owned approximately 41.6
percent of the Company's outstanding common shares at December 31,
1994, is also the Chairman and Chief Executive Officer of the
Company. See Note 2 for information regarding the Company's
acquisition of AFC and Note 3 regarding the sale of the General Cable
Notes.
During 1990, the Company acquired the non-standard private
passenger automobile insurance business (the "NSA Group") from AFC.
The purchase price was subject to adjustment in 1995, based on 1991-
1994 pre-tax earnings of the NSA Group, by a reduction of up to $20.0
million or an increase of up to $40.0 million, in each case plus
interest. In December 1993, the Company, having concluded based on
the NSA Group's pre-tax earnings subsequent to 1990 that it was
highly probable that the maximum $40.0 million purchase price
adjustment would be payable by the Company, paid $40.0 million, plus
$12.8 million of interest, to Great American Insurance Company
("GAIC"), a wholly-owned insurance subsidiary of AFC, in full
settlement of the purchase price contingency in order to cut off the
accrual of interest at the relatively high rate prescribed by the
acquisition agreement. Also, as part of the agreement for the
purchase of the NSA Group, AFC, through GAIC, provides stop-loss
protection to the Company which, in effect, guarantees the adequacy
of unpaid loss and allocated loss adjustment expense reserves of the
NSA Group (net of reinsurance and salvage and subrogation recoveries)
related to periods prior to 1991 under policies written and assumed
by the NSA Group.
In 1988, the Company's workers' compensation insurance
operations ("Republic Indemnity") entered into a reinsurance contract
with GAIC to cover the aggregate losses on workers' compensation
coverage for the accident years 1980-1987, inclusive. The contract
provides for coverage by GAIC of net aggregate paid losses of
Republic Indemnity in excess of $440 million, up to a maximum of
$35.1 million. Cumulative paid losses at December 31, 1994
pertaining to claims during this period totaled $438.5 million. In
addition, GAIC has agreed to reimburse Republic Indemnity for its
loss adjustment expenses pertaining to this period up to a maximum of
$4.9 million.
F-31<PAGE>
16. QUARTERLY FINANCIAL DATA ( Unaudited )
Summarized quarterly financial data for 1994 and 1993 are set
forth below. Quarterly results have been influenced by acquisitions
and divestitures and by seasonal factors inherent in the Company's
businesses. The 1993 results include tax benefits of $15.0 million
($.32 per share), $45.0 million ($.96 per share) and $65.0 million
($1.33 per share) for the first, second and third quarters,
respectively, attributable to increases in the Company's net deferred
tax asset. In addition, the table below gives effect to the
classification of certain businesses as discontinued operations.
<TABLE>
<CAPTION>
(In Millions,
Except Per 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Share Amounts) 1994 1993 1994 1993 1994 1993 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $357.8 $370.2 $469.9 $426.6 $476.6 $443.7 $463.1 $522.8
Income (loss)
from continuing
operations (55.9) 31.1 16.6 75.0 25.2 86.2 14.9 50.4
Net income (loss) (55.9) 33.9 15.2 75.0 26.1 82.1 14.9 41.0
Income (loss)
per share from
continuing
operations (1.16) .67 .35 1.60 .52 1.77 .31 1.03
Net income (loss)
per share (1.16) .73 .32 1.60 .54 1.68 .31 .84
(In Millions,
Except Per Total
Share Amounts) 1994 1993
Revenues $1,767.4 $1,763.3
Income(loss)
from continuing
operations .8 242.7
Net income(loss) .3 232.0
Income(loss)
per share from
continuing
operations .02 5.03
Net income(loss)
per share .01 4.81
</TABLE>
F-32<PAGE>
<PAGE>
SCHEDULE III
AMERICAN PREMIER UNDERWRITERS, INC.
Condensed Financial Information of Registrant (Note 1)
(In Millions)
COMBINED CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
For the Years Ended December 31,
<S> <C> <C> <C>
REVENUES 1994 1993 1992
Equity in earnings of subsidiaries $ 161.3 $ 178.1 $ 146.2
Interest and dividend income 37.6 52.4 45.0
Net sales 20.8 16.8 17.3
Loss on sale of General Cable Corporation
Securities (75.8) - -
Net realized gains (losses) .1 92.9 (3.3)
144.0 340.2 205.2
EXPENSES
Corporate and administrative
expenses 20.0 20.2 20.2
Interest and debt expense 52.8 62.6 69.0
Provision for loss on sale of
subsidiaries and asset impairment 4.0 37.9 -
Other (income) expense, net 27.3 30.3 32.3
104.1 151.0 121.5
Income from continuing operations before
income taxes 39.9 189.2 83.7
Income tax (expense) benefit (39.1) 53.5 (32.8)
Income from continuing operations .8 242.7 50.9
DISCONTINUED OPERATIONS
Equity in earnings of subsidiaries - 2.8 1.7
Loss from disposal of businesses (.5) (13.5) -
Cumulative effect of accounting change - - 252.8
NET INCOME $ .3 $232.0 $305.4
COMBINED CONDENSED BALANCE SHEET
As of December 31,
1994 1993
ASSETS
Investments $ 807.9 $ 927.4
Receivables from subsidiaries 306.5 293.5
Investments in subsidiaries 1,285.8 1,231.7
Net assets of discontinued operations - 9.8
Deferred tax asset 267.7 295.8
Other assets 150.9 120.8
$ 2,818.8 $ 2,879.0
LIABILITIES AND CAPITAL
Accounts payable, accrued expenses and
other liabilities $ 302.9 $ 196.2
Payables to subsidiaries 463.5 440.9
Long-term debt 503.7 519.6
Other capital 1,548.7 1,722.3
$ 2,818.8 $ 2,879.0
</TABLE>
S-1PAGE
<PAGE>
SCHEDULE III (continued)
AMERICAN PREMIER UNDERWRITERS, INC.
Condensed Financial Information of Registrant (Note 1)
(In Millions)
COMBINED CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: 1994 1993 1992
Income from continuing operations $ .8 $ 242.7 $ 50.9
Adjustments
Equity in earnings of subsidiaries (161.3) (178.1) (146.2)
Deferred Federal income tax 36.3 (57.9) 28.9
Net (gain) loss on disposal of bisinesses,
investments, and PP&E 80.4 (54.5) 4.1
Cash received from subsidiaries 53.6 231.2 122.2
Litigation settlement - 15.6 -
Other, net 12.1 (35.7) (24.0)
Cash flows from operating
activities 21.9 163.3 35.9
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale
investments (353.6) - -
Maturities and sales of available for sale
investments 16.3 - -
Purchases of held for investment
securities (106.5) (158.3) -
Maturities of held for investment
securities 93.1 336.7 -
Sale of General Cable Corporation
Securities 176.7 - -
Net (increase) decrease in short-term
investments 158.7 (74.8) 353.5
Purchases of investments (263.4) (344.1) (674.1)
Sales and maturities of investments 318.4 275.0 387.7
Sales of businesses 11.2 - -
Acquisitions of businesses, net of cash
acquired - (57.3) -
Other, net 10.6 (.7) (2.4)
Cash flows from investing
activities 61.5 (23.5) 64.7
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of Company Common Stock (47.7) (1.9) (36.8)
Repayment of debt (16.3) (133.7) -
Common Stock dividends (40.6) (38.2) (36.8)
Other, net 17.8 23.3 13.2
Cash flows from financing
activities (86.8) (150.5) (60.4)
Net cash flows from continuing
operations (3.4) (10.7) 40.2
Net cash (to) from discontinued
operations - 8.3 (36.6)
Increase (decrease) in cash (3.4) (2.4) 3.6
Cash - beginning of year 3.8 6.2 2.6
Cash - end of year $ .4 $ 3.8 $ 6.2
Cash dividends received from equity method
accounting investees $ - $ 2.5 $ 3.9
Cash dividends received from consolidated
subsidiaries $ 21.0 $ 36.2 $ 53.1
</TABLE>
Note 1:For purposes of preparing the combined condensed financial
statements included in this Schedule III, the accounts of the Company
("Registrant") have been combined with the accounts of Pennsylvania
Company ("Pennco"). Pennco is a wholly owned direct subsidiary of
the Registrant, and is itself a holding company. At December 31,
1994, approximately 67% of Investments and substantially all
Investments in Subsidiaries as reported on the Combined Condensed
Balance Sheet were owned by Pennco. Pennco has no debt obligations
and there are no restrictions affecting transfers of funds between
Pennco and the Registrant. Accordingly, management believes that the
financial resources held at Pennco as well as Pennco's cash flow are
available, if necessary, to service the obligations of the
Registrant.
S-2<PAGE>
<PAGE>
SCHEDULE VIII
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
Valuation and Qualifying Accounts
For the Years Ended December 31, 1994, 1993 and 1992
(Dollars In Millions)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Charged to
beginning costs and other
of period expenses accounts
<S> <C> <C> <C>
Description
Year ended December 31, 1994:
Allowance for uncollectible accounts -
trade and other receivables $16.4 $ 1.0 $ -
Miscellaneous reserves for losses -
other asset categories 6.7 .9 54.0(c)(d)
Year ended December 31, 1993:
Allowance for uncollectible accounts -
trade and other receivables 9.9 6.4 .6(e)
Allowance for uncollectible notes
receivable 12.9 - -
Miscellaneous reserves for losses -
other asset categories 6.3 5.4 (9.3)(d)
Year ended December 31, 1992:
Allowance for uncollectible accounts -
trade and other receivables 6.9 2.0 1.8(c)
Allowance for uncollectible notes
receivable 15.2 - -
Miscellaneous reserves for losses -
other asset categories 36.9 3.5 (17.0)(d)
Balance at
end of
Deductions period
Year ended December 31, 1994: $ 3.6(a)(b)(c) $13.8
Allowance for uncollectible accounts-
trade and other receivables
Miscellaneous reserves for losses-
other asset categories 8.4(b)(d) 53.2
Year ended December 31, 1993:
Allowance for uncollectible accounts-
trade and other receivables .5(a)(b) 16.4
Allowance for uncollectible notes
receivable 12.9(f) -
Miscellaneous reserves for losses-
other assets categories 5.7(b) 6.7
Year ended December 31, 1992
Allowance for uncollectible accounts-
trade and other receivables .8(a)(b) 9.9
Allowance for uncollectible notes
receivables 2.3(f) 12.9
Miscellaneous reserves for losses -
other asset categories 17.1(a)(c) 6.3
</TABLE>
(a) Includes reductions for divested businesses.
(b) Includes reductions of valuation accounts for actual charges incurred.
(c) Includes transfers to/from other reserve accounts.
(d) Includes changes in unrealized gains and/or losses on
securities.
(e) Includes additions for businesses acquired.
(f) Includes a reduction in reserves for uncollectibility of notes
which resulted from the prior sale of certain offshore drilling
rigs, to reflect the receipt of significant principal and
interest payments.
S-3<PAGE>
<PAGE>
EXHIBIT INDEX
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K)
(2) ---Agreement and Plan of Acquisition and *
Reorganization by and among American
Premier Group, Inc., the Company, American
Premier Sub, Inc., American Financial
Corporation and AFC Sub, Inc. dated as
of December 9, 1994, as amended, incor-
porated by reference to Exhibit 2 to the
Registration Statement on Form S-4
No. 33-56813 (effective February 17, 1995)
of American Premier Group, Inc.
(3) (i) ---Amended and Restated Articles of Incor- *
poration of the Company, as amended
effective March 25, 1994, incorporated by
reference to Exhibit (3)(i) to the Company's
Annual Report on Form 10-K for 1993.
(ii) ---By-Laws of the Company, as amended
February 15, 1995.
(4)(i) ---Order No. 3708 of the United States Dis- *
trict Court for the Eastern District of
Pennsylvania in In the Matter of Penn
Central Transportation Company, Debtor,
Bankruptcy No. 70-347 dated August 17,
1978 directing the consummation of the
Plan of Reorganization for Penn Central
Transportation Company, incorporated by
reference to Exhibit 4 to Form 8-K Current
Report of Penn Central Transportation
Company for August 1978.
(4)(ii) (a) ---(i) Indenture dated as of August 1, 1989 *
between the Company and Morgan Guaranty
Trust Company of New York, as Trustee,
- -----------
* Asterisk indicates an exhibit previously filed with the
Securities and Exchange Commission and incorporated herein by
reference.
<PAGE>
<PAGE>
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K)
regarding the Company's Subordinated
Debt Securities (the "Indenture"),
incorporated by reference to Exhibit 4.1
to the Company's Form 8-K Current Report
dated August 10, 1989.
---(ii) Instrument of Resignation of Trustee *
and Appointment and Acceptance of Successor
Trustee and Appointment of Agent dated as
of November 15, 1991 among the Company,
Morgan Guaranty Trust Company of New York
as Resigning Trustee and Star Bank, N.A.
as Successor Trustee, incorporated by
reference to Exhibit (4)(ii)(d)(ii) to the
Company's Annual Report on Form 10-K for
1991.
---(iii) Officer's Certificate Pursuant to *
Sections 102 and 301 of the Indenture
relating to authentication and designation
of the Company's 9-3/4% Subordinated Notes
due August 1, 1999, to which is attached
the Form of Note, incorporated by reference
to Exhibit 4.2 to the Company's Form 8-K
Current Report dated August 10, 1989.
---(iv) Officer's Certificate Pursuant to *
Sections 102 and 301 of the Indenture
relating to authentication and designation
of the Company's 10-5/8% Subordinated Notes
due April 15, 2000, to which is attached
the Form of Note, incorporated by reference
to Exhibit 4.1 to the Company's Form 8-K
Current Report dated April 19, 1990.
---(v) Officer's Certificate Pursuant to *
Sections 102 and 301 of the Indenture
relating to authentication and designation
of the Company's 10-7/8% Subordinated Notes
due May 1, 2011, to which is attached the
Form of Note, incorporated by reference
to Exhibit 4.1 to the Company's Form 8
amendment dated May 8, 1991 to the Company's
Form 8-K Current Report dated May 7, 1991.
- -----------
* Asterisk indicates an exhibit previously filed with the
Securities and Exchange Commission and incorporated herein by
reference.
PAGE
<PAGE>
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K)
(10)(i) ---Stock Purchase Agreement, dated as of *
June 10, 1993, among the Company, PCC
Technical Industries, Inc. and Tracor,
Inc., incorporated by reference to
Exhibit (99) to the Company's Current
Report on Form 8-K dated May 26, 1993.
The following Exhibits (10)(iii)(a) through (10)(iii)(g) are
compensatory plans and arrangements in which directors or executive
officers participate:
(iii) (a) ---(i) The Company's Stock Option Plan, as *
amended March 25, 1992, incorporated by
reference to Exhibit (10)(iii)(a)(i) to
the Company's Annual Report on Form 10-K
for 1992.
---(ii) Amendment to the Company's Stock *
Option Plan adopted by the Company's
Board of Directors on March 24, 1993,
incorporated by reference to Exhibit
(10)(iii)(a)(ii) to the Company's Annual
Report on Form 10-K for 1992.
---(iii) Forms of stock option agreements *
used to evidence options granted under the
Company's Stock Option Plan to officers and
directors of the Company, incorporated by
reference to Exhibit (10)(iii)(a)(iii) to
the Company's Annual Report on Form 10-K
for 1992.
---(iv) The Company's Stock Option Loan Pro- *
gram, as amended February 8, 1991, incorpor-
rated by reference to Exhibit (10)(iii)(a)(v)
to the Company's Annual Report on Form 10-K
for 1990.
(b) ---The Company's Annual Incentive Compensa- *
tion Plan, as amended February 12, 1992,
incorporated by reference to Exhibit
(10)(iii)(b) to the Company's Annual Report
on Form 10-K for 1991.
(c) ---Description of the Company's retirement *
program for outside directors, as adopted
by the Company's Board of Directors on
March 23, 1983, incorporated by reference
to Exhibit (10)(iii)(i) to the Company's
Annual Report on Form 10-K for 1982.
- -----------
* Asterisk indicates an exhibit previously filed with the
Securities and Exchange Commission and incorporated herein by
reference.
PAGE
<PAGE>
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K)
(d) ---The Company's Employee Stock Redemption *
Program, as adopted by the Company's Board
of Directors on March 28, 1985, incorpor-
ated by reference to Exhibit (10)(iii)(j)
to the Company's Annual Report on Form 10-K
for 1984.
(e) ---(i) Severance Agreement dated March 29, *
1987 between the Company and Alfred W.
Martinelli, a director of the Company,
incorporated by reference to Exhibit
(10)(iii)(a)(i) to the Company's Form 10-Q
Quarterly Report for the Quarter Ended
March 31, 1987.
---(ii) Consulting Agreement dated as of *
March 29, 1987 between the Company and
Alfred W. Martinelli, incorporated by
reference to Exhibit (10)(iii)(a)(ii)
to the Company's Form 10-Q Quarterly
Report for the Quarter Ended March 31,
1987.
---(iii) Letter agreement amending the fore- *
going Consulting and Severance Agreements
dated December 9, 1991 between the Company
and Alfred W. Martinelli, incorporated by
reference to Exhibit (10)(iii)(e)(iii)
to the Company's Annual Report on Form 10-K
for 1991.
---(iv) Letter agreement amending the fore-
going Consulting and Severance Agreements
dated June 29, 1994 between the Company
and Alfred W. Martinelli.
(f) ---Letters dated April 9, 1987 from the Com- *
pany to each of Neil M. Hahl and Robert W.
Olson, officers of the Company, with
respect to severance arrangements, as
supplemented by letters dated June 26,
1987 to each such officer, incorporated by
reference to Exhibit (10)(iii)(a) to the
Company's Form 10-Q Quarterly Report for
the Quarter Ended June 30, 1987.
- -----------
* Asterisk indicates an exhibit previously filed with the
Securities and Exchange Commission and incorporated herein by
reference.
PAGE
<PAGE>
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K)
(g) ---(i) Excess of Loss Agreement, effective *
March 31, 1988, between Republic Indemnity
Company of America and Great American
Insurance Company, incorporated by refer-
ence to Exhibit (g)(1) to Amendment No. 1
to Schedule 13E-3, dated January 17, 1989,
relating to Republic American Corporation
filed by Republic American Corporation, the
Company, RAWC Acquisition Corp., American
Financial Corporation and Carl H. Lindner
(the "Schedule 13E-3 Amendment").
---(ii) First Amendment to Excess of Loss *
Agreement, effective March 31, 1988,
between Republic Indemnity Company of
America and Great American Insurance
Company, incorporated by reference to
Exhibit (g)(2) to the Schedule 13E-3
Amendment.
(h) ---(i) Business Assumption Agreement, *
effective as of December 31, 1990, between
Stonewall Insurance Company and Dixie
Insurance Company (now Infinity Insurance
Company), incorporated by reference to
Exhibit (10)(iii)(o)(i) to the Company's
Annual Report on Form 10-K for 1990.
---(ii) Quota Share Agreements, effective *
December 31, 1990, between Stonewall
Insurance Company and Dixie Insurance
Company (now Infinity Insurance Company),
incorporated by reference to Exhibit
(10)(iii)(o)(ii) to the Company's Annual
Report on Form 10-K for 1990.
---(iii) Management Agreement, effective as *
January 1, 1991, by and between Dixie
Insurance Company (now Infinity Insurance
Company) and Stonewall Insurance Company,
incorporated by reference to Exhibit
(10)(iii)(o)(iii) to the Company's Annual
Report on Form 10-K for 1990.
---(iv) Assumption and Bulk Reinsurance Agree-
ment, effective December 31, 1994, between
Stonewall Insurance Company and Infinity
Insurance Company.
- ------------
* Asterisk indicates an exhibit previously filed with the
Securities and Exchange Commission and incorporated herein by
reference.
PAGE
<PAGE>
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K)
(i) ---Excess of Loss Agreements, effective *
December 31, 1990, between Great American
Insurance Company and each of Atlanta
Casualty Company, Dixie Insurance Company
(now Infinity Insurance Company) and Windsor
Insurance Company, incorporated by reference
to Exhibit (10)(iii)(p) to the Company's
Annual Report on Form 10-K for 1990.
(j) ---Premium Payment Agreement, effective as *
of January 1, 1991, by and between Great
American Insurance Company and the Company,
incorporated by reference to Exhibit
(10)(iii)(q) to the Company's Annual Report
on Form 10-K for 1990.
(11) ---Supplemental information regarding computa-
tions of net income per share amounts.
(12) ---Calculation of ratio of earnings to fixed
charges.
(21) ---List of subsidiaries of the Company.
(23) ---Consent of Deloitte & Touche LLP.
(27) ---Financial data schedule. +
(28) ---Information from reports provided to state
regulatory authorities.
- ----------------
* Asterisk indicates an exhibit previously filed with the Securities
and Exchange Commission and incorporated herein by reference.
+ Copy included in Report filed electronically with the Securities
and Exchange Commission.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 1994 No. 1-11632
AMERICAN ANNUITY GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Delaware No. 06-1356481
250 East Fifth Street, Cincinnati, Ohio 45202
(513) 333-5300
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
Common Stock, Par Value $1.00 Per Share New York
9-1/2% Senior Notes due August 15, 2001 New York
11-1/8% Senior Subordinated Notes due
February 1, 2003 New York
Securities Registered Pursuant to Section 12(g) of the Act: None
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, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and need not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this
Form 10-K. [X]
As of February 28, 1995, there were 39,141,080 shares of the
Registrant's Common Stock outstanding. The aggregate market value of Common
Stock held by non-affiliates at that date was approximately $75.4 million
based upon non-affiliate holdings of 7,268,359 shares and a market price of
$10.38 per share.
Documents Incorporated by Reference:
Proxy Statement for the 1995 Annual Meeting of Shareholders (portions of
which are incorporated by reference into Part III hereof).
<PAGE>
AMERICAN ANNUITY GROUP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I
Page
Item 1. Business
Introduction 1
GALIC 1
Discontinued Manufacturing Operations 11
Employees 11
Item 2. Properties 11
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders *
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure *
Part III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management 20
Item 13. Certain Relationships and Related Transactions 20
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K S-1
* The response to this item is "none".
<PAGE>
PART I
ITEM 1
Business
Introduction
American Annuity Group, Inc. ("AAG" or "the Company") is a holding company
whose primary asset is the capital stock of Great American Life Insurance
Company ("GALIC").
American Annuity is the successor to STI Group, Inc., formerly known as
Sprague Technologies, Inc. ("STI"). STI was formed in May 1987 by American
Premier Underwriters, Inc., formerly known as The Penn Central Corporation,
for the purpose of divesting its electronics components businesses. STI
subsequently sold substantially all of its assets and retired its debt,
netting approximately $100 million in cash and cash equivalents.
On December 31, 1992, STI purchased 100% of the capital stock of GALIC from
Great American Insurance Company ("GAI") for $468 million. The purchase was
financed with (a) $230 million of borrowings, (b) $156 million of new equity
raised from the sale of common and preferred stock to GAI, and (c) available
cash. American Financial Corporation ("AFC"), the parent of GAI,
beneficially owned approximately 80% of American Annuity's Common Stock at
March 1, 1995.
In 1994, AAG and GALIC formed or acquired several small subsidiaries with
combined total assets of approximately $40 million, including the following:
Lifestyle Financial Investments, Inc. and T'N'T Marketing, Inc., third-party
marketers of annuities through financial institutions; Western Pacific Life
Insurance Company and Carillon Life Insurance Company, two annuity companies
acquired principally for their insurance licenses; and AAG Securities, Inc.,
a broker-dealer licensed to sell mutual funds and variable annuities. The
total investment in these companies was approximately $15 million.
GALIC
GALIC was incorporated in New Jersey in 1959 and redomiciled as an Ohio
corporation in 1982. GALIC entered the tax-deferred annuity business in
1976; prior to that time it wrote primarily whole-life, term-life, and
accident and health insurance policies. GALIC is currently rated "A"
(Excellent) by A.M. Best.
Annuities are long-term retirement savings plans that benefit from interest
accruing on a tax-deferred basis. The issuer of the annuity collects
contributions, credits interest on the policy and pays out a benefit upon
death, surrender or annuitization.
Annuity contracts can be either fixed rate or variable rate. With a fixed
rate annuity, an interest crediting rate is set by the issuer, periodically
reviewed by the issuer, and changed from time to time as determined to be
appropriate. With a variable rate annuity, the value of the policy is tied
to an underlying securities portfolio or other performance index. GALIC has
not issued variable annuities in the past.
1
<PAGE>
GALIC sells annuities primarily to employees of qualified not-for-profit
organizations under Section 403(b) of the Internal Revenue Code. These
employees are eligible to save for retirement through contributions made on
a before-tax basis. Contributions are made at the discretion of the
participants through payroll deductions or through tax-free "rollovers" of
funds. Federal income taxes are not payable on contributions or earnings
until amounts are withdrawn.
The following table (in millions) presents information concerning GALIC in
accordance with generally accepted accounting principles ("GAAP"), unless
otherwise noted.
1994 1993 1992 1991 1990
Total Assets (A) $5,071 $4,883 $4,436 $4,686 $3,847
Annuity Policyholders' Funds
Accumulated 4,615 4,257 3,974 3,727 3,398
Stockholders' Equity 449 520 418 358 355
Statutory Basis:
Capital and Surplus 256 251 216 219 192
Asset Valuation Reserve (B)(C) 80 70 71 112 10
Interest Maintenance Reserve (C) 28 36 17 - -
Annuity Receipts:
Flexible Premium:
First Year $ 39 $ 47 $ 48 $ 67 $ 73
Renewal 208 223 232 240 220
247 270 280 307 293
Single Premium 196 130 80 153 238
Total Annuity Receipts $ 443 $ 400 $ 360 $ 460 $ 531
[FN]
(A) Includes the following amounts for securities purchased in December
and paid for in the subsequent year: 1994 - $0; 1993 - $68 million;
1992 - $0.2 million; 1991 - $557 million and 1990 - $46 million.
(B) For 1991 and 1990, amounts represent the Mandatory Securities
Valuation Reserve.
(C) Allocation of surplus for statutory reporting purposes.
GALIC markets its annuities principally to employees of educational
institutions in the kindergarten through high school ("K-12") segment.
Management believes that the K-12 segment is attractive because of the
growth potential and persistency rate it has demonstrated.
Sales of annuities are affected by many factors, including: (i) competitive
rates and products; (ii) the general level of interest rates; (iii) the
favorable tax treatment of annuities; (iv) commissions paid to agents; (v)
services offered; (vi) ratings from independent insurance rating agencies;
and (vii) general economic conditions.
Annuity receipts increased in 1993 and 1994 on the strength of sales of
single premium products introduced in the second half of 1992. Receipts in
1992 and 1991 were lower than in 1990 due to (i) a reduction in receipts
relating to a product introduced in 1990 which encouraged rollovers of other
retirement funds and (ii) unfavorable economic and market conditions,
including the impact of the negative publicity associated with a number of
highly publicized insolvencies in the life insurance industry.
2
<PAGE>
GALIC's Corporate Strategy
GALIC's primary business objective is to maximize its long-term
profitability through the sale of 403(b) annuities. GALIC seeks to achieve
this objective through a strategy of: (i) offering annuity products that
are tailored to meet its policyholders' financial needs and designed to
encourage a high level of persistency; (ii) providing competitive commission
structures and high-quality service in order to foster long-term
relationships with its independent agents; (iii) maintaining a conservative
investment portfolio in order to demonstrate financial stability to its
policyholders; (iv) maintaining competitive crediting rates on annuity
policies to encourage new and renewal business while achieving the desired
spread between investment earnings and interest credited; (v) developing
complementary distribution channels; and (vi) maintaining high ratings from
independent insurance rating agencies.
Annuity Products
GALIC's principal products are Flexible Premium Deferred Annuities ("FPDAs")
and Single Premium Deferred Annuities ("SPDAs"). FPDAs are characterized by
premium payments that are flexible in amount and timing as determined by the
policyholder. SPDAs are issued in exchange for a one-time lump-sum premium
payment. Since January 1, 1990, approximately three-fourths of GALIC's SPDA
receipts have resulted from rollovers of tax-deferred funds previously
maintained by policyholders with other insurers. In 1994, FPDAs accounted
for approximately 55% of GALIC's total annuity receipts.
Tax-qualified premiums represented 85% of GALIC's total premiums written in
1994; written premiums from the K-12 segment represented approximately
three-fourths of GALIC's total tax-qualified premiums in 1994. The
following table summarizes GALIC's written premiums and policyholder benefit
reserves on a statutory basis by product line (dollars in millions).
<TABLE>
<CAPTION>
Policyholder
1994 Premiums Written Benefit Reserves at
First % of December 31, 1994
Year Renewal Total Amount %
<S> <C> <C> <C> <C> <C>
Flexible Premium:
403(b) Single-tier $ 24 $ 30 12.1% $ 134 2.9%
403(b) Two-tier 13 171 41.4 2,808 60.1
Other Single-tier 0 1 0.2 45 1.0
Other Two-tier 2 6 1.8 199 4.2
Total 39 208 55.5 3,186 68.2
Single Premium:
403 (b) Single-tier 39 - 8.7 12 0.3
403 (b) Two-tier 36 - 8.1 430 9.2
Other Single-tier 25 - 5.6 39 0.8
Other Two-tier 96 - 21.6 704 15.1
Total 196 - 44.0 1,185 25.4
Annuities in Payout - - - 277 5.9
Life, Accident & Health - 2 0.5 22 0.5
Total $235 $210 100.0% $4,670 100.0%
</TABLE>
3
<PAGE>
At December 31, 1994, approximately 94% of GALIC's policyholder liabilities
consisted of fixed rate annuities which offered a minimum interest rate
guarantee of 4%. GALIC's new products offer a minimum guaranteed rate of
3%. All of GALIC's annuity policies permit GALIC to change the crediting
rate at any time (subject to the minimum guaranteed interest rate). In
determining the frequency and extent of changes in the crediting rate, GALIC
takes into account the profitability of its annuity business and the
relative competitive position of its products.
GALIC seeks to maintain a desired spread between the yield on its investment
portfolio and the rate it credits to its policies. GALIC accomplishes this
by (i) offering crediting rates which it has the option to change, (ii)
designing annuity products that encourage persistency and (iii) maintaining
an appropriate matching of assets and liabilities. Tax-qualified annuity
policyholders maintain access to their funds without incurring penalties
through provisions in the contracts which allow policy loans.
In addition to its use of two-tier structures explained below, GALIC imposes
certain surrender charges and front-end fees during the first five to ten
years of a policy to discourage customers from surrendering or withdrawing
funds in those early years. As a result of these features, GALIC's annuity
surrenders have averaged approximately 8% of statutory reserves over the
past five years. The following table illustrates GALIC's annual persistency
rates for its major products over the past five years.
Persistency Rates
Product Group 1994 1993 1992 1991 1990
Flexible Premium 92.5% 92.0% 90.6% 89.3% 91.2%
Single Premium 93.5 93.3 93.8 92.8 92.6
GALIC's persistency rates have been helped by the permanent surrender charge
inherent in the two-tier design of many of GALIC's products. Two account
values are maintained for two-tier annuities -- the annuitization (or upper-
tier) value and the surrender (or lower-tier) value.
With some two-tier annuities, the annuitization value and the surrender
value are the same at inception of the policy, but since each value
accumulates interest at a different rate, over time, the annuitization value
will grow to an amount which is greater than the surrender value. Other
two-tier annuities credit the same interest rate to both the surrender and
the annuitization value but withhold a portion of the first-year premiums
when calculating the surrender value, but not the annuitization value.
The annuitization value is paid only if the policyholder chooses to
annuitize (withdraw funds in a series of periodic payments for at least the
minimum number of years specified in the policy). If a lump sum payment is
chosen by the policyholder, the surrender value is paid.
GALIC's two-tier annuities are particularly attractive to policyholders who
intend to utilize funds accumulated to provide retirement income since the
annuitization value is accumulated at a competitive long-term interest rate.
As a result of recent regulatory and market concerns regarding two-tier
products in general, GALIC is also selling new products which feature a
single-tier design. After the initial surrender charges have been reduced
to zero, single-tier annuities have only one value which is available
whether the policy is surrendered or annuitized.
Management believes that over time, as the policyholder population ages, the
percentage of policyholders annuitizing will increase.
4
<PAGE>
Marketing and Distribution
GALIC markets its annuity products through over 50 managing general agents
("MGAs") who, in turn, direct approximately 900 actively producing
independent agents. GALIC has developed its business since 1980 on the
basis of its relationships with MGAs and independent agents primarily
through a consistent marketing approach and responsive service.
GALIC seeks to attract and retain MGAs who are experienced and highly
motivated and who consistently place a high volume of the types of annuities
offered by GALIC. Toward this end, GALIC has established a "President's
Advisory Council" consisting of 10 of the top producers each year, all of
whom must market primarily GALIC products. The President's Advisory Council
serves as a major influence on new product design and marketing strategy.
To extend the distribution of GALIC annuities to a broader customer base,
the Company is developing a Personal Producing General Agent ("PPGA")
distribution system. Approximately 140 PPGAs are contracted to sell GALIC
annuities to both qualified and non-qualified customers. These new
appointments will give the Company the opportunity to expand the premium
writings in those territories not served by an MGA. In addition, new
subsidiaries, Lifestyle Financial Investments, Inc. and T'N'T Marketing,
Inc. are expanding the Company's efforts to sell single premium, non-
qualified products through financial institutions.
GALIC's strategy is to offer its agents competitive commission rates and to
provide prompt processing of agent requests, with the objective of
attracting and retaining agents on the basis of service, as well as
compensation. Commissions paid on first year premiums are significantly
higher than those paid on renewal premiums. Commissions are generally lower
for sales of annuities to older policyholders, reflecting the lower profit
potential available from policyholders who maintain their funds with GALIC
for a shorter period.
GALIC is licensed to sell its products in all states (except New York) and
in the District of Columbia and Virgin Islands. The geographical
distribution of GALIC's annuity premiums written in 1994 compared to 1990
was as follows (dollars in millions):
1994 1990
State Premiums % Premiums %
California $ 91 20.6% $111 20.9%
Michigan 40 9.0 62 11.7
Florida 38 8.6 40 7.5
Massachusetts 35 7.9 48 9.0
Ohio 27 6.1 20 3.8
Connecticut 20 4.5 36 6.8
Minnesota 20 4.5 * *
New Jersey 20 4.5 29 5.5
Washington 16 3.6 * *
Illinois 14 3.2 18 3.4
North Carolina 13 2.9 * *
Texas 11 2.5 47 8.9
Rhode Island 9 2.0 14 2.6
All others, each less than 2% 89 20.1 106 19.9
$443 100.0% $531 100.0%
[FN]
* less than 2%
5
<PAGE>
At December 31, 1994, GALIC had approximately 250,000 annuity policies in
force, nearly all of which were individual contracts. GALIC's policyholders
are employees of over 7,300 institutions nationwide.
Investments
GALIC's annuity products are structured to generate a stable flow of
investable funds. GALIC earns a spread by investing these funds at an
investment earnings rate in excess of the crediting rate payable to its
policyholders.
Investments comprise approximately 96% of assets and are the principal
source of income. Fixed income securities (including policy loans, mortgage
loans and short-term investments) comprise over 98% of the Company's
investment portfolio.
Risks inherent in connection with fixed income securities include loss upon
default and market price volatility. Factors which can affect the market
price of these securities include: (i) creditworthiness of issuers; (ii)
changes in market interest rates; (iii) the number of market makers and
investors; and (iv) defaults by major issuers of securities.
The Company's investment strategy emphasizes high quality fixed income
securities which management believes should produce a relatively consistent
and predictable level of investment income.
The Ohio Insurance Code contains rules governing the types and amounts of
investments which are permissible for Ohio life insurers. These rules are
designed to ensure the safety and liquidity of the insurers' investment
portfolios by placing restrictions on the quality, quantity and
diversification of permitted investments.
The National Association of Insurance Commissioners ("NAIC") assigns quality
ratings to publicly traded as well as privately placed securities. These
ratings range from Class 1 (highest quality) to Class 6 (lowest quality).
The following table shows the Company's fixed maturity portfolio at market
value by NAIC designation (and comparable Standard & Poor's Corporation
rating) at December 31:
NAIC
Rating Comparable S&P Rating 1994 1993 1992
1 AAA, AA, A 59% 58% 67%
2 BBB 35 37 24
Total investment grade 94 95 91
3 BB 4 4 5
4 B 2 1 4
5 CCC, CC, C * * *
6 D - - *
Total non-investment grade 6 5 9
Total fixed maturities 100% 100% 100%
[FN]
* less than 1%
AAG's primary investment objective in selecting securities for its fixed
maturity portfolio is to optimize interest yields while maintaining an
appropriate relationship of maturities between assets and expected
liabilities. The Company invests in bonds that have primarily intermediate-
term maturities. This practice provides flexibility to respond to
fluctuations in the marketplace.
6
<PAGE>
At December 31, 1994, the average maturity of AAG's fixed maturity
investments was approximately 7-1/2 years (including mortgage-backed
securities, which had an estimated average life of approximately 8-1/2
years). The table below sets forth the maturities of the Company's fixed
maturity investments based on their carrying value.
Maturity 1994 1993
One year or less * *
After one year through five years 15% 10%
After five years through ten years 44 43
After ten years 13 12
72 65
Mortgage-backed securities 28 35
100% 100%
[FN]
* less than 1%
The following table shows the performance of the investment portfolio,
excluding equity investments in affiliates (dollars in millions):
1994 1993 1992
Average cash and investments at cost $4,744$4,455 $4,078
Gross investment income 377 358 334
Realized gains - 35 27
Percentage earned:
Excluding realized gains 7.9% 8.0% 8.2%
Including realized gains 7.9% 8.8 8.9
AAG's investment portfolio is managed by a subsidiary of AFC which charges a
management fee limited to a maximum of one-tenth of one percent of invested
assets.
Independent Ratings
GALIC is currently rated "A" (Excellent) by A.M. Best and "A+" (High claims
paying ability) by Duff & Phelps. Publications of A.M. Best indicate that
an "A" rating is assigned to those companies which in A.M. Best's opinion
have achieved excellent overall performance when compared to the standards
established by A.M. Best as norms of the life insurance industry and which
generally have demonstrated a strong ability to meet their obligations to
policyholders over a long period of time. In evaluating a company's
financial and operating performance, independent rating agencies review the
company's profitability, leverage and liquidity, as well as the company's
book of business, the quality and estimated market value of its assets, the
adequacy of its policy reserves and the experience and competency of its
management. Their ratings are based upon factors of concern to
policyholders and agents and are not directed toward the protection of
investors.
Management believes that the ratings assigned to GALIC by independent
insurance rating agencies are important because potential policyholders
often use a company's rating as an initial screening device in considering
annuity products. Management also believes that the majority of purchasers
of 403(b) annuities would not be willing to purchase annuities from an
issuer that had an A.M. Best rating below certain levels. In addition,
certain school districts, hospitals and banks do not allow insurers with an
A.M. Best rating below certain levels to sell annuity products through their
institutions.
7
<PAGE>
Policy Liabilities and Reserves
GALIC establishes and carries reserves to meet future obligations under its
annuity policies. GALIC's $4.6 billion liability for accumulated
policyholders' funds at December 31, 1994, is calculated based upon
assumptions of future interest rate spreads expected to be realized and
expected mortality, maturity and surrender rates to be experienced on the
annuity policies in force. Annuity premiums are recorded under GAAP as
increases to the liability for accumulated policyholders' funds rather than
as revenues. Accumulated interest also increases this liability. Benefit
payments are recorded as decreases to this liability instead of as expenses.
Competition
GALIC operates in a highly competitive environment. More than 100 insurance
companies offer tax-deferred annuities. GALIC competes with other insurers
and financial institutions based on many factors, including ratings,
financial strength, reputation, service to policyholders, product design
(including interest rates credited), commissions and service to agents.
Since GALIC markets and distributes policies through independent agents, it
must also compete for agents. Management believes that consistently
targeting the same market and emphasizing service to agents and
policyholders give GALIC a competitive advantage.
No single insurer dominates the marketplace. Competitors include (i)
individual insurers and insurance groups, (ii) mutual funds and (iii) other
financial institutions of varying sizes, some of which are mutual insurance
companies possessing competitive advantages in that all of their profits
inure to their policyholders, and many of which possess financial resources
substantially in excess of those available to GALIC. In a broader sense,
GALIC competes for retirement savings with a variety of financial
institutions offering a full range of financial services. Financial
institutions have demonstrated a growing interest in marketing investment
and savings products, other than traditional deposit accounts. In addition,
recent judicial and regulatory decisions have expanded powers of financial
institutions in this regard. It is too early to predict what impact, if
any, these developments will have on GALIC.
Regulation
GALIC is subject to comprehensive regulation under the insurance laws of the
States of Ohio and California and the other states in which it operates.
These laws, in general, require approval of the particular insurance
regulators prior to certain actions such as the payment of dividends in
excess of statutory limitations, continuing service arrangements with
affiliates and certain other transactions. Regulation and supervision are
administered by a state insurance commissioner who has broad statutory
powers with respect to granting and revoking licenses, approving forms of
insurance contracts and determining types and amounts of business which may
be conducted in light of the financial strength and size of the particular
company. State insurance departments conduct periodic financial
examinations of insurance companies. GALIC's state of domicile, Ohio,
requires that examinations be conducted at least every three years; its most
recent examination was for the three-year period ended December 31, 1993.
State insurance laws also regulate the character of each insurance company's
investments, reinsurance and security deposits.
GALIC may be required, under the solvency or guaranty laws of most states in
which it does business, to pay assessments (up to certain prescribed limits)
to fund policyholder losses or liabilities of insurance companies that
become insolvent. These assessments may be deferred or forgiven under most
guaranty 8
<PAGE>
laws if they would threaten an insurer's financial strength and, in certain
instances, may be offset against future premium taxes. The incurrence and
amount of such assessments have increased in recent years. In connection
with the GALIC purchase, GALIC's costs for state guarantee funds are set at
$1 million per year for a five-year period with respect to insurance
companies in receivership, rehabilitation, liquidation or similar situations
at December 31, 1992. For any year in which GALIC pays more than $1 million
to the various states, GAI will reimburse GALIC for the excess assessments.
For any year in which GALIC pays less than $1 million, AAG will pay GAI the
difference between $1 million and the assessed amounts. GALIC paid $2.0
million and $2.2 million in assessments in 1994 and 1993, respectively.
Accordingly, GALIC recorded receivables from GAI of $1.0 million for 1994
and $1.2 million for 1993.
The Ohio Department of Insurance is GALIC's principal regulatory agency.
GALIC is deemed to be "commercially domiciled" in California based on past
premium volume written in the state and, as a result, is subject to certain
provisions of the California Insurance Holding Company laws, particularly
those governing the payment of stockholder dividends, changes in control and
intercompany transactions. An insurer's status as "commercially domiciled"
is determined annually under a statutory formula. GALIC's status may change
in California in the future if its premium volume there decreases to below
20% of its overall premium volume over the most recent three years.
The NAIC is an organization comprised of the chief insurance regulator for
each of the 50 states and the District of Columbia. One of its major roles
is to develop model laws and regulations affecting insurance company
operations and encourage uniform regulation through the adoption of such
models in all states. As part of the overall insurance regulatory process,
the NAIC forms numerous task forces to review, analyze and recommend changes
to a variety of areas affecting both the operating and financial aspects of
insurance companies. Recently, increased scrutiny has been placed upon the
insurance regulatory framework, and a number of state legislatures have
considered or enacted legislative proposals that alter, and in many cases
increase, state authority to regulate insurance companies and their holding
company systems. In light of recent legislative developments, the NAIC and
state insurance regulators have also become involved in a process of re-
examining existing laws and regulations and their application to insurance
companies. Legislation has also been introduced in Congress which could
result in the federal government's assuming some role in the insurance
industry, although none has been enacted to date.
In 1990, the NAIC began an accreditation program to ensure that states have
adequate procedures in place for effective insurance regulation, especially
with respect to financial solvency. The accreditation program requires that
a state meet specific minimum standards in over 15 regulatory areas to be
considered for accreditation. The accreditation program is an ongoing
process and once accredited, a state must enact any new or modified
standards approved by the NAIC within two years following adoption. As of
December 31, 1994, 44 states, including Ohio and California, were
accredited.
In December 1992, the NAIC adopted a model law enacting risk-based capital
formulas which became effective in 1993. The model law sets thresholds for
regulatory action, and currently GALIC's capital significantly exceeds risk-
based capital requirements. If the NAIC elects to impose more stringent
risk-based capital rules in the future, GALIC's ability to pay dividends
could be adversely affected.
The current NAIC model for extraordinary dividends requires prior regulatory
approval of any dividend that exceeds the "lesser of" 10% of statutory
surplus or 100% of the prior year's net gain from operations. The NAIC has
approved eight
9
<PAGE>
alternative provisions which may be considered "substantially similar" to
the model. The NAIC model or one of the alternatives must be adopted by a
state in order to be accredited by the NAIC.
In October 1993, Ohio revised its dividend law to adopt one of the eight
alternatives. The standard in Ohio requires 30 days prior notice of any
dividend which, together with all such amounts paid in the preceding twelve
months, exceeds the "greater of" 10% of statutory surplus or 100% of the
prior year's net income, but not exceeding earned surplus as of the prior
year-end. The maximum dividend permitted by law is not indicative of an
insurer's actual ability to pay dividends, which may be constrained by
business and regulatory considerations. These considerations include the
impact of dividends on surplus, which could affect (i) an insurer's ratings,
(ii) its competitive position and (iii) the amount of premiums that can be
written. Furthermore, the Ohio Insurance Department has broad discretion to
limit the payment of dividends by insurance companies domiciled in Ohio.
California amended its dividend law effective January 1, 1994, adopting one
of the alternative provisions approved by the NAIC. Under the new
California law, approval is required for dividends which exceed the "greater
of" 10% of statutory surplus or 100% of "net gain from operations", but not
exceeding earned surplus, in any twelve month period.
The NAIC has been considering the adoption of a model investment law for
several years. A draft of the model law was released for comment in 1994.
It is not possible to predict the content of the final law. However, based
on the draft released in 1994, it is not expected that the final law will
have a material impact on the investment activities of GALIC.
In 1991, the NAIC adopted additional disclosure requirements relating to the
marketing and sale of two-tier annuities. Certain states have adopted
regulations or interpreted existing regulations to restrict the sale of two-
tier annuity products or impose limitations on the terms of such products
that make their sale less attractive to GALIC. To date, these additional
disclosure requirements and restrictions have not had a material impact on
GALIC's business. The NAIC is also considering the adoption of actuarial
guidelines with respect to two-tier annuity products. In connection with
the sale of GALIC, GAI is obligated to neutralize the financial effects of
implementing any such guidelines on GALIC's statutory earnings and capital,
except for the initial, one-time impact on GALIC's statutory earnings.
GAI's obligations will apply only to GALIC's annuity business at the date of
adoption and only if the guidelines are (i) adopted prior to January 1,
1996, or (ii) on the NAIC agenda for adoption as of December 31, 1995, and
actually adopted on or prior to December 31, 1996. Management believes it
is likely that these guidelines will be adopted by December 31, 1995 and
should not have a significant impact on GALIC's financial condition.
10
<PAGE>
Discontinued Manufacturing Operations
Prior to 1993, the Company sold nearly all of its manufacturing operations.
At December 31, 1994, the Company owned a small foreign electronic
components manufacturer which is being held for sale.
Certain manufacturing facilities are still owned by the Company. See
"Properties" below.
Employees
As of December 31, 1994, AAG and its subsidiaries employed approximately 440
persons. None of the employees are represented by a labor union. AAG
believes that its employee relations are excellent.
ITEM 2
Properties
Location
In 1993, AAG and GALIC moved their offices to Cincinnati from Stamford,
Connecticut and Los Angeles, California, respectively.
AAG and GALIC rent office space in Cincinnati totaling approximately 90,000
square feet under leases expiring in 1996 through 1999. Management believes
that its corporate offices are generally well maintained and adequate for
the Company's present needs.
The material properties of the Company's former manufacturing operations are
listed below.
Lease
Interior Expiration
Location Square Feet Use (if leased)
Discontinued operations:
North Adams, MA 154,000 Manufacturing facility Owned
Hudson, NH 121,400 Manufacturing facility March 2003
Concord, NH 113,000 Manufacturing facility Owned
Hillsville, VA 102,000 Manufacturing facility Owned
Ronse, Belgium 85,000 Manufacturing facility Owned
Longwood, FL 60,000 Manufacturing facility Owned
North Adams, MA 44,000 R & D facility Owned
North Adams, MA 22,000 Manufacturing facility January 1998
Most of the manufacturing facilities are still owned and are currently being
leased to companies using them for manufacturing operations. The Company is
attempting to sell or extend leases on these facilities. In addition to the
facilities listed above, the Company has agreed to contribute a facility in
North Adams, Massachusetts which has been vacant for several years to a not-
for-profit entity which intends to develop the property into a multi-
discipline art center.
11
<PAGE>
Environmental Matters
Federal and state laws and regulations, including the federal Comprehensive
Environmental Response, Compensation, and Liability Act and similar state
laws, impose liability on the Company (as the successor to Sprague) for the
investigation and cleanup of hazardous substances disposed of or spilled by
its discontinued manufacturing operations, at facilities still owned by the
Company and facilities transferred in connection with the sales of certain
operations, as well as at disposal sites operated by third parties. In
addition, the Company has indemnified the purchasers of its former
operations for the cost of such activities. At several sites, the Company
is conducting cleanup activities of soil and ground water contamination in
accordance with consent agreements between the Company and state
environmental agencies. The Company has also conducted or is aware of
investigations at a number of other locations of its former operations that
have disclosed environmental contamination that could cause the Company to
incur additional investigative, remedial and legal costs. The Company has
also been identified by state and federal regulators as a potentially
responsible party at a number of other disposal sites.
Based on the costs incurred by the Company over the past several years and
discussions with its independent environmental consultants, management
believes that reserves recorded are sufficient in all material respects to
satisfy the known liabilities. However, the regulatory standards for clean-
up are continually evolving toward more stringent requirements. In
addition, many of the environmental investigations at the Company's former
operating locations and third-party sites are still preliminary, and where
clean-up plans have been proposed, they have not yet received full approval
from the relevant regulatory agencies. Further, the presence of Company-
generated wastes at third-party disposal sites exposes the Company to joint
and several liability for the potential additional costs of cleaning up
wastes generated by others. Accordingly, there can be no assurance that the
costs of environmental clean-up for the Company may not be significantly
higher in future years, possibly necessitating additional charges.
The Maine Department of Environmental Protection has issued a proposed
Administrative Consent Agreement and Enforcement Order calling for a
$328,000 fine based on alleged 1991 violations of certain reporting
regulations. The Company is working with the Department of Environmental
Protection to resolve this matter and is negotiating the amount of the fine.
There are certain other claims involving the Company, including claims
relating to the generation, disposal or release into the environment of
allegedly hazardous substances. In management's opinion, the outcome of
these claims will not, individually or in the aggregate, have a material
adverse effect on the Company's financial condition or results of
operations.
12
<PAGE>
ITEM 3
Legal Proceedings
AAG and GALIC are subject to litigation and arbitration in the normal course
of business. GALIC is not a party to any material pending litigation or
arbitration.
See "Item 2: Properties - Environmental Matters" for a discussion
concerning certain environmental claims and litigation against the Company.
PART II
ITEM 5
Market for Registrant's Common Equity
and Related Stockholder Matters
AAG's Common Stock is listed and traded principally on the New York Stock
Exchange ("NYSE") under the symbol AAG. On March 1, 1995, there were
approximately 10,000 holders of record of Common Stock. The following table
sets forth the range of high and low sales prices for the Common Stock on
the NYSE Composite Tape.
1994 1993
High Low High Low
First Quarter $10.63 $8.75 $11.38 $5.63
Second Quarter 10.00 8.38 11.38 8.75
Third Quarter 10.00 8.88 11.00 7.88
Fourth Quarter 9.63 8.88 10.38 8.25
AAG's dividend paying capability is limited by certain customary debt
covenants to amounts based on cumulative earnings and losses, debt
repurchases, capital transactions and other items. The Company paid annual
dividends of $.06 per share in 1994 and $.05 per share in 1993. Although no
future dividend policy has been determined, management believes the Company
will continue to have the capability to pay similar dividend amounts.
13
<PAGE>
ITEM 6
Selected Financial Data
The following financial data have been summarized from, and should be read
in conjunction with, the Company's consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The data reflects the purchase of GALIC as of December 31,
1992 (in millions, except per share amounts).
<TABLE>
<CAPTION>
Operations Statement Data: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Total revenues $371.2 $387.2 $3.6 $1.9 $0.4
Income (loss) from continuing
operations 40.9 53.0 (9.0) (4.7) (6.0)
Loss from discontinued operations (2.6) (9.6) (16.8) (47.8) (43.3)
Extraordinary items (1.7) (3.4) - - -
Changes in accounting principle (0.5) - (3.1) - -
Net income (loss) $ 36.1 $ 40.0 ($28.9) ($52.5) ($49.3)
Earnings (loss) per common share:
Continuing operations $1.05 $1.41 ($0.50) ($0.26) ($0.33)
Discontinued operations (.07) (.27) (.94) (2.66) (2.37)
Extraordinary items (.05) (.10) - - -
Changes in accounting
principle (.01) - (.17) - -
Net income (loss) $0.92 $1.04 ($1.61) ($2.92) ($2.70)
Cash dividends per common share $0.06 $0.05 $0.05 $0.05 $0.05
Balance Sheet Data:
Total assets $5,089.9 $4,913.8 $4,480.4 $170.1 $294.8
Notes payable 183.3 225.9 230.9 27.9 30.6
Net unrealized gains (losses)
included in stockholders'
equity (29.0) 56.9 28.4 - -
Total stockholders' equity 204.4 250.3 186.6 108.5 171.8
</TABLE>
14
<PAGE>
ITEM 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
Following is a discussion and analysis of the financial statements and other
statistical data that management believes will enhance the understanding of
AAG's financial condition and results of operations. This discussion should
be read in conjunction with the financial statements beginning on page F-1.
AAG is organized as a holding company with nearly all of its operations
being conducted by Great American Life Insurance Company ("GALIC"). The
parent corporation, however, has continuing expenditures for administrative
expenses, corporate services, liabilities in connection with discontinued
operations and, most importantly, for the payment of interest and principal
on borrowings. Since its continuing business is financial in nature, AAG
does not prepare its consolidated financial statements using a current-
noncurrent format. Consequently, certain traditional ratios and financial
analysis tests are not meaningful.
Liquidity and Capital Resources
Ratios AAG's ratio of earnings to fixed charges was 4.0 in 1994 and 4.7 in
1993. The ratio of AAG's consolidated debt to equity excluding the effects
of unrealized gains and losses on stockholders' equity was .79, 1.17 and
1.46 at December 31, 1994, 1993 and 1992, respectively. These same ratios
including the effects of unrealized gains and losses were .90, .90 and 1.24,
respectively.
The National Association of Insurance Commissioners ("NAIC") has adopted a
model law enacting risk-based capital ("RBC") formulas and setting
thresholds for regulatory action. At December 31, 1994 and 1993, GALIC's
capital ratios significantly exceeded RBC requirements.
Sources and Uses of Funds AAG's ability to make payments of interest and
principal on its debt and other holding company costs is dependent on
payments from GALIC in the form of capital distributions and income tax
payments. In 1994, AAG received $26.6 million in tax allocation payments
and $44.0 million in capital distributions from GALIC.
The amount of capital distributions which can be paid by GALIC is subject to
restrictions relating to capital and surplus and statutory net income. In
addition, any dividend or distribution paid from other than earned surplus
is considered an extraordinary dividend and may be paid only after prior
regulatory approval. (See Note K to the financial statements.) The maximum
amount of dividends payable by GALIC in 1995 without prior regulatory
approval is approximately $49.7 million. In January 1995, GALIC paid a
capital distribution of $16.8 million to AAG.
In connection with the acquisition of GALIC on December 31, 1992, AAG sold
Common and Preferred Stock to GALIC's parent for $156 million in cash. The
proceeds of those stock sales together with $230 million in new borrowings
and most of the accumulated cash funds of the Company were used to purchase
GALIC. The total cost to acquire GALIC was approximately $486 million,
including transaction costs and fees of $17.4 million.
The borrowings used to fund the GALIC acquisition were repaid during 1993
from the sales of $125 million of 11-1/8% Senior Subordinated Notes due 2003
and $100 million of 9-1/2% Senior Notes due 2001.
15
<PAGE>
In 1994, AAG (i) issued 4.0 million shares of Common Stock in exchange for
all of its Preferred Stock and $7.1 million principal amount of its notes
and (ii) repurchased $70.0 million principal amount of its notes (including
$14 million purchased by GALIC).
AAG has a $50 million revolving bank line under which $30.0 million was
outstanding at December 31, 1994 and $25.5 million at March 1, 1995.
Amounts outstanding under this agreement bear interest at variable rates
tied to either Prime or LIBOR, at the discretion of the Company. Borrowings
thereunder may be used for general corporate purposes. AAG has used the
amounts borrowed under the bank line primarily to repurchase its outstanding
debt.
AAG's revolving line of credit matures in 1998. The Company has no other
scheduled principal maturities until 2001. Assuming no further prepayments
of its debt, AAG's annual interest payments will be approximately $17.8
million in 1995, $17.7 million in 1996, 1997, 1998 and $15.5 million in
1999.
Based upon the current level of operations and anticipated growth, AAG
believes that it will have sufficient resources to meet its liquidity
requirements.
Investments The Ohio Insurance Code contains rules restricting the types
and amounts of investments which are permissible for Ohio life insurers.
These rules are designed to ensure the safety and liquidity of insurers'
investment portfolios. The NAIC is considering the formulation of a model
investment law which, if adopted, would have to be considered by Ohio for
adoption. The formulation is in the preliminary stages and management
believes its impact on AAG's operations will not be material.
The NAIC assigns quality ratings to publicly traded as well as privately
placed securities. At December 31, 1994, 94% of AAG's fixed maturity
portfolio was comprised of investment grade bonds (NAIC rating of "1" or
"2"). Management believes that the high credit quality of AAG's investment
portfolio should generate a stable and predictable investment return.
AAG invests primarily in fixed income investments which, including loans and
short-term investments, comprised over 98% of its investment portfolio at
December 31, 1994. AAG generally invests in securities with intermediate-
term maturities with an objective of optimizing interest yields while
maintaining an appropriate relationship of maturities between AAG's assets
and expected liabilities. AAG's fixed maturity portfolio is classified into
two categories: "held to maturity" and "available for sale". (See Note A
to the financial statements.) At December 31, 1994, AAG had approximately
$279 million in net unrealized losses on its fixed maturity portfolio
compared to net unrealized gains of $206 million at December 31, 1993. This
decrease, representing approximately 11% of the carrying value of AAG's bond
portfolio, resulted from an increase in the general level of interest rates.
During 1994, none of the Company's fixed maturity investments were non-
performing. In addition, AAG has little exposure to mortgage loans and real
estate, which represented only 1.5% of total assets at December 31, 1994.
The majority of mortgage loans and real estate was purchased within the last
two years.
At December 31, 1994, AAG's mortgage-backed securities portfolio consisted
primarily of collateralized mortgage obligations ("CMOs"), which represented
approximately 28% of fixed maturity investments compared to 35% at December
31, 1993. As of December 31, 1994, interest only (I/O), principal only
(P/O) and other "high risk" CMOs represented less than two-tenths of one
percent of total assets. AAG invests primarily in CMOs which are structured
to minimize prepayment risk. In addition,
16
<PAGE>
the majority of CMOs held by AAG were purchased at a discount to par value.
Management believes that the structure and discounted nature of the CMOs
will minimize the effect of prepayments on earnings over the anticipated
life of the CMO portfolio.
Substantially all of AAG's CMOs are AAA-rated by Standard & Poor's
Corporation and are collateralized primarily by GNMA, FNMA and FHLMC single-
family residential pass-through certificates. The market in which these
securities trade is highly liquid. Aside from interest rate risk, AAG does
not believe a material risk (relative to earnings or liquidity) is inherent
in holding such investments.
Results of Operations
General GALIC was acquired by AAG on December 31, 1992; accordingly, its
results are not included in the Company's statement of operations prior to
1993. Following is a condensed statement of operating earnings, excluding
realized gains and losses and the 1993 provision for relocation expense (in
millions):
1994 1993
Operating revenues $371.3 $351.7
Operating expenses:
Benefits to annuity policyholders (241.9) (228.6)
Interest and other debt expenses (21.4) (22.6)
Amortization of DPAC (7.1) (14.7)
Other expenses (37.6) (33.3)
(308.0) (299.2)
Operating earnings before taxes 63.3 52.5
Income tax expense 22.3 17.4
Net operating earnings $ 41.0 $ 35.1
Net operating earnings for 1994 were up 17% from 1993. Increases in
interest margins and growth in invested assets contributed to the
improvement. While net operating earnings is not considered an alternative
to net income as an indication of AAG's overall performance, management
believes that it is helpful in comparing the operating performance of AAG
and other similar companies.
Annuity receipts for GALIC were as follows (in millions):
1994 1993
Flexible Premium Deferred Annuities:
First year $ 39 $ 47
Renewal 208 223
247 270
Single Premium Deferred Annuities 196 130
Total annuity receipts $443 $400
GALIC's annuity receipts in 1994 increased 10.6% over 1993 due to strong
growth in sales of single premium products.
All of GALIC's products are fixed rate annuities which permit GALIC to
change the crediting rate at any time (subject to minimum interest rate
guarantees of 3% to 4% per annum). As a result, management has been able to
react to changes in interest rates and maintain a desired interest rate
spread with little or no effect on persistency.
Net Investment Income Net investment income increased 5% in 1994 over 1993
due primarily to an increase in the Company's average invested asset base.
Investment income is reflected net of investment expenses of $4.9 million in
1994 and 1993.
17
<PAGE>
Realized Gains Individual securities are sold from time to time as market
opportunities appear to present optimal situations under AAG's investment
strategies.
Equity in Net Loss of Affiliate Equity in net loss of affiliate represents
AAG's proportionate share of Chiquita's losses. Chiquita reported a loss
before extraordinary item for 1994 of $49 million compared to a loss of $51
million for 1993. The loss in 1994 reflected higher costs and charges
related to (i) farm closings and write-downs of banana cultivations
following an unusually severe strike in Honduras, and (ii) a substantial
reduction of Chiquita's banana trading operations in Japan. These charges
were partially offset by improved results from Chiquita's meat operations as
well as a higher average worldwide price for bananas. Chiquita's loss in
1993 was attributed primarily to a multi-year investment spending program
and the ongoing impact of its restructuring and cost reduction efforts.
Benefits to Annuity Policyholders Benefits to annuity policyholders
increased 6% in 1994 over 1993 primarily due to an increase in average
annuity policyholder funds accumulated. The rate at which GALIC credits
interest on annuity policyholders' funds is subject to change based on
management's judgment of market conditions.
Interest on Borrowings and Other Debt Expenses Interest on borrowings
decreased 5% in 1994 from 1993 due to repurchases of debt during 1994. (See
Note E to the financial statements.)
Amortization of Deferred Policy Acquisition Costs ("DPAC") DPAC
(principally commissions, advertising, underwriting, policy issuance and
sales expenses that vary with and are primarily related to the production of
new business) amortization in 1994 decreased 52% from 1993. This decrease
reflects reviews during 1993 and 1994 of DPAC assumptions, which resulted in
updating certain factors, primarily the time frame over which DPAC is
amortized. The time frame was extended to more accurately reflect the
estimated lives of policies and the expected gross profits resulting from
these policies. Estimates of lives and expected gross profits were refined
based on actual experience of the Company by product line.
Provision for Relocation Expenses In 1993, GALIC relocated its corporate
offices from Los Angeles to Cincinnati; the estimated pretax cost of this
move ($8.0 million) was included in 1993 continuing operations.
Also in 1993, AAG relocated its corporate offices from Stamford, Connecticut
to Cincinnati; the estimated cost of this relocation and related shutdown
and severance costs ($5.0 million) was provided for in discontinued
operations in 1992.
Other Operating and General Expenses Other operating and general expenses
increased 13% in 1994 compared to 1993. Additional costs for information
systems, communications, rent and new distribution networks were partially
offset by lower employee costs. The 1993 employee costs were unusually high
due to the temporary staff required for the relocation of operations from
Los Angeles to Cincinnati.
Discontinued Operations The Company has sold virtually all of its former
manufacturing businesses. A small Belgium based subsidiary continues to be
held for sale along with certain properties, many of which are currently
leased to companies using them for manufacturing operations.
The Company has certain obligations related to its former business
activities. Among these obligations are the funding of pension plans,
environmental costs, settlement of government claims, lease payments for two
former plant sites, certain retiree medical benefits, and certain
obligations associated with the sales of the Company's manufacturing
operations. (See Note G to the financial statements.)
18
<PAGE>
While it is difficult to estimate future environmental investigative,
remedial and legal costs accurately, management believes the remaining
aggregate cost at all sites for which it has responsibility will range from
$8.6 million to $14.0 million at December 31, 1994. Management's estimate
of this range at year end 1993 was $10 million to $15 million. The reserve
for environmental related costs was $11.7 million at December 31, 1994 and
$10.6 million at December 31, 1993.
Regulatory standards for clean-up are continuously evolving toward more
stringent requirements. Changes in regulatory standards and further
investigations (many of which are still preliminary) at the Company's former
operating locations and third-party sites could affect estimated costs in
the future. Management believes, based on the costs incurred by the Company
over the past several years and discussions with its independent
environmental consultants, that reserves recorded are sufficient to satisfy
the known liabilities and that the ultimate cost will not, individually or
in the aggregate, have a material adverse effect on the financial condition
or results of operations of AAG.
In 1991, the Company identified possible deficiencies in procedures for
reporting quality assurance information to the Defense Electronics Supply
Center ("DESC") with respect to the Company's former manufacturing
operations. Over the last several years, the Company has been engaged in
negotiations with the United States Government with respect to the
settlement of claims the Government might have arising out of the reporting
deficiencies. Based on these negotiations, the Company believed it had
sufficient reserves to cover the estimated settlement amount. In March
1995, the Company received notification from the Government indicating
additional reporting deficiencies. The Company is in the process of
evaluating this information and is unable to ascertain the validity of these
new claims or the amounts involved. It is impossible to determine the
impact, if any, of these alleged claims on the Company and its financial
condition.
Extraordinary Items In 1994, AAG repurchased $77.1 million principal amount
of its notes, realizing a pretax loss of $1.5 million ($1.0 million net of
tax). In addition, AAG recorded a pretax charge of $1.1 million ($700,000
net of tax), representing AAG's proportionate share of Chiquita's
extraordinary loss on the retirement of certain of its debt in the first
quarter of 1994.
In 1993, AAG prepaid its bank term loan and wrote off $5.2 million ($3.4
million net of tax) of related unamortized debt issuance costs.
Accounting Changes Effective January 1, 1994, AAG implemented Statement of
Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits", and recorded a pretax charge of $740,000
($481,000, net of tax) for the projected future costs of providing certain
benefits to employees of GALIC.
Effective January 1, 1992, AAG implemented SFAS No. 106, "Accounting for
Postretirement Benefits Other Than Pensions", and recorded a provision of
$3.1 million for the projected future costs of providing postretirement
benefits to retirees in its discontinued manufacturing operations.
New Accounting Standard to be Implemented The Financial Accounting
Standards Board ("FASB") has issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan", which is scheduled to become effective in 1995.
Implementation of this standard is not expected to have a material effect on
AAG.
19
<PAGE>
ITEM 8
Financial Statements and Supplementary Data
PAGE
Reports of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1994 and 1993 F-2
Consolidated Statement of Operations:
Years Ended December 31, 1994, 1993 and 1992 F-3
Consolidated Statement of Changes in Stockholders' Equity:
Years Ended December 31, 1994, 1993 and 1992 F-4
Consolidated Statement of Cash Flows:
Years Ended December 31, 1994, 1993 and 1992 F-5
Notes to Consolidated Financial Statements F-6
"Selected Quarterly Financial Data" has been included in Note M to the
Consolidated Financial Statements.
PART III
The information required by the following Items will be included in American
Annuity's definitive Proxy Statement for the 1995 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission
within 120 days of the Company's fiscal year end and is herein incorporated
by reference:
ITEM 10 Directors and Executive Officers of the Registrant
ITEM 11 Executive Compensation
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management
ITEM 13 Certain Relationships and Related Transactions
20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Annuity Group, Inc.
We have audited the accompanying consolidated balance sheets of American
Annuity Group, Inc. and subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1994. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American Annuity Group, Inc. and subsidiaries at December 31,
1994 and 1993, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, the Company
made certain accounting changes in 1994, 1993 and 1992.
Ernst & Young LLP
Cincinnati, Ohio
March 13, 1995
F-1
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity - at amortized cost
(market - $3,062.4 and $2,751.9) $3,273.7 $2,633.2
Available for sale - at market
(amortized cost - $1,326.4 and $1,667.0) 1,258.6 1,754.5
Equity securities - at market
(cost - $10.7 and $12.8) 21.7 25.9
Investment in affiliate 20.8 25.2
Mortgage loans on real estate 47.2 52.1
Real estate, net of accumulated
depreciation of $4.9 and $4.6 28.0 26.1
Policy loans 185.5 166.6
Short-term investments 26.0 57.0
Total investments 4,861.5 4,740.6
Cash 36.7 15.0
Accrued investment income 77.7 66.9
Deferred policy acquisition costs, net 65.1 39.2
Other assets 48.9 52.1
Total assets $5,089.9 $4,913.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Annuity policyholders' funds accumulated $4,618.1 $4,256.7
Notes payable 183.3 225.9
Payable for securities purchased - 68.0
Payable to affiliates, net 1.2 28.3
Accounts payable, accrued expenses and other
liabilities 82.9 84.6
Total liabilities 4,885.5 4,663.5
Series A Preferred Stock
(redemption value - $45.0) - 29.9
Common Stock, $1 par value
-100,000,000 shares authorized
-39,141,080 and 35,097,447
shares outstanding 39.1 35.1
Capital surplus 330.8 301.0
Retained earnings (deficit) (136.5) (172.6)
Unrealized gains (losses)
on marketable securities, net (29.0) 56.9
Total stockholders' equity 204.4 250.3
Total liabilities and
stockholders' equity $5,089.9 $4,913.8
See Notes to Consolidated Financial Statements.
</TABLE>
F-2
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Revenues:
Net investment income $371.8 $353.3 $ 3.6
Realized gains (losses) on sales
of investments (0.1) 35.5 -
Equity in net loss of affiliate (2.8) (2.9) -
Other income 2.3 1.3 -
371.2 387.2 3.6
Costs and Expenses:
Benefits to annuity policyholders 241.9 228.6 -
Interest on borrowings and other
debt expenses 21.4 22.6 -
Amortization of deferred policy
acquisition costs 7.1 14.7 -
Provision for GALIC relocation expenses - 8.0 -
Other operating and general expenses 37.6 33.3 12.1
308.0 307.2 12.1
Income (loss) from continuing operations
before income taxes 63.2 80.0 (8.5)
Provision for income taxes 22.3 27.0 0.5
Income (loss) from continuing operations 40.9 53.0 (9.0)
Discontinued operations, net of tax (2.6) (9.6) (16.8)
Income (loss) before extraordinary items
and cumulative effect of accounting
changes 38.3 43.4 (25.8)
Extraordinary items, net of tax (1.7) (3.4) -
Cumulative effect of accounting changes,
net of tax (0.5) - (3.1)
Net Income (Loss) $ 36.1 $ 40.0 ($ 28.9)
Preferred Dividend Requirement 0.9 3.6 -
Net income (loss) applicable
to Common Stock $ 35.2 $ 36.4 ($ 28.9)
Average Common Shares outstanding 38.1 35.1 18.0
Earnings (loss) per common share:
Continuing operations $1.05 $ 1.41 ($ .50)
Discontinued operations (.07) (.27) (.94)
Extraordinary items (.05) (.10) -
Cumulative effect of accounting changes (.01) - (.17)
Net income (loss) $0.92 $ 1.04 ($ 1.61)
See Notes to Consolidated Financial Statements.
</TABLE>
F-3
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions)
<TABLE>
<CAPTION>
Year ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Preferred Stock:
Balance at beginning of period $ 29.9 $ 29.4 $ -
Exchanged for common stock (30.0) - -
Issued during the period - - 29.4
Accretion of discount 0.1 0.5 -
Balance at end of period $ - $ 29.9 $ 29.4
Common Stock:
Balance at beginning of period $ 35.1 $ 35.1 $ 20.5
Issued during the period 4.0 - 18.6
Retirement of treasury stock - - (4.0)
Balance at end of period $ 39.1 $ 35.1 $ 35.1
Capital Surplus:
Balance at beginning of period $301.0 $306.3 $297.5
Common stock issued during the period 33.0 - 93.9
Common dividends declared (2.3) (1.7) -
Preferred dividends declared (0.8) (3.1) -
Accretion of preferred stock discount (0.1) (0.5) -
Proceeds in excess of fair value of
preferred stock - - 15.6
Retirement of treasury stock - - (20.6)
Excess of purchase price over GALIC's
net assets - - (79.2)
Other - - (0.9)
Balance at end of period $330.8 $301.0 $306.3
Retained Earnings (Deficit):
Balance at beginning of period ($172.6) ($212.6) ($183.7)
Net income (loss) 36.1 40.0 (28.9)
Balance at end of period ($136.5) ($172.6) ($212.6)
Treasury Stock:
Balance at beginning of period $ - $ - ($ 24.1)
Treasury stock acquired - - (0.5)
Retirement of treasury stock - - 24.6
Balance at end of period $ - $ - $ -
Unrealized Gains (Losses), Net:
Balance at beginning of period $ 56.9 $ 28.4 $ -
Change during period (85.9) 28.5 28.4
Balance at end of period ($ 29.0) $ 56.9 $ 28.4
Pension Adjustment:
Balance at beginning of period $ - $ - ($ 1.7)
Change during period - - 1.7
Balance at end of period $ - $ - $ -
See Notes to Consolidated Financial Statements.
</TABLE>
F-4
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Year ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 36.1 $ 40.0 ($ 28.9)
Adjustments:
Discontinued operations 2.6 9.6 16.8
Loss on retirement of debt 1.7 3.4 -
Cumulative effect of accounting changes 0.5 - 3.1
Benefits to annuity policyholders 241.9 228.6 -
Amortization of deferred policy
acquisition costs 7.1 14.7 -
Equity in net losses of affiliate 2.8 2.9 -
Depreciation and amortization 0.3 0.9 -
Realized (gains) losses on investing
activities 0.1 (35.5) -
Increase in accrued investment income (10.1) (13.9) -
Increase in deferred policy
acquisition costs (30.5) (28.0) -
Change in amounts due affiliates 23.2 32.6 -
Decrease (increase) in other assets 0.7 (2.3) -
Decrease in other liabilities (14.9) (19.3) -
Other, net 0.9 (0.4) (39.3)
262.4 233.3 (48.3)
Cash Flows from Investing Activities:
Purchases of and additional
investments in:
Fixed maturity investments (1,189.2)(2,015.1) -
Equity securities (0.7) (5.6) -
Real estate, mortgage loans and
other assets (27.9) (59.3) -
Subsidiaries and affiliates (14.0) - (216.6)
Maturities and redemptions of fixed
maturity investments 238.2 379.2 -
Sales of:
Fixed maturity investments 621.9 1,202.0 -
Equity securities 4.8 30.6 -
Real estate, mortgage loans and
other assets 27.2 2.5 -
Discontinued operations - - 130.8
Increase in policy loans (16.1) (8.1) -
Other, net - 2.9 -
(355.8) (470.9) (85.8)
Cash Flows from Financing Activities:
Annuity receipts 442.7 400.1 -
Annuity benefits and withdrawals (321.0) (337.9) -
Additions to notes payable 34.7 225.0 230.0
Reductions of notes payable (69.2) (230.0) (27.9)
Issuance of common stock - - 111.3
Issuance of preferred stock - - 45.0
Repurchase of common stock - - (0.5)
Cash dividends paid (3.1) (4.1) (0.9)
84.1 53.1 357.0
Net increase (decrease) in cash and
short-term investments (9.3) (184.5) 222.9
Beginning cash and short-term investments 72.0 256.5 33.6
Ending cash and short-term investments $ 62.7 $ 72.0 $256.5
See Notes to Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The accompanying consolidated financial statements
include the accounts of American Annuity Group, Inc. and its subsidiaries
("AAG" or "the Company"). Intercompany transactions and balances are
eliminated in consolidation. Certain reclassifications have been made to
prior periods to conform to the current year's presentation.
American Financial Corporation and subsidiaries ("AFC") owned 31,319,629
shares (80%) of AAG's Common Stock at December 31, 1994.
The acquisition of Great American Life Insurance Company ("GALIC"), a
subsidiary of AFC, on December 31, 1992, was recorded as a transfer of net
assets between companies under common control. As a result, the net assets
of GALIC were recorded by AAG at AFC's historical basis and the excess
consideration paid over AFC's historical basis was treated as a reduction of
common stockholders' equity. The results of GALIC's operations have been
included in AAG's consolidated financial statements since its acquisition.
Investments When available, fair values for investments are based on prices
quoted in the most active market for each security. If quoted prices are
not available, fair value is estimated based on present values, fair values
of comparable securities, or similar methods.
AAG implemented Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
beginning December 31, 1993. This standard requires that (i) debt
securities be classified as "held to maturity" and reported at amortized
cost if AAG has the positive intent and ability to hold them to maturity,
(ii) debt and equity securities be classified as "trading" and reported at
fair value, with unrealized gains and losses included in earnings, if they
are bought and held principally for selling in the near term and (iii) debt
and equity securities not classified as held to maturity or trading be
classified as "available for sale" and reported at fair value, with
unrealized gains and losses reported as a separate component of
stockholders' equity. Only in certain limited circumstances, such as
significant issuer credit deterioration or if required by insurance or other
regulators, may a company change its intent to hold a certain security to
maturity without calling into question its intent to hold other debt
securities to maturity in the future.
Short-term investments are carried at cost; mortgage loans on real estate
are generally carried at amortized cost; policy loans are stated at the
aggregate unpaid balance. Carrying amounts of these investments approximate
their fair value.
Gains or losses on sales of securities are recognized at the time of
disposition with the amount of gain or loss determined on the specific
identification basis. When a decline in the value of a specific investment
is considered to be other than temporary, a provision for impairment is
charged to earnings and the carrying value of that investment is reduced.
Premiums and discounts on mortgage-backed securities are amortized over
their expected average lives using the interest method.
F-6
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Investment in Affiliate AAG's investments in equity securities of companies
that are 20% to 50% owned by AFC and its subsidiaries are carried at cost,
adjusted for a proportionate share of their undistributed earnings or
losses.
Deferred Policy Acquisition Costs ("DPAC") DPAC (principally commissions,
advertising, underwriting, policy issuance and sales expenses that vary with
and are primarily related to the production of new business) is deferred and
amortized, with interest, in relation to the present value of expected gross
profits on the policies. These gross profits consist principally of net
investment income and future surrender charges, less interest on
policyholders' funds and future policy administration expenses. DPAC is
reported net of unearned revenue relating to certain policy charges that
represent compensation for future services. These unearned revenues are
recognized as income using the same assumptions and factors used to amortize
DPAC.
To the extent that unrealized gains (losses) from securities classified as
"available for sale" would result in adjustments to DPAC, unearned revenues
and policyholder liabilities had those gains (losses) actually been
realized, such balance sheet amounts are adjusted, net of deferred taxes.
Annuity Policyholders' Funds Accumulated Annuity receipts and benefit
payments are generally recorded as increases or decreases in "annuity
policyholders' funds accumulated" rather than as revenue and expense.
Increases in this liability for interest credited are charged to expense and
decreases for surrender charges are credited to other income.
Income Taxes As of December 31, 1992, AAG and its 80%-owned U.S.
subsidiaries were consolidated with AFC for federal income tax purposes.
AAG and GALIC have separate tax allocation agreements with AFC which
designate how tax payments are shared by members of the tax group. In
general, both companies compute taxes on a separate return basis. GALIC is
obligated to make payments to (or receive benefits from) AFC based on
taxable income without regard to temporary differences. In accordance with
terms of AAG's indentures, AAG receives GALIC's tax allocation payments for
the benefit of AAG's deductions arising from current operations. If GALIC's
taxable income (computed on a statutory accounting basis) exceeds a current
period net operating loss of AAG, the taxes payable by GALIC associated with
the excess are payable to AFC. If the AFC tax group utilizes any of AAG's
net operating losses or deductions that originated prior to 1993, AFC will
pay to AAG an amount equal to the benefit received.
Effective January 1, 1992, the Company implemented SFAS No. 109, "Accounting
for Income Taxes". As permitted under the Statement, AAG's prior year
financial statements have not been restated and no adjustment was necessary
for the cumulative effect of the change. Under SFAS No. 109, the liability
method used in accounting for income taxes is less restrictive than the
liability method under SFAS No. 96, previously used by the Company. The
provisions of SFAS No. 109 allow AAG to recognize deferred tax assets if it
is more likely than not that a benefit will be realized.
F-7
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases and are measured using
enacted tax rates. Current and deferred tax assets and liabilities are
aggregated with other amounts receivable from or payable to affiliates.
Debt Issuance Costs Debt expenses are amortized over the terms of the
respective borrowings on the interest method.
Statement of Cash Flows For cash flow purposes, "investing activities" are
defined as making and collecting loans and acquiring and disposing of debt
or equity instruments and property and equipment. "Financing activities"
include annuity receipts, benefits and withdrawals and obtaining resources
from owners and providing them with a return on their investments. All
other activities are considered "operating". Short-term investments having
original maturities of three months or less when purchased are considered to
be cash equivalents for purposes of the financial statements.
Benefit Plans AAG sponsors an Employee Stock Ownership Retirement Plan
("ESORP") covering all employees who are qualified as to age and length of
service. The ESORP, which invests primarily in securities of AAG, is a
trusteed, noncontributory plan for the benefit of the employees of AAG and
its participating subsidiaries. Contributions are discretionary by the
directors of AAG and are charged against earnings in the year for which they
are declared. Qualified employees having vested rights in the plan are
entitled to benefit payments at age 60.
AAG and certain of its subsidiaries provide health care and life insurance
benefits to eligible retirees. Effective January 1, 1992, AAG implemented
SFAS No. 106, "Accounting for Postretirement Benefits Other Than Pensions".
This standard requires companies to expense projected future costs of
providing benefits as employees render service.
Effective January 1, 1994, AAG implemented SFAS No. 112, "Employers'
Accounting for Postemployment Benefits" which covers benefits provided to
former or inactive employees (primarily those on disability) who were not
deemed retired under other company plans. This standard requires companies
to accrue the projected future cost of providing postemployment benefits
instead of recognizing an expense for these benefits when paid. The
implementation of SFAS No. 112 did not have a material effect on AAG's
financial position or results of operations.
F-8
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
B. INVESTMENTS
Fixed maturity investments at December 31, consisted of the following (in
millions):
1994
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ - $ - $ - $ -
Public utilities 461.2 424.0 0.8 (38.0)
Mortgage-backed securities 721.0 657.9 0.1 (63.2)
All other corporate 2,091.5 1,980.5 6.7 (117.7)
$3,273.7 $3,062.4 $ 7.6 ($218.9)
1994
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ 130.3 $125.3 $0.1 ($ 5.1)
Public utilities 66.2 63.7 0.2 (2.7)
Mortgage-backed securities 604.6 564.8 0.7 (40.5)
All other corporate 525.3 504.8 2.2 (22.7)
$1,326.4 $1,258.6 $3.2 ($71.0)
1993
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ - $ - $ - $ -
Public utilities 412.4 425.5 16.8 (3.7)
Mortgage-backed securities 487.8 496.3 11.5 (3.0)
All other corporate 1,733.0 1,830.1 100.9 (3.8)
$2,633.2 $2,751.9 $129.2 ($10.5)
1993
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ 54.5 $ 56.0 $ 1.5 $ -
Public utilities 123.9 128.8 4.9 -
Mortgage-backed securities 1,014.5 1,062.0 47.5 -
All other corporate 474.1 507.7 33.6 -
$1,667.0 $1,754.5 $87.5 $ -
"Investing activities" related to fixed maturity investments during 1994
included in AAG's Consolidated Statement of Cash Flows consisted of the
following:
Held to Available
Maturity for Sale Total
Purchases ($713.6) ($475.6) ($1,189.2)
Maturities and paydowns 54.8 183.4 238.2
Sales 5.6 616.3 621.9
Gross Gains 0.8 7.9 8.7
Gross Losses (1.0) (9.8) (10.8)
Certain securities classified as "held to maturity" were sold for a loss of
$0.6 million in 1994 due to deterioration in the issuer's creditworthiness.
Gross gains of $45.3 million and gross losses of $11.0 million were realized
on sales of fixed maturity investments during 1993.
The table below sets forth the scheduled maturities of AAG's fixed maturity
investments based on carrying value as of December 31:
1994
Held to Available 1993
Maturity Maturity for Sale Total Total
One year or less * * * *
After one year through five years 14% 1% 15% 10%
After five years through ten years 36 8 44 43
After ten years 7 6 13 12
57 15 72 65
Mortgage-backed securities 16 12 28 35
73% 27% 100% 100%
[FN]
* less than 1%
F-9
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Distribution based on market value is generally the same. Mortgage-backed
securities had an expected average life of approximately 8-1/2 years at
December 31, 1994.
The carrying values of investments in any entity or mortgage-backed
security, ("MBS") in excess of 10% of stockholders' equity at December 31,
1994, other than investments in affiliates and investments issued or
guaranteed by the U.S. Government or government agencies, were as follows
(in millions):
Fixed Maturities
Issuer Amount Issuer Amount
General Electric Capital MBS $58.3 Cargill Inc ESOP Series $25.0
Prudential Home MBS 46.1 Philadelphia Electric 25.0
Residential Funding MBS 45.3 American Stores 24.6
Georgia Pacific 44.3 Harcourt General 24.1
Countrywide MBS 43.7 Occidental Petroleum 24.0
CNA Financial 37.3 FMC 23.5
Houston Industries 37.3 Nerco International 23.2
GTE 35.8 VF Corporation 22.9
Ashland Oil 32.3 Whitman 22.9
Anschutz Ranch 31.1 Phillips Petroleum 22.8
Federal Express 31.0 Duquesne Light 22.6
SCE Capital 29.3 Ohio Edison 22.5
Conagra 28.0 Resolution Trust Corp MBS 22.4
Hotel First Mortgage 27.8 Texas Utilities 22.2
Coastal 27.6 Marriott International 22.0
Philip Morris 26.5 First Union 21.9
Time Warner Entertainment 26.5 Praxair 21.6
Omega Healthcare 26.4 The Dial Corporation 20.9
Citicorp MBS 25.4 Bank of New York 20.8
Commonwealth Edison 25.2 Owens Corning 20.7
At December 31, 1994, gross unrealized gains on marketable equity securities
were $11.1 million and gross unrealized losses were $0.1 million. Realized
gains and changes in unrealized appreciation on fixed maturity and equity
security investments are summarized as follows (in millions):
Fixed Equity Tax
1994 MaturitiesSecurities Effects Total
Realized ($ 2.1) $ 2.0 $ 0.0 ($ 0.1)
Change in Unrealized (485.3) (2.1) 170.6 (316.8)
1993
Realized $ 34.3 $ 1.2 ($ 12.4) $ 23.1
Change in Unrealized 88.6 10.9 (34.8) 64.7
As of February 28, 1995, the pretax unrealized losses on AAG's available for
sale portfolio had decreased approximately $50 million since year end 1994,
due primarily to a decrease in the general level of interest rates.
F-10
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Major categories of net investment income were as follows (in millions):
1994 1993
Fixed maturities $372.7 $354.8
Other* 4.0 3.4
Total investment income $376.7 358.2
Investment expenses (4.9) (4.9)
Net investment income $371.8 $353.3
[FN]
* Both years include $1.0 million in payments from a subsidiary of AFC
for the rental of an office building owned by GALIC.
AAG's investment portfolio is managed by a subsidiary of AFC. Investment
expenses in each year included investment management charges of $4.4
million, which represented approximately one-tenth of one percent of AAG's
invested assets.
C. INVESTMENT IN AFFILIATE
Investment in affiliate reflects AAG's 5% ownership (2.7 million shares) of
the common stock of Chiquita Brands International ("Chiquita") which is
accounted for under the equity method. AFC and its other subsidiaries owned
an additional 41% interest in the common stock of Chiquita. Chiquita is a
leading international marketer, processor and producer of quality food
products. The market value of AAG's investment in Chiquita was
approximately $36.4 million and $30.7 million at December 31, 1994 and 1993,
and $36.1 million at March 1, 1995.
In the first quarter of 1994, AAG recorded a pretax extraordinary charge of
$1.1 million, representing its proportionate share of Chiquita's loss on the
retirement of debt.
Included in AAG's retained earnings (deficit) at December 31, 1994, was
approximately $5.5 million applicable to equity in undistributed net losses
of Chiquita.
D. DEFERRED POLICY ACQUISITION COSTS
The DPAC balances at December 31, 1994 and 1993 are shown net of unearned
revenues of $158.8 million and $146.2 million, respectively.
E. NOTES PAYABLE
Notes payable consisted of the following at December 31, (in millions):
1994 1993
AAG (Parent Company):
11-1/8% Senior Subordinated Notes
due February 2003 $103.9 $125.0
9-1/2% Senior Notes due August 2001 44.0 100.0
Bank Credit Line due December 1998 30.0 -
Subsidiary debt 5.4 0.9
Total $183.3 $225.9
F-11
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In 1994, AAG entered into a $50 million revolving credit agreement with
three banks. Loans under the credit agreement bear interest at floating
rates based on prime or Eurodollar rates and are collateralized by 20% of
the Common Stock of GALIC. At December 31, 1994, the average rate on these
borrowings was 7.35%.
During 1994, AAG repurchased $21.1 million principal amount of its 11-1/8%
Notes (including $3 million purchased by GALIC) and $56.0 million principal
amount of its 9-1/2% Notes (including $11 million purchased by GALIC) in
exchange for approximately $69 million in cash and 810,000 shares of its
Common Stock. As a result of the repurchases, AAG realized a pretax
extraordinary loss of $1.5 million.
In connection with the GALIC acquisition, AAG borrowed $180 million under a
Bank Term Loan Agreement and $50 million under a Bridge Loan. In 1993, AAG
sold $225 million principal amount of Notes to the public and used the
proceeds to repay the Bank and Bridge Loans. As a result, AAG recorded an
extraordinary loss of $5.2 million ($3.4 million net of tax) representing
unamortized bank debt issue costs which were written off upon retirement of
the bank debt.
AAG has no scheduled principal payments on its 9-1/2% Notes and 11-1/8%
Notes until 2001. Interest payments were $23.2 million in 1994, $11.7
million in 1993 and $2.0 million in 1992.
F. STOCKHOLDERS' EQUITY
The Company is authorized to issue 25,000,000 shares of Preferred Stock, par
value $1.00 per share.
On December 31, 1992, AAG acquired GALIC from Great American Insurance
Company ("GAI"), a wholly owned subsidiary of AFC. In connection with the
acquisition, GAI purchased from AAG 17,076,923 shares of AAG's Common Stock
at $6.50 per share, and 450,000 shares of its Series A Preferred Stock at
$100 per share. The preferred shares issued were recorded at $29.4 million
(imputed dividend rate of 12% through 2007) with the excess proceeds of
$15.6 million credited to capital surplus. On March 31, 1994, AAG issued
approximately 3.2 million shares of Common Stock in exchange for the Series
A Preferred shares. The Series A Preferred Stock had a redemption value of
$100 per share and paid dividends at the rate of $7.00 per share per annum.
AAG's dividend paying capability is limited by certain customary debt
covenants to amounts based on cumulative earnings and losses, debt
repurchases, capital transactions and other items.
F-12
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
G. DISCONTINUED OPERATIONS
The results of discontinued operations included in the Consolidated
Statement of Operations were as follows (in millions):
1994 1993 1992
Net sales $ - $ - $ 80.7
Cost of sales - - (80.7)
Interest and debt expense - - (1.2)
Loss on sales of businesses and restructuring
provisions (4.0) (14.8) (24.5)
Loss from discontinued operations before tax (4.0) (14.8) (25.7)
Income tax benefit (1.4) (5.2) (8.9)
Net loss from discontinued operations ($ 2.6) ($ 9.6)($16.8)
All of the Company's former manufacturing businesses are reported as
discontinued operations. At December 31, 1994, the Company's last
manufacturing unit, Electromag NV, was being held for sale and was carried
at estimated net realizable value.
In 1994, AAG recorded a $4.0 million pretax charge for discontinued
operations, primarily related to environmental liabilities. The loss from
discontinued operations in 1993 included charges for employee related
obligations of approximately $9.7 million resulting primarily from a
decrease in the discount rate used to calculate pension obligations. The
remaining charges reflected additional write-downs and other estimated
expenses associated with the Company's former manufacturing properties.
During 1992, the Company recorded charges related to discontinued operations
as follows: employee related obligations - $6.8 million; environmental
liabilities - $5.0 million; corporate office shutdown and severance costs -
$5.0 million; property valuation adjustments - $3.6 million; potential
merchandise returns - $2.0 million and other - $2.1 million.
In 1992, AAG sold its capacitor and thick film network businesses for
approximately $130 million in cash, notes and property. The Company
recorded provisions of $42.6 million related to the anticipated sales of
these operations during 1991.
The Company has a noncontributory defined benefit pension plan covering
former U.S. employees of its discontinued manufacturing operations. The
former employees in this plan generally receive pension benefits that are
based upon formulas that reflect all past service with the Company and the
employee's compensation during employment. Contributions are made on an
actuarial basis in amounts necessary to satisfy requirements of ERISA. At
December 31, 1994, the actuarial value of the benefit obligations, which are
being discounted at 8.0%, exceeded the plan assets by $10.5 million, which
has been included in accrued expenses in the financial statements.
Effective January 1, 1992, AAG implemented SFAS No. 106 and recorded a
provision of $3.1 million for the projected future costs of providing
postretirement medical benefits to retirees in its discontinued
manufacturing operations.
F-13
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
H. INCOME TAXES
Provision (benefit) for income taxes consisted of (in millions):
1994 1993 1992
Federal:
Current $21.2 $27.4 $ -
Deferred (1.4) (7.4) (8.9)
State - - 0.5
Total $19.8 $20.0 ($8.4)
The principal items accounting for the difference in taxes on earnings
computed at the federal statutory rate (35% in 1994 and 1993 and 34% in
1992) and as recorded were as follows (in millions):
1994 1993 1992
Income (loss) before income taxes:
Continuing operations $63.2 $80.0 ($ 8.5)
Discontinued operations (4.0) (14.8) (25.7)
Extraordinary items (2.6) (5.2) -
Accounting changes (0.7) - (3.1)
Income (loss) before income taxes $55.9 $60.0 ($37.3)
Tax (benefit) computed at
statutory rate $19.6 $21.0 ($12.7)
Effect of:
Net operating loss for which no
benefit has been recognized - - 4.0
Other, net 0.2 (1.0) 0.3
Total $19.8 $20.0 ($ 8.4)
The significant components of deferred tax assets and liabilities included
in the Consolidated Balance Sheet were as follows (in millions):
December 31,
1994 1993
Deferred tax assets:
Net operating loss carryforwards $47.6 $56.4
Accrued expenses 13.3 16.7
Investment securities 50.8 -
Valuation allowance for deferred
tax assets (50.6) (61.3)
Deferred tax liabilities:
Deferred policy acquisition costs (21.9) (13.1)
Policyholder liabilities (16.0) (12.3)
Investment securities - (6.1)
At December 31, 1994, AAG had net operating loss carryforwards for federal
income tax purposes of approximately $136 million which are scheduled to
expire as follows: $6 million in 1995 and 1996; $130 million in 2001
through 2005. Cash disbursements for income taxes were not material.
F-14
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
I. LEASES
Leases relate principally to certain administrative facilities and
discontinued operations. Future minimum lease payments, net of sublease
revenues, under operating leases having initial or remaining noncancellable
lease terms in excess of one year at December 31, 1994 are payable as
follows: 1995 - $1.6 million; 1996 - $1.7 million; 1997 - $1.3 million;
1998 - $1.0 million; 1999 - $900,000; 2000 and beyond - $2.2 million.
Rental expense for operating leases was $1.7 million in 1994, $900,000 in
1993 and $1.5 million in 1992.
J. CONTINGENCIES
The Company is continuing its investigations and clean-up activities in
accordance with consent agreements with state environmental agencies. Based
on the costs incurred over the past several years and discussions with
independent environmental consultants, the Company believes the remaining
aggregate cost of environmental work at all sites for which it has
responsibility will range from $8.6 million to $14.0 million. The reserve
for environmental work was $11.7 million at December 31, 1994. Management
does not believe that these clean-up activities will have a material effect
upon the Company's financial position, results of operations or cash flows.
In 1991, the Company identified possible deficiencies in procedures for
reporting quality assurance information to the Defense Electronics Supply
Center ("DESC") with respect to the Company's former manufacturing
operations. Over the last several years, the Company has been engaged in
negotiations with the United States Government with respect to the
settlement of claims the Government might have arising out of the reporting
deficiencies. Based on these negotiations, the Company believed it had
sufficient reserves to cover the estimated settlement amount. In March
1995, the Company received notification from the Government indicating
additional reporting deficiencies. The Company is in the process of
evaluating this information and is unable to ascertain the validity of these
new claims or the amounts involved. It is impossible to determine the
impact, if any, of these alleged claims on the Company and its financial
condition.
K. STATUTORY INFORMATION; RESTRICTIONS ON TRANSFERS OF FUNDS AND ASSETS OF
SUBSIDIARIES
GALIC is required to file financial statements with state insurance
regulatory authorities prepared on an accounting basis prescribed or
permitted by such authorities (statutory basis). Certain statutory amounts
at December 31, were as follows (in millions):
1994 1993
Policyholders' surplus $255.9 $251.3
Asset valuation reserve 79.5 70.3
Interest maintenance reserve 27.7 35.7
Net earnings 54.2 44.0
F-15
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The amount of dividends which can be paid by GALIC without prior approval of
regulatory authorities is subject to restrictions relating to capital and
surplus and statutory net income. Based on earned surplus at December 31,
1994, GALIC may pay approximately $49.7 million in dividends in 1995 without
prior approval.
L. ADDITIONAL INFORMATION
Related Party Transaction In the fourth quarter of 1994, AAG purchased
Carillon Life Insurance Company from a subsidiary of AFC for $9.0 million in
cash. At December 31, 1994, Carillon had statutory assets of $9.0 million
and statutory surplus of $6.3 million. Carillon is licensed to sell annuity
products in 41 states and the District of Columbia.
Fair Value of Financial Instruments The following table shows (in millions)
the carrying value and estimated fair value of AAG's financial instruments
at December 31.
<TABLE>
<CAPTION>
1994 1993
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
<S> <C> <C> <C> <C>
Assets
Fixed maturity investments $4,532.3 $4,321.0 $4,387.7 $4,506.4
Equity securities 21.7 21.7 25.9 25.9
Investment in affiliate 20.8 36.4 25.2 30.7
Liabilities
Annuity policyholders' funds
accumulated (a) $4,553.0 $4,510.0 $4,217.5 $4,164.0
Notes payable (b) 179.2 182.6 219.1 237.7
<FN>
(a) Carrying values are shown net of deferred policy acquisition
costs of $65.1 million at December 31, 1994 and $39.2 million at
December 31, 1993.
(b) Carrying values are shown net of debt issue costs of $4.1
million at December 31, 1994 and $6.8 million at December 31,
1993.
</TABLE>
When available, fair values are based on prices quoted in the most active
market for each security. If quoted prices are not available, fair value is
estimated based on present values, discounted cash flows, fair value of
comparable securities, or similar methods. The fair value of the liability
for annuities in the payout phase is assumed to be the present value of the
anticipated cash flows, discounted at current interest rates. Fair value of
annuities in the accumulation phase is assumed to be the policyholders' cash
surrender amount.
F-16
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unrealized Gains (Losses) The components of the Consolidated Balance Sheet
caption "Unrealized gains (losses) on marketable securities, net" in
stockholders' equity are summarized as follows (in millions):
<TABLE>
<CAPTION>
Unadjusted
Asset Effect of Reported
(Liability) SFAS 115 Amount
<S> <C> <C> <C>
1994
Fixed maturities - available for sale $1,326.4 ($67.8) $1,258.6
Equity securities 10.7 11.0 21.7
Deferred policy acquisition costs, net 61.9 3.2 65.1
Annuity policyholders' funds
accumulated (4,627.2) 9.1 (4,618.1)
Deferred income taxes on net
unrealized losses - 15.5 15.5(a)
Unrealized losses on marketable
securities, net ($29.0)
Unadjusted
Asset Effect of Reported
(Liability) SFAS 115 Amount
1993
Fixed maturities - available for sale $1,667.0 $87.5 $1,754.5
Equity securities 12.8 13.1 25.9
Deferred policy acquisition costs, net 42.5 (3.3) 39.2
Annuity policyholders' funds
accumulated (4,246.9) (9.8) (4,256.7)
Deferred income taxes on net
unrealized gains - (30.6) (30.6)(a)
Unrealized gains on marketable
securities, net $56.9
<FN>
(a) Included in "Payable to affiliates, net" on the Consolidated
Balance Sheet.
</TABLE>
F-17
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
M. QUARTERLY FINANCIAL DATA (Unaudited)
The following table represents quarterly results of operations for the years
ended December 31, 1994 and 1993 (in millions, except per share data).
<TABLE>
<CAPTION>
First Second Third Fourth Total
1994 Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
Realized gains (losses) $ 0.6 $ - $ 0.1 ($ 0.8)($ 0.1)
Total revenues 92.9 94.1 91.7 92.5 371.2
Income from continuing operations 10.8 11.1 9.4 9.6 40.9
Discontinued operations - (2.6) - - (2.6)
Extraordinary items (1.1) (0.3) (0.4) 0.1 (1.7)
Accounting change (0.5) - - - (0.5)
Net income 9.2 8.2 9.0 9.7 36.1
Earnings (loss) per common share:
Continuing operations $0.28 $0.28 $0.24 $0.25 $1.05
Discontinued operations - (0.07) - - (0.07)
Extraordinary items (0.03) (0.01) (0.01) - (0.05)
Accounting change (0.01) - - - (0.01)
Net income per common share $0.24 $0.20 $0.23 $0.25 $0.92
Average common shares outstanding 35.1 39.1 39.1 39.1 38.1
First Second Third Fourth Total
1993 Quarter Quarter Quarter Quarter Year
Realized gains $ 13.4 $ 12.8 $ 2.8 $ 6.5 $ 35.5
Total revenues 101.4 102.0 89.6 94.2 387.2
Income from continuing operations 11.4* 16.9 10.3 14.4 53.0*
Discontinued operations - - - (9.6) (9.6)
Extraordinary item - - (3.4) - (3.4)
Net income 11.4 16.9 6.9 4.8 40.0
Earnings (loss) per common share:
Continuing operations $0.30 $0.46 $0.27 $0.38 $1.41
Discontinued operations - - - (0.27) (0.27)
Extraordinary item - - (0.10) - (0.10)
Net income per common share $0.30 $0.46 $0.17 $0.11 $1.04
Average common shares outstanding 35.1 35.1 35.1 35.1 35.1
<FN>
* Includes GALIC relocation charge of $5.2 million, net of tax.
</TABLE>
F-18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements are Included in Part II, Item 8.
2. Financial Statement Schedules:
Selected Quarterly Financial Data is included in Note L to the
Consolidated Financial Statements.
Schedules filed herewith:
For 1994, 1993 and 1992 Page
II - Condensed Financial Information of Registrant S-2
All other schedules for which provisions are made in the
applicable regulation of the Securities and Exchange
Commission have been omitted as they are not applicable, not
required, or the information required thereby is set forth in
the Financial Statements or the notes thereto.
3. Exhibits - See Exhibit Index on Page E-1.
(b) Reports on Form 8-K: None
S-1
<PAGE>
AMERICAN ANNUITY GROUP, INC. - PARENT ONLY
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
Condensed Balance Sheet
December 31,
Assets: 1994 1993
Cash and short-term investments $ 1.9 $ 10.4
Investment in subsidiaries 457.4(a) 519.6(a)
Other assets 19.4 24.7
$478.7 $554.7
Liabilities and Capital:
Accounts payable, accrued expenses and
other liabilities $ 41.6 $ 50.3
Payables to affiliates 40.8 29.1
Notes payable 191.9(b) 225.0
Stockholders' equity 204.4(a) 250.3(a)
$478.7 $554.7
Condensed Statement of Earnings
1994 1993
Revenues:
Equity in undistributed earnings of
subsidiaries $ 47.3 $ 97.2
Dividends from GALIC 44.0 18.2
Net investment income 0.4 0.5
91.7 115.9
Costs and Expenses:
Interest on borrowings and other debt expenses 21.9 22.5
Provision for GALIC relocation expenses - 8.0
Other operating and general expenses 6.6 5.4
28.5 35.9
Income from continuing operations before
income taxes 63.2 80.0
Provision for income taxes 22.3 27.0
Income from continuing operations 40.9 53.0
Discontinued operations, net of tax (2.6) (9.6)
Income before extraordinary items and
cumulative effect of accounting changes 38.3 43.4
Extraordinary items, net of tax (1.7) (3.4)
Cumulative effect of accounting changes,
net of tax (0.5) -
Net Income $ 36.1 $40.0
[FN]
(a) Includes unrealized gains (losses) of ($29.0) million in 1994 and $56.9
million in 1993.
(b) Includes $14.0 million principal amount of notes payable owned by GALIC.
S-2
<PAGE>
AMERICAN ANNUITY GROUP, INC. - PARENT ONLY
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
Condensed Statement of Cash Flows
Year ended December 31
1994 1993
Operating Activities:
Net income $36.1 $40.0
Adjustments:
Discontinued operations 2.6 9.6
Extraordinary items 1.7 3.4
Accounting change 0.5 -
Equity in net earnings of subsidiaries (59.7) (77.6)
Depreciation and amortization 0.8 1.2
Decrease in other assets 2.7 0.4
Increase in balances with affiliates 13.1 40.0
Decrease in other liabilities (12.8) (10.7)
Capital distributions from GALIC 44.0 18.2
Other, net - (0.1)
29.0 24.4
Investing Activities:
Additional investments in subsidiaries (9.3) (13.0)
Financing Activities:
Additions to notes payable 30.0 225.0
Reductions of notes payable (55.1) (230.0)
Cash dividends paid (3.1) (4.1)
(28.2) (9.1)
Net Increase (Decrease) in Cash and Short-term Investments(8.5) 2.3
Cash and short-term investments at beginning of period 10.4 8.1
Cash and short-term investments at end of period $ 1.9 $10.4
S-3
<PAGE>
AMERICAN ANNUITY GROUP, INC.
INDEX TO EXHIBITS
Number Exhibit Description
3.1 Certificate of Incorporation of Registrant
3.2 By-laws of Registrant
4.1 Indenture dated as of February 2, 1993, between the Registrant and
Star Bank, National Association, as Trustee, relating to the
Registrant's 11-1/8% Senior Subordinated Notes due 2003, incorporated
herein by reference to Exhibit 4.2 to the Registrant's Current Report
on Form 8-K, dated February 5, 1993.
4.2 Indenture dated as of August 18, 1993, between the Registrant and
NationsBank, National Association, as Trustee, relating to the
Registrant's 9-1/2% Senior Notes due 2001, incorporated herein by
reference to Exhibit 4.1 to the Registrant's Registration Statement
on Form S-2 dated August 11, 1993.
10.1 Agreement of Allocation of Payment of Federal Income Taxes ("American
Annuity Tax Allocation Agreement"), dated December 31, 1992, between
American Financial Corporation and the Registrant incorporated herein
by reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-2 dated January 7, 1993.
10.2 Assignment of Tax Allocation Payments dated December 31, 1992,
between American Financial Corporation and the Registrant
incorporated herein by reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form S-2 dated January 7, 1993.
10.3 Agreement for the Allocation of Federal Income Taxes dated May 13,
1974, between American Financial Corporation and Great American Life
Insurance Company, as supplemented on January 1, 1987 incorporated
herein by reference to Exhibit 10.16 to the Registrant's Registration
Statement on Form S-2 dated January 7, 1993.
10.4 Investment Services Agreement, dated December 31, 1992, between Great
American Life Insurance Company and American Money Management
Corporation incorporated herein by reference to Exhibit 10.17 to the
Registrant's Registration Statement on Form S-2 dated January 7,
1993.
10.5 Common Stock Registration Agreement, dated December 31, 1992, between
the Registrant and American Financial Corporation and its wholly
owned subsidiary Great American Insurance Company incorporated herein
by reference to Exhibit 10.22 to the Registrant's Registration
Statement on Form S-2 dated January 7, 1993.
10.6 Common Stock Registration Agreement, dated December 31, 1992 between
Chiquita Brands International, Inc. and Great American Life Insurance
Company incorporated herein by reference to Exhibit 10.24 to the
Registrant's Registration Statement on Form S-2 dated January 7,
1993.
10.7 American Annuity Group's 1993 Stock Appreciation Rights Plan,
incorporated herein by reference to Exhibit 10.8 to the Registrant's
Form 10-K for 1993.
27.0 Financial Data Schedule - included in Report filed electronically
with the Securities and Exchange Commission.
99.1 Credit Agreement dated as of January 31, 1994 amended and restated as
of December 7, 1994.
E-1
<PAGE>
AMERICAN ANNUITY GROUP, INC.
EXHIBIT 24 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-55189) pertaining to the Employee Stock Purchase Plan of
American Annuity Group, Inc. of our report dated March 13, 1995, with
respect to the consolidated financial statements and schedules of American
Annuity Group, Inc. included in this Annual Report (Form 10-K) for the year
ended December 31, 1994.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 16, 1995
E-2
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, American Annuity Group, Inc. has duly caused this
Report to be signed on its behalf by the undersigned, duly authorized.
American Annuity Group, Inc.
Signed: March 20, 1995 BY:s/CARL H. LINDNER
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
s/CARL H. LINDNER Chairman of the Board March 20, 1995
Carl H. Lindner of Directors
s/S. CRAIG LINDNER Director March 20, 1995
S. Craig Lindner
s/ROBERT A. ADAMS Director March 20, 1995
Robert A. Adams
s/WILLIAM R. MARTIN Director March 20, 1995
William R. Martin*
s/RONALD F. WALKER Director March 20, 1995
Ronald F. Walker
s/WILLIAM J. MANEY Senior Vice President, March 20, 1995
William J. Maney Treasurer and Chief
Financial Officer
(Principal Accounting Officer)
[FN]
* Chairman of Audit Committee
