|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previous: INDEPENDENT BANKSHARES INC, 11-K, 1995-03-31 |
Next: CONTINENTAL AIRLINES INC /DE/, 8-K, 1995-03-31 |
SECURITIES AND
EXCHANGE
COMMISSION
Washington,
D.C. 20549
<PAGE>
FORM
10-K
Annual Report Pursuant to
Section 13
or 15(d) of
the
Securities
Exchange Act of
1934
For the Fiscal Year Ended
<PAGE>
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
<PAGE>
One East Fourth Street,
Cincinnati,
Ohio
45202
(513)
579-2172
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 Per
Share
Pacific and
Chicago
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
<PAGE>
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
<PAGE>
statements
incorporated by
reference in Part III of this Form
10-K or
any
amendment to this
Form 10-K. [X]
As of March 15, 1995, there
were
13,291,117
shares of the
Registrant's Common Stock
outstanding.
The
aggregate market
value of the Common Stock held by
non-affiliates at
that date,
was approximately $52 million
(based upon
non-affiliated holdings
of 2,309,688 shares and a market
price of
$22.50 per
share).
<PAGE>
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 FINANCIAL
ENTERPRISES, INC.
INDEX TO
ANNUAL REPORT
ON FORM
10-K
<TABLE>
<CAPTION>
<S>
<C>
Part I
Page
<PAGE>
Item 1 - Business
1
Item 2 - Properties
*
Item 3 - Legal Proceedings
*
Item 4 - Submission of Matters
to a Vote
of
Security Holders *
<PAGE>
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
*
<PAGE>
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".9
<PAGE>
</TABLE>
<PAGE>
PART
I
<PAGE>
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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
<PAGE>
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 following
table shows
certain
information
concerning AFEI's investments in
investees
(in
millions):
<PAGE>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
company for $21.6 million cash.
1
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
The following financial data
(in
thousands, except
per share
<PAGE>
data) has been summarized from, and
should be
read in
conjunction
with, AFEI's financial
statements.
Effective
January 1, 1992,
two 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>
<PAGE>
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
<PAGE>
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
<PAGE>
<PAGE>
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
2
<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
AFEI's
financial
condition and
results of operations. This
discussion
should be
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
fixed assets or rentals.
2
<PAGE>
RESULTS OF OPERATIONS - THREE YEARS
ENDED
DECEMBER 31,
1994
Investee Corporations Equity in
net
earnings and
<PAGE>
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
<PAGE>
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
<PAGE>
used in calculating AFEI's equity
in net
earnings
(losses) of
investees (in millions):
</TABLE>
<TABLE>
<CAPTION>
American
Premier American Annuity
Citicasters
General
Cable(b)
1994 1993
1992 1994 1993 1992 1994(a)
1993
1992(c)
<S>
<C> <C>
<C> <C> <C> <C> <C>
<C>
<C>
Investee earnings (losses)
before accounting changes
$
0.3 $232.0
$52.6 $36.1 $40.0 ($25.8) $59.7
($57.6)
<PAGE>
($53.3)
AFEI's share of investee
earnings (losses)
$
0.1 $ 65.0
$16.5 $ 3.6 $ 4.1 ($5.6) $ 7.2
($16.1)
($14.9)
Basis adjustments, including
amortization of goodwill
0.1 1.2
10.2 - - - (6.2)
17.3
6.0
Equity in net earnings
(losses)
of investees as shown in
Statement
of Earnings
$
<PAGE>
0.2 $ 66.2
$26.7 $ 3.6 $ 4.1 ($ 5.6) $ 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
<PAGE>
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".
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
<PAGE>
million in
1993 and a
net loss of
$28.9 million 1992. American
Annuity's
results for
1994 included
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
<PAGE>
provisions related to the
manufacturing
businesses
which have
been sold.
Citicasters Citicasters
reported net
income of
$59.7 million
<PAGE>
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.
4
<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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
5
<PAGE>
ITEM
8
<PAGE>
Financial Statements and
Supplementary Data
<TABLE>
<CAPTION>
Page
<S>
<C>
<PAGE>
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
<PAGE>
F-8
<FN>
"Selected Quarterly Financial
Data" has
been included
in Note F to AFEI's
Financial Statements.
</TABLE>
PART
III
<PAGE>
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
<PAGE>
ITEM 12 Security
Ownership of
Certain
Beneficial Owners and
Management
ITEM 13 Certain
Relationships and
Related
Transactions
6
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
furnished to us, American Premier
Underwriters, Inc.
and General
Cable Corporation changed their
method of
accounting
for income
taxes in 1992.
ERNST &
YOUNG LLP
<PAGE>
Cincinnati, Ohio
March 24, 1995
F-1
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
February 15, 1995
<PAGE>
(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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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,
<PAGE>
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.
<PAGE>
DELOITTE & TOUCHE
<PAGE>
Cincinnati, Ohio
February 18, 1994
F-3
<PAGE>
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
<PAGE>
$ 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
<PAGE>
- 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
<PAGE>
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
<PAGE>
$390,396 $411,317
<FN>
See notes to financial
statements.
</TABLE>
<PAGE>
F-4
<PAGE>
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
<PAGE>
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
<PAGE>
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)
<PAGE>
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
<PAGE>
$.32 $3.21 $3.62
Cash dividends per common share
$.45 $.05 $.02
<FN>
See notes to financial
statements.
</TABLE>
<PAGE>
F-5
<PAGE>
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
<PAGE>
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
<PAGE>
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
($
<PAGE>
5,800) $ 6,400 $ -
<FN>
See notes to financial
statements.
</TABLE>
F-6
<PAGE>
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:
<PAGE>
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)
<PAGE>
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:
<PAGE>
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
<PAGE>
$ 392 $ 2,332
<FN>
See notes to financial
statements.
</TABLE>
F-7
<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
<PAGE>
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
<PAGE>
January 1,
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
calculating AFEI's share of
investee
earnings.
Included in
<PAGE>
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
<PAGE>
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>
AMERICAN FINANCIAL
ENTERPRISES, INC.
<PAGE>
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
<PAGE>
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>
<PAGE>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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'
<PAGE>
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
<PAGE>
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.
<PAGE>
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):
<PAGE>
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
<PAGE>
63.1
<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
<PAGE>
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>
AMERICAN FINANCIAL
ENTERPRISES, INC.
<PAGE>
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
<PAGE>
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
<PAGE>
$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
<PAGE>
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.
<PAGE>
F-11
<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.
<PAGE>
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>
<PAGE>
<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
<PAGE>
(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
<PAGE>
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
<PAGE>
<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>
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
<PAGE>
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>
<PAGE>
<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
</TABLE>
<PAGE>
See Note B for effects of
significant
items
recognized in
individual quarters.
F-13
<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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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>
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.
<PAGE>
Signed: March 29, 1995 By:
Carl H.
Lindner,
Chairman of the
Board and
President
<PAGE>
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,
<PAGE>
1995
Carl H. Lindner
s/JULIUS S. ANREDER
Director*
March 29,
1995
Julius S. Anreder
s/JAMES E. EVANS
Director*
<PAGE>
March 29,
1995
James E. Evans
s/RONALD F. WALKER
Director
March 29,
1995
Ronald F. Walker
s/FRED J. RUNK
Director,
Vice
President and March 29,
<PAGE>
1995
Fred J. Runk
Treasurer
(principal
financial
and
accounting
officer)
<FN>
* Member of the Audit Committee
</TABLE>
<PAGE>
AMERICAN FINANCIAL
ENTERPRISES, INC.
INDEX TO
EXHIBITS
<TABLE>
<CAPTION>
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
<PAGE>
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 Enterpises, Inc. 10-K for the year ended
December 31,
1994 and is
qualified in its entirety by reference to such
financial
statements.
</LEGEND>
<CIK> 0000319157
<NAME> FINANCE DEPARTMENT
<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
<PAGE>
<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>
<PAGE>
<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" represent AFEI's
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
<PAGE>
[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
-------------------
<PAGE>
----------------
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
<PAGE>
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>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
3
<PAGE>
<PAGE>
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
<PAGE>
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
<PAGE>
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,
4
<PAGE>
<PAGE>
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
<PAGE>
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
<PAGE>
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
5
<PAGE>
<PAGE>
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
<PAGE>
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
<PAGE>
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
6
<PAGE>
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
7
<PAGE>
<PAGE>
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
<PAGE>
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
<PAGE>
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
8
<PAGE>
<PAGE>
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
<PAGE>
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
<PAGE>
--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
9
<PAGE>
<PAGE>
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
<PAGE>
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
<PAGE>
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
10
<PAGE>
<PAGE>
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)
<PAGE>
<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
<PAGE>
--
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>
11
<PAGE>
<PAGE>
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
<PAGE>
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>
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%
<PAGE>
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>
12
<PAGE>
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<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,
<PAGE>
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
<PAGE>
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
14
<PAGE>
<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
<PAGE>
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,
<PAGE>
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
<PAGE>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
<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
<PAGE>
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,
<PAGE>
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
<PAGE>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<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
<PAGE>
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
<PAGE>
Securities Exchange
Act of
1934, because of the
nature of
his responsibilities
as an
officer of
subsidiaries of the
Company.
21
<PAGE>
<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
<PAGE>
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 $
<PAGE>
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
<PAGE>
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>
23<PAGE>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
$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
<PAGE>
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.
26<PAGE>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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
27<PAGE>
<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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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,
<PAGE>
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.
30<PAGE>
<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
<PAGE>
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
<PAGE>
$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.
31<PAGE>
<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.
<PAGE>
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
<PAGE>
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.
32<PAGE>
<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%
<PAGE>
</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
<PAGE>
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
33<PAGE>
<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
<PAGE>
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
<PAGE>
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
34<PAGE>
<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
<PAGE>
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:
<PAGE>
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).
35<PAGE>
<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
<PAGE>
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
<PAGE>
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.
36<PAGE>
<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>
<PAGE>
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
<PAGE>
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
<PAGE>
37<PAGE>
<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.
38<PAGE>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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 *
<PAGE>
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
<PAGE>
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.
-----------
<PAGE>
* 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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
-----------
<PAGE>
* 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
<PAGE>
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.
<PAGE>
------------
* 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.
<PAGE>
+
(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>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
$ 4.81
$ 6.48
Weighted average number of common shares 48.0
48.2
47.2
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3<PAGE>
<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
<PAGE>
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
<PAGE>
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)
<PAGE>
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-4<PAGE>
<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
<PAGE>
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)
<PAGE>
(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)
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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-6<PAGE>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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-9<PAGE>
<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
<PAGE>
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,
<PAGE>
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-10<PAGE>
<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
<PAGE>
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
<PAGE>
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) $
<PAGE>
.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
<PAGE>
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
<PAGE>
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-13<PAGE>
<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
<PAGE>
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
<PAGE>
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:
<PAGE>
(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)
<PAGE>
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
$
<PAGE>
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
<PAGE>
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>
<PAGE>
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-17<PAGE>
<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
<PAGE>
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
<PAGE>
$ 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
<PAGE>
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)
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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)
<PAGE>
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>
<PAGE>
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
<PAGE>
known. Results for 1993 include tax benefits of $132
million
attributable to such adjustments.
F-22<PAGE>
<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
<PAGE>
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.
<PAGE>
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-23<PAGE>
<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>
<PAGE>
<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
<PAGE>
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
<PAGE>
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-25<PAGE>
<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
<PAGE>
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.
<PAGE>
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)
<PAGE>
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-26<PAGE>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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)
<PAGE>
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
<PAGE>
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
<PAGE>
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-29<PAGE>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
Total
1994 1993
<S> <C> <C> <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
$1,767.4 $1,763.3
<PAGE>
Income (loss)
from continuing
operations (55.9) 31.1 16.6 75.0 25.2
86.2
14.9 50.4
.8 242.7
Net income (loss) (55.9) 33.9 15.2 75.0 26.1
82.1
14.9 41.0
.3 232.0
Income (loss)
per share from
continuing
operations (1.16) .67 .35 1.60 .52
1.77
.31 1.03
.02 5.03
Net income (loss)
per share (1.16) .73 .32 1.60 .54
1.68
.31 .84
.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
<PAGE>
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
<PAGE>
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
<PAGE>
Other capital 1,548.7
1,722.3
$ 2,818.8
$ 2,879.0
</TABLE>
S-1<PAGE>
<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
-
<PAGE>
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
-
<PAGE>
-
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)
<PAGE>
(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
<PAGE>
</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 Charged
Charged
at to
to
beginning costs and
other
of period expenses
accounts
Balance
at end
of
Deductions Period
<S> <C>
<C>
<C> <C>
Year ended December 31, 1994:
Allowance for uncollectible accounts -
trade and other receivables $16.4 $ 1.0
$ -
$ 3.6(a)(b)(c) $13.8
Miscellaneous reserves for losses -
other asset categories 6.7 .9
54.0(c)(d)
<PAGE>
8.4(b)(d) 53.2
Year ended December 31, 1993:
Allowance for uncollectible accounts -
trade and other receivables 9.9 6.4
.6(e)
.5(a)(b) 16.4
Allowance for uncollectible notes
receivable 12.9 -
-
12.9(f) -
Miscellaneous reserves for losses -
other asset categories 6.3 5.4
(9.3)(d)
5.7(b) 6.7
Year ended December 31, 1992:
Allowance for uncollectible accounts -
trade and other receivables 6.9 2.0
1.8(c)
.8(a)(b) 9.9
Allowance for uncollectible notes
receivable 15.2 -
-
2.3(f) 12.9
Miscellaneous reserves for losses -
other asset categories 36.9 3.5
<PAGE>
(17.0)(d)
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
<PAGE>
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
<PAGE>
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
<PAGE>
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 *
<PAGE>
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
<PAGE>
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
<PAGE>
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.
-----------
<PAGE>
* 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
<PAGE>
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.
<PAGE>
------------
* 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.
<PAGE>
+
(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>
<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
<PAGE>
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
<PAGE>
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
<PAGE>
Part I
Page
Item 1. Business
Introduction
1
GALIC
1
Discontinued Manufacturing Operations
11
Employees
11
Item 2. Properties
11
Item 3. Legal Proceedings
<PAGE>
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
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports
on Form 8-K
S-1
* The response to this item is "none".
<PAGE>
<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
<PAGE>
(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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
("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
<PAGE>
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;
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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%
<PAGE>
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>
<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
<PAGE>
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")
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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)
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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-
<PAGE>
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,
<PAGE>
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
<PAGE>
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
<PAGE>
$ 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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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,
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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>
<PAGE>
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 $
<PAGE>
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)
<PAGE>
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
-
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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 $
<PAGE>
-
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 $
<PAGE>
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
-
<PAGE>
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:
<PAGE>
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)
-
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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)
<PAGE>
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)
<PAGE>
$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)
<PAGE>
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:
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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)
<PAGE>
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]
<PAGE>
* 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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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)
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
$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
<PAGE>
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)
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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)
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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)
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Chief
Financial
Officer
(Principal
Accounting
Officer)
[FN]
* Chairman of Audit Committee
|
|