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, 1995 No. 1-1345
AMERICAN FINANCIAL ENTERPRISES, INC.
Incorporated under IRS Employer I.D.
the Laws of Connecticut No. 31-0996797
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2172
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 preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and need not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
As of March 15, 1996, 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 $58 million (based upon non-affiliated holdings of
2,309,688 shares and a market price of $25.25 per share).
_________________
Documents Incorporated by Reference:
Proxy Statement for the 1996 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
Part I Page
Item 1 - Business 1
Item 2 - Properties *
Item 3 - Legal Proceedings *
Item 4 - Submission of Matters to a Vote of Security Holders *
Part II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 2
Item 6 - Selected Financial Data 2
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 3
Item 8 - Financial Statements and Supplementary Data 5
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 6
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
* The response to this Item is "none".
<PAGE>
PART I
ITEM 1
Business
Introduction
American Financial Enterprises, Inc. ("AFEI") was incorporated
as a Connecticut corporation in August 1980. Its address is One
East Fourth Street, Cincinnati, Ohio 45202; its phone number is
(513) 579-2172. AFEI's assets consist primarily of investments
in equity securities of affiliate corporations. AFEI employs
fewer than ten people, all of whom currently spend a significant
portion of their time as employees of its parent, American
Financial Corporation ("AFC"), and its subsidiaries.
On April 3, 1995, American Financial Corporation merged with a
newly formed subsidiary of American Premier Group, Inc. ("New
American Premier"), another new company formed to own 100% of the
common stock of AFC and American Premier Underwriters, Inc.
("American Premier"). Shareholders of American Premier,
including AFEI, received shares of New American Premier on a one-
for-one basis. Subsequent to the merger, New American Premier's
name was changed to American Financial Group, Inc. ("AFG"). AFEI
(and AFC) receive dividends paid on AFG common stock; however,
their shares generally will not be eligible to be voted as long
as AFEI (and AFC) are owned by AFG. At March 1, 1996, AFG
(through AFC and its subsidiaries) owned approximately 83% of
AFEI's outstanding shares of Common Stock.
Investment in Affiliates
At December 31, 1995, AFEI had investments in three companies,
all of which are accounted for as affiliates under the equity
method. Under this method, AFEI includes in its income the
portion of the net earnings of these companies attributable to
the common shares owned by AFEI, even though they might not be
received as dividends. See Note B to AFEI's Financial
Statements. The following table shows certain information
concerning AFEI's investments in affiliates (in millions):
<TABLE>
<CAPTION>
Additional AFEI's Investment (a)
Ownership Carrying
AFEI Ownership by Affiliates Value at Market Value at
Affiliate Shares % Shares % 12/31/95 12/31/95 3/15/96
<S> <C> <C> <C> <C> <C> <C> <C>
American Financial Group 10.0 13% 8.7 11% $396 $305 $296
American Annuity Group 4.2 10% 30.9 71% 42 51 53
Citicasters 2.6 13% 5.0 25% 26 62 76
$464 $418 $425
<FN>
(a) Carrying value represents acquisition cost plus AFEI's
equity in undistributed earnings and losses.
</FN>
</TABLE>
<PAGE>
AFG's subsidiaries operate primarily in specialty and multi-
line property and casualty insurance and, through American
Annuity, the sale of tax-deferred annuities and certain life and
health insurance. Citicasters operates nineteen radio stations
along with two network-affiliated television stations in major
markets throughout the country.
In February 1996, Citicasters entered into a merger agreement
with Jacor Communications, Inc. pursuant to which each
Citicasters shareholder, including AFEI, will receive $29.50 per
share in cash plus warrants to purchase Jacor common stock. AFEI
purchased 2.6 million common shares (adjusted for 1995 stock
splits) of Citicasters for $23.9 million cash in June 1994.
Pursuant to a rights offering, AFEI purchased approximately
390,000 shares of American Annuity common stock for $3.7 million
in August 1995. In June 1994, AFEI sold its investment in
General Cable to an unaffiliated 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 and the
dividends paid.
<TABLE>
<CAPTION>
1995 1994
Quarter Low High Dividends Low High Dividends
<S> <C> <C> <C> <C> <C> <C>
First $20.50 $24.00 $.10 $25.00 $26.88 -
Second 20.25 23.00 .10 23.00 26.50 -
Third 22.00 24.00 .10 22.00 24.00 -
Fourth 21.75 24.50 .25 20.50 24.00 $.45
</TABLE>
The number of beneficial owners of AFEI's Common Stock at
March 1, 1996, was in excess of 500; registered holders numbered
approximately 270.
<PAGE>
ITEM 6
Selected Financial Data
The following financial data (in thousands, except per share
data) has been summarized from, and should be read in conjunction
with, AFEI's financial statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
Earnings Statement Data:
<S> <C> <C> <C> <C> <C>
Total Revenues $32,053 $5,196 $78,773 $12,285 $9,605
Earnings (Loss) Before Cumulative
Effect of Affiliate Accounting
Changes (a) 20,912 4,210 42,674 (979) (5,845)
Net Earnings (Loss) 20,912 4,210 42,674 48,088 (5,845)
Earnings (Loss) Per Common Share:
Before Cumulative Effect of
Affiliate Accounting Changes $1.57 $.32 $3.21 ($ .07) ($.44)
Net Earnings (Loss) 1.57 .32 3.21 3.62 (.44)
Cash Dividends Per Common Share .55 .45 .05 .02 .02
Balance Sheet Data:
Total Assets $465,247 $390,396 $411,317 $487,137 $414,783
Long-term Debt 19,667(b) 16,000 15,000 161,500 152,500
Shareholders' Equity 384,037 338,235 352,206 303,797 255,975
Book Value Per Common Share 28.89 25.45 26.50 22.86 19.26
<FN>
(a) Effective January 1, 1992, two affiliates recorded
adjustments for cumulative effects of accounting changes from
the implementation of Financial Accounting Standards Board
Statements.
(b) Represents borrowings under AFEI's credit line with AFC.
</FN>
</TABLE>
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 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 Financial Group, American Annuity and
Citicasters.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Funds AFEI relies on dividends from its affiliates
to meet fixed charges and other operating expenses. At the
current indicated rate, $10 million in annual dividends from
American Financial Group is expected to be more than sufficient
to cover such charges. If, in the future, affiliate dividends
are insufficient to meet its fixed charges and debt maturities,
AFEI would be required to meet them through bank borrowings,
sales of investments, borrowings from affiliates, or similar
transactions.
AFEI has two revolving credit agreements under which it may
borrow an aggregate maximum of $25 million at any one time. At
December 31, 1995, AFEI had $19.7 million borrowed under its
credit line with AFC and no outstanding borrowings under its bank
line.
Pursuant to a rights offering, AFEI purchased 390,000 shares
of American Annuity for $3.7 million in August 1995, primarily
using funds borrowed under its bank line. In June 1994, AFEI
sold its investment in General Cable for $21.6 million cash and
repaid its bank debt. Also in June 1994, AFEI purchased 2.6
million shares (adjusted for 1995 stock splits) of Citicasters
common stock for $23.9 million, using the balance of the proceeds
from the General Cable sale in addition to $13.5 million borrowed
under its bank line.
AFEI paid dividends of $7.3 million ($.55 per common share) in
1995 and $6.0 million ($.45 per common share) in 1994.
<PAGE>
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.
3
<PAGE>
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 1995
Affiliates Equity in net earnings and losses of affiliates
(companies in which AFEI owns a significant portion of the voting
stock) represents AFEI's proportionate share of the affiliates'
earnings and losses. Since AFEI's basis in certain assets and
liabilities of affiliates differs from amounts reported by these
companies, adjustments are made to AFEI's share of their reported
earnings.
Equity in net earnings of affiliates increased $27 million in
1995 compared to 1994. Included in 1994 is AFEI's share
(approximately $15 million) of American Premier's loss on the sale
of General Cable securities. Included in 1993 is AFEI's share
(approximately $35 million) of a tax benefit recorded by American
Premier. The following table presents the significant amounts used
in calculating AFEI's equity in net earnings (losses) of affiliates
(in millions):
<TABLE>
<CAPTION>
AFG American Premier American Annuity
1995 (a) 1995(a) 1994 1993 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Affiliate earnings (losses) $161.4 $16.3 $ 0.3 $232.0 $55.3 $36.1 $40.0
AFEI's share of affiliate
earnings (losses) $ 22.1 $ 3.7 $ 0.1 $ 65.0 $ 5.4 $ 3.6 $ 4.1
Basis adjustments, including
amortization of goodwill (1.0) - 0.1 1.2 - - -
Equity in net earnings of
affiliates as shown in
Statement of Earnings $ 21.1 $ 3.7 $ 0.2 $ 66.2 $ 5.4 $ 3.6 $ 4.1
<CAPTION>
Citicasters General Cable
1995 1994 (b) (c) 1993
<S> <C> <C> <C>
Affiliate earnings (losses) $14.3 $59.7 ($57.6)
AFEI's share of affiliate
earnings (losses) $ 1.9 $ 7.2 ($16.1)
Basis adjustments, including
amortization of goodwill (0.3) (6.2) 17.3
Equity in net earnings of
affiliates as shown in
Statement of Earnings $ 1.6 $ 1.0 $ 1.2
<PAGE>
<FN>
(a) AFEI received shares of AFG in exchange for its investment in
American Premier on April 3, 1995. Affiliate earnings for AFG are
AFG's results since April and affiliate earnings for American
Premier in 1995 are American Premier's first quarter results.
(b) Represents Citicasters' results since June 30, 1994, the date
of AFEI's acquisition of its Citicasters shares.
(c) Equity accounting ceased as of December 31, 1993, pending the
sale of General Cable shares.
</FN>
</TABLE>
American Financial Group AFG reported net income of
$161.4 million in the nine months ended December 31, 1995. As
discussed in Note A, AFEI received shares of AFG, a new company
formed to own both AFC and American Premier, in exchange for its
American Premier stock on a one-for-one basis on April 3, 1995. No
gain or loss was recorded on the exchange of shares.
American Premier American Premier reported net income of
$300,000 in 1994 and $232.0 million in 1993. Results for 1994
included a loss of $75.8 million on the sale of General Cable
securities. Results for 1993 included a tax benefit of $132 million
attributable to an increase in American Premier's net deferred tax
asset.
American Annuity American Annuity reported net income of $55.3
million in 1995, $36.1 million in 1994 and $40.0 million in 1993.
American Annuity's results for 1995 included after-tax realized
gains of $10.2 million compared to realized losses of $100,000 in
1994 and realized gains of $23.1 million in 1993. Results for 1993
also included an after-tax provision for relocation expenses of
$5.2 million.
Citicasters Citicasters reported net income of $14.3 million in
1995 and $59.7 million in the six months ended December 31, 1994.
Citicasters' results for 1994 included a $50.1 million after-tax
gain from the sale of four television stations which was not
included in determining AFEI's equity in Citicasters' earnings.
Gains on Sales of Affiliates AFEI recognized pretax gains of
$339,000 on the sale of its General Cable shares in June 1994, and
$7.1 million on the sale of 4.5 million shares of American Premier
in 1993.
4
<PAGE>
Interest Expense Interest expense increased to $1.2 million in 1995
from $665,000 in 1994 due to increased average borrowings and higher
interest rates on borrowings. The $10.6 million decrease in interest
expense in 1994 compared to 1993 was due to the repayment of
borrowings in 1993.
Administrative and General Expenses Administrative and general
expenses included charges of $320,000 in each of the years 1995,
1994 and 1993 for accounting, legal, data processing, tax and
investment services provided by AFC. As a subsidiary of AFC, AFEI
does not incur all of the costs of operating as an independent
entity. While it is not practical to estimate all of the costs of
operating as a separate entity, management believes the above
expense allocation is reasonable.
Income Taxes The provision (credit) for income taxes reflects the
effects of deductions relating to affiliate dividends.
ITEM 8
Financial Statements and Supplementary Data
Page
Reports of Independent Auditors F-1
Balance Sheet:
December 31, 1995 and 1994 F-4
Statement of Earnings:
Years ended December 31, 1995, 1994 and 1993 F-5
Statement of Changes in Shareholders' Equity:
Years ended December 31, 1995, 1994 and 1993 F-6
Statement of Cash Flows:
Years ended December 31, 1995, 1994 and 1993 F-7
Notes to Financial Statements F-8
"Selected Quarterly Financial Data" has been included in Note G to
AFEI's
Financial Statements.
5
<PAGE>
ITEM 9
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
AFEI filed a report on Form 8-K on August 29, 1995, reporting a
change in independent accountants of American Premier Underwriters,
Inc., an AFEI investee. The report is incorporated herein by reference.
PART III
The information required by the following Items will be included
in AFEI's definitive Proxy Statement which will be filed with the
Securities and Exchange Commission in connection with the 1996
Annual Meeting of Shareholders and is incorporated herein 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
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, 1995 and 1994, and the related
statements of earnings, changes in shareholders' equity, and cash
flows for each of the three years in the period ended
December 31, 1995. 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. (1994 and
1993) and General Cable Corporation (1993) have been audited by other
auditors whose reports have been furnished to us; insofar as our
opinion on the financial statements relates to data included for those
corporations, it is based solely on their reports.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all
material respects, the financial position of American Financial
Enterprises, Inc. at December 31, 1995 and 1994, and the results of
its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 15, 1996
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 year
ended December 31, 1994 (not presented separately herein).
These financial statements and financial statement schedules
are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of American
Premier Underwriters, Inc. and Consolidated Subsidiaries at
December 31, 1994 and the results of its operations and its
cash flows for each of the two years in the period ended
December 31, 1994 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly
in all material respects the information shown therein.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
February 15, 1995
(March 23, 1995 with respect to the
acquisition of American Financial
Corporation as discussed in Note B 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
consolidated financial statements and related schedules are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these
consolidated financial statements and related schedules
based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial
position of General Cable Corporation and subsidiaries at
December 31, 1993 and the results of their operations and
their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our
opinion, such consolidated financial statement schedules,
when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all
material respects the information shown therein.
DELOITTE & TOUCHE
Cincinnati, Ohio
February 18, 1994
F-3
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Assets
Cash and short-term investments $ 506 $ 275
Investment in affiliates:
American Financial Group, Inc. 396,427 -
American Premier Underwriters, Inc. - 341,276
American Annuity Group, Inc. 41,978 21,461
Citicasters Inc. 26,336 24,882
Other assets - 2,502
$465,247 $390,396
Liabilities and Shareholders' Equity
Accounts payable, accrued expenses and
other liabilities $ 975 $ 1,027
Payable to American Financial Corporation 80,235 35,134
Long-term debt - payable to bank - 16,000
81,210 52,161
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 230,240 216,638
Equity in affiliates' net unrealized
gains (losses) on marketable securities,
net of deferred income taxes 26,400 (5,800)
Total Shareholders' Equity 384,037 338,235
$465,247 $390,396
</TABLE>
See notes to financial statements.
F-4
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Income:
Equity in net earnings of affiliates:
American Financial Group, Inc. $21,128 $ - $ -
American Premier Underwriters, Inc. 3,688 158 66,161
American Annuity Group, Inc. 5,449 3,578 4,053
Citicasters Inc. 1,607 1,030 -
General Cable Corporation - - 1,158
Gains on sales of affiliates 95 339 7,095
Interest income 86 91 306
32,053 5,196 78,773
Costs and Expenses:
Interest charges on borrowed money 1,161 665 11,300
Administrative and general expenses 1,857 2,080 1,549
3,018 2,745 12,849
Earnings before federal income taxes 29,035 2,451 65,924
Provision (credit) for federal income taxes 8,123 (1,759) 23,250
Net Earnings $20,912 $4,210 $42,674
Average number of common shares 13,291 13,291 13,291
Net earnings per common share $1.57 $.32 $3.21
Cash dividends per common share $.55 $.45 $.05
</TABLE>
See notes to financial statements.
F-5
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Common Stock:
Balance at Beginning and End of Period $ 13,291 $ 13,291 $ 13,291
Capital Surplus:
Balance at Beginning and End of Period $114,106 $114,106 $114,106
Retained Earnings:
Balance at Beginning of Period $216,638 $218,409 $176,400
Net earnings 20,912 4,210 42,674
Cash dividends paid (7,310) (5,981) (665)
Balance at End of Period $230,240 $216,638 $218,409
Equity in Affiliates' Net Unrealized Gains (Losses) on
Marketable Securities, Net of Deferred Income Taxes:
Balance at Beginning of Period ($ 5,800) $ 6,400 $ -
Change during period 32,200 (12,200) 6,400
Balance at End of Period $ 26,400 ($ 5,800) $ 6,400
</TABLE>
See notes to financial statements.
F-6
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Operating Activities:
Net earnings $20,912 $ 4,210 $42,674
Adjustments:
Equity in net earnings of affiliates (31,872) (4,766) (71,372)
Gains on sales of affiliates (95) (339) (7,095)
Cash dividends from affiliates 10,337 8,991 11,367
Decrease in other assets 14 342 270
Increase (decrease) in payable to AFC 8,134 (1,759) 23,250
Increase (decrease) in accounts payable,
accrued expenses and other liabilities (52) 409 (4,479)
Other 161 - -
7,539 7,088 (5,385)
Investing Activities:
Sales of affiliates - 21,628 150,610
Purchases of affiliates (3,665) (23,852) -
(3,665) (2,224) 150,610
Financing Activities:
Additional long-term borrowings 4,300 18,500 3,000
Borrowings from AFC 19,667 - -
Reduction of long-term debt (20,300) (17,500) (149,500)
Cash dividends paid (7,310) (5,981) (665)
(3,643) (4,981) (147,165)
Net Increase (Decrease) In Cash and Short-term Investments 231 (117) (1,940)
Cash and short-term investments at beginning
of period 275 392 2,332
Cash and short-term investments at end of period $ 506 $ 275 $ 392
</TABLE>
See notes to financial statements.
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. On April 3,
1995, AFC merged with a newly formed subsidiary of American
Premier Group, Inc. ("New American Premier"), another new
company formed to own 100% of the common stock of AFC and
American Premier Underwriters, Inc. ("American Premier").
Shareholders of American Premier, including AFEI, received
shares of New American Premier on a one-for-one basis.
Subsequent to the merger, New American Premier's name was
changed to American Financial Group, Inc. ("AFG"). At December
31, 1995, AFG (through AFC and its subsidiaries) owned
10,981,429 shares (83%) of AFEI's outstanding Common Stock.
Certain reclassification have been made to prior years to
conform to the current year's presentation.
The preparation of the financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the amounts reported in the financial statements and
accompanying notes. Changes in circumstances could
cause actual results to differ materially from those
estimates.
Income Taxes AFEI files consolidated federal income tax
returns with AFC. Deferred income taxes are calculated using
the liability method. Under this method, deferred income tax
assets and liabilities are determined based on differences
between financial reporting and tax bases and are measured
using enacted tax rates. Current and deferred tax assets and
liabilities are aggregated with other amounts receivable from
or payable to AFC.
Statement of Cash Flows For cash flow purposes, "investing
activities" are defined as making and collecting loans and
acquiring and disposing of debt or equity instruments and
property and equipment. "Financing activities" include
obtaining resources from owners and providing them with a
return on their investments, borrowing money and repaying
amounts borrowed. All other activities are considered
"operating". Short-term investments having original maturities
of three months or less when purchased are considered to be
cash equivalents for purposes of the financial statements.
B. Investment in Affiliates AFEI's and AFC's combined ownership
of the common stock of AFG, American Annuity Group, Inc. and
Citicasters Inc. exceeds 20%. Accordingly, these investments
are accounted for under the equity method. Under this method,
AFEI includes in its income the portion of the net earnings of
these companies attributable to the common shares owned by
AFEI, even though they might not be received as dividends.
Included in AFEI's balance sheet is its portion of affiliates'
unrealized gains and losses on marketable securities.
Since AFEI's basis in certain assets and liabilities of
affiliates differs from amounts reported by these companies,
adjustments are made to their reported earnings in calculating
<PAGE>
AFEI's share of affiliate earnings. Included in AFEI's
retained earnings at December 31, 1995, was $131 million
applicable to its equity in undistributed net earnings of
affiliates.
Investment in American Financial Group AFEI owned 10.0 million
shares (13%) of AFG's common stock at December 31, 1995. Since
AFEI and AFC are AFG subsidiaries, AFG does not report shares
owned by them as outstanding for financial reporting purposes.
F-8
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
AFEI (and AFC) receive dividends paid on AFG common stock;
however, their shares generally will not be eligible to be voted
as long as AFEI (and AFC) are owned by AFG. The market value of
AFEI's investment in AFG was $305 million at December 31, 1995
and $296 million at March 15, 1996. AFG's subsidiaries operate
primarily in specialty and multi-line property and casualty
insurance and the sale of tax-deferred annuities.
Summarized financial information for AFG (for the period it was
accounted for as an affiliate) follows (in millions):
<TABLE>
<CAPTION>
Nine months
ended
12/31/95
<S> <C>
Cash and Investments $11,493
Other Assets 3,461
Insurance Claims and Reserves 10,981
Long-term Debt 882
Minority Interest 314
Shareholders' Equity 1,440
Revenues $ 3,076.4
Earnings Before Extraordinary Items 160.6
Extraordinary Items .8
Net Earnings 161.4
</TABLE>
Investment in American Premier As discussed in Note A, AFEI
received shares of American Financial Group in exchange for its
American Premier stock on a one-for-one basis in April 1995.
In 1993, AFEI sold 4.5 million shares of American Premier in a
secondary public offering, realizing a pretax gain of
$7.1 million.
<PAGE>
Summarized financial information for American Premier (for the
periods it was accounted for as an affiliate) follows (in
millions):
<TABLE>
<CAPTION>
1995
1st Qtr 1994 1993
<S> <C> <C> <C>
Cash and Investments $2,751
Other Assets 1,446
Insurance Claims and Reserves 1,674
Debt 510
Minority Interest 6
Shareholders' Equity 1,549
Revenues $432.8 $1,758.9 $1,736.3
Income from Continuing Operations 16.3 0.8 242.7
Discontinued Operations - (0.5) (10.7)
Net Income 16.3 0.3 232.0
</TABLE>
American Premier's 1994 results included a $75.8 million loss
on the sale of securities of General Cable.
Investment in American Annuity Group Pursuant to a rights
offering, AFEI purchased approximately 390,000 shares of
American Annuity common stock for $3.7 million cash in August
1995. AFEI owned 4.2 million shares of American Annuity common
stock at December 31, 1995, representing 10% of its outstanding
shares. The market value of AFEI's investment in
F-9
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
American Annuity was $51 million and $37 million at December 31, 1995
and 1994, respectively, and $53 million at March 15, 1996. American
Annuity is engaged in the sale of tax-deferred annuities and certain
life and health insurance. Discontinued operations represent results
related to American Annuity's former electronics components businesses.
Summarized financial information for American Annuity follows (in
millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash and Investments $5,998 $4,898
Other Assets 613 192
Annuity Benefits Accumulated 5,052 4,618
Notes Payable 168 183
Stockholders' Equity 429 204
Revenues $ 439.6 $ 372.7 $388.9
Income from Continuing Operations 58.7 40.9 53.0
Discontinued Operations (3.2) (2.6) (9.6)
Extraordinary Items (0.2) (1.7) (3.4)
Cumulative Effect of Accounting Change - (0.5) -
Net Income 55.3 36.1 40.0
</TABLE>
<PAGE>
Investment in Citicasters AFEI purchased 2.6 million shares of
Citicasters common stock (adjusted for 1995 stock splits) for
$23.9 million cash in June 1994. These shares represented 13%
of Citicasters' outstanding shares at December 31, 1995. The
market value of AFEI's investment in Citicasters was
$62 million and $29 million at December 31, 1995 and 1994,
respectively and $76 million at March 15, 1996. Citicasters
operates nineteen radio stations, along with two network-
affiliated television stations in major markets throughout the
country.
In February 1996, Citicasters entered into a merger agreement
with Jacor Communications, Inc. providing for the acquisition of
Citicasters by Jacor. Under the agreement, AFEI will receive $77
million in cash plus warrants to buy approximately 520,000 shares
of Jacor common stock at $28 per share. AFEI expects to
realize a pretax gain of approximately $50 million on the sale.
Consummation of the transaction is subject to regulatory
approvals, and certain adjustments to the price will be made if
the transaction does not close by September 30, 1996.
<PAGE>
Summarized financial information for Citicasters follows (in
millions):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Contracts, Broadcasting Licenses
and Other Intangibles $313 $275
Other Assets 103 128
Long-term Debt 132 122
Shareholders' Equity 160 151
Net Revenues $136.4 $197.0
Operating Income 36.5 51.6
Net Earnings 14.3 63.1
</TABLE>
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.
F-10
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Investment in General Cable 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.
C. Payable to American Financial Corporation In December 1995,
AFEI paid the outstanding balance of its bank line using funds
borrowed under a new $20 million credit agreement with AFC
which expires in December 1997. Borrowings bear interest at
rates 1/8th of 1% below the bank line rates. All other terms
are similar to those in the bank line agreement. Maximum
borrowings under the two lines may not exceed $25 million at
any one time. At December 31, 1995, AFEI had borrowed $19.7
million under this agreement. The remainder of AFEI's payable
to AFC at that date represents primarily tax payments due under
AFEI's tax agreement and deferred taxes on AFEI's equity in
affiliates' net unrealized gains on marketable securities.
D. Long-Term Debt In 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 bank credit
agreement under which it may borrow a maximum of $20 million
through December 1997. There were no borrowings at
December 31, 1995 (See Note C). Loans under the line of credit
bear interest at rates approximating prime and are
collateralized by a pledge of AFG 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.
AFEI paid cash interest totaling $1.2 million, $634,000 and
$15.2 million in 1995, 1994 and 1993, respectively.
E. Shareholders' Equity AFEI's authorized capital includes
5.5 million shares of $1 Par, Non-voting Cumulative Preferred
Stock and 1.5 million shares of $1 Par, Voting Cumulative
Preferred Stock.
<PAGE>
Between 1985 and 1989, AFEI granted nonqualified stock
options to certain officers and directors at the fair value
of the underlying AFEI Common Stock (ranging from $19.88 -
$22.50 per share) at the date of grant. The options became
exercisable at the rate of 20% per year commencing one year
after grant, and generally expire ten years after grant. No
options have been exercised. At December 31, 1995, options
for 462,500 shares were outstanding and exercisable.
F. Income Taxes At December 31, 1995 AFEI had net operating loss
carryforwards ("NOL's") for tax return purposes of approximately
$23 million which are scheduled to expire in 2000 and 2003.
F-11
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
The following is a reconciliation of federal income taxes at
the "statutory" rate of 35% and as shown in the Statement of
Earnings (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Earnings before income taxes $29,035 $2,451 $65,924
Income taxes at statutory rate 10,162 858 23,073
Effect of dividends received deductions (2,039) (2,617) -
Other - - 177
Provision (credit) for federal income
taxes as shown in the Statement of
Earnings $ 8,123 ($1,759) $23,250
</TABLE>
The dividends received deductions relate to dividends received
or accrued on the stocks of affiliates.
AFEI's tax agreement with AFC calls for payments to (or
benefits from) AFC based on book taxable income without regard to
temporary differences (differences between the book basis and the
tax basis of assets or liabilities that will result in future
taxable income or deductions). The following were effects of
temporary differences and NOLs at December 31, (in millions):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Investment in affiliates $92.8 $81.3
Tax return NOL (7.8) (15.7)
Other separate company NOL (37.0) (28.8)
</TABLE>
<PAGE>
G. Quarterly Operating Results (Unaudited) The following table
presents quarterly results of operations for the years ended
December 31, 1995 and 1994 (in thousands, except per share
data):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
1995
Revenues $4,955 $4,771 $7,314 $15,013 $32,053
Net earnings 3,460 3,301 4,779 9,372 20,912
Net earnings per
common share .26 .25 .36 .70 1.57
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
</TABLE>
See Note B for effects of significant items recognized in individual
quarters.
F-12
<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 G to AFEI's Financial Statements.
B. The Annual Reports on Form 10-K of American
Financial Group, Inc. (File No. 1-11453) and American
Annuity Group, Inc. (File No. 1-11632) for the period
ended December 31, 1995, are hereby incorporated by
reference.
Copies of these Annual Reports on Form 10-K
and all subsequent reports filed pursuant to Section 13
of the Securities Exchange Act of 1934 may be obtained
from the Commission's principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of the fees prescribed by the rules and
regulations of the Commission or may be examined without
charge at Room 1024 of the Commission's public reference
facilities at the same address. Copies of material
filed with the Commission may also be inspected at the
following regional offices: 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and 7 World Trade
Center, Suite 1300, New York, New York 10048.
C. All other schedules for which provisions are
made in the applicable regulation of the Securities and
Exchange Commission have been omitted as they are not
applicable, not required, or the information required
thereby is set forth in the Financial Statements or the
notes thereto.
3. Exhibits - see Exhibit Index on page E-1.
(b) Reports on Form 8-K:
Date of Report Item Reported
February 14, 1996 Proposed merger between Citicasters
and Jacor Communications, Inc.
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.
Signed: March 27, 1996 By:s/CARL H. LINDNER
Carl H. Lindner, Chairman of the
Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
s/CARL H. LINDNER Chairman of the Board March 27, 1996
Carl H. Lindner
s/JULIUS S. ANREDER Director* March 27, 1996
Julius S. Anreder
s/JAMES E. EVANS Director* March 27, 1996
James E. Evans
s/RONALD F. WALKER Director March 27, 1996
Ronald F. Walker
s/FRED J. RUNK Director, Vice President and March 27, 1996
Fred J. Runk Treasurer (Principal Financial
and Accounting Officer)
*Member of the Audit Committee
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Exhibit Description
<S> <C> <C>
3(a) The Amended and Restated Certificate Incorporated by reference to
of Incorporation Registrant's Annual Report on
Form 10-K for December 31, 1993.
3(b) By-Laws Incorporated by reference to
Registrant's Annual Report on
Form 10-K for December 31, 1993.
4(a) 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.
4(b) Credit Agreement dated as of
December 29, 1995 between AFEI __
and American Financial Corporation
10 Management Contract: Stock Option Incorporated by reference to
Agreement Registrant's Annual Report on
Form 10-K for December 31,
1993.
16 Letter from Deloitte & Touche LLP Incorporated by reference to
AFEI's Form 8-K filed on
August 29, 1995.
27 Financial Data Schedule (*)
99 Form 10-K of American Financial
Group, Inc. for the year ended __
December 31, 1995
99(a) Form 10-K of American Annuity
Group, Inc. for the year ended __
December, 31, 1995
<FN>
(*) Copy included in Report filed electronically with the Securities
and Exchange Commission.
</FN>
</TABLE>
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
American Financial Enterprises, Inc. 10-K for the year ended
December 31, 1995 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 506
<SECURITIES> 464,741<F1>
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 465,247
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 13,291
0
0
<OTHER-SE> 370,746
<TOTAL-LIABILITY-AND-EQUITY> 465,247
<SALES> 0
<TOTAL-REVENUES> 32,053<F2>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,857
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,161
<INCOME-PRETAX> 29,035
<INCOME-TAX> 8,123
<INCOME-CONTINUING> 20,912
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,912
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
<FN>
<F1>"Marketable securities" represents AFEI's investments in affiliates
which are accounted for under the equity method.
<F2>Included in "Total revenues" is equity in net earnings of affiliates of
$31.9 million.
</FN>
</TABLE>
CREDIT AGREEMENT
This Credit Agreement is made and entered into as of the
29th day of December, 1995 by and between American Financial
Corporation, an Ohio corporation ("Lender"), and American
Financial Enterprises, Inc., a Connecticut corporation
("Borrower").
WHEREAS, Borrower and Lender wish to enter into this Credit
Agreement pursuant to which Borrower may borrow from Lender up to
$20,000,000;
WHEREAS, Borrower and The First National Bank of Boston have
entered into a Credit Agreement dated as of September 30, 1993
("Bank of Boston Agreement") which provides that Borrower may
borrow up to $20,000,000 upon the terms and conditions set forth
in the Bank of Boston Agreement;
WHEREAS, Lender and Borrower believe it to be mutually
beneficial to enter into an agreement similar to the Bank of
Boston Agreement;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein and other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereby agree
as follows:
Section 1. Revolving Loans. From and after the date hereof
to and including December 31, 1997, Lender will make available to
the Borrower loans as requested by Borrower pursuant to the
provisions hereof. Each such loan shall be referred to herein as
a "Loan". Borrower may borrow and repay Loans hereunder from
time to time so long as (i) the aggregate amount of Loans
outstanding hereunder at any one time does not exceed $20,000,000
and (ii) the sum of the Loans outstanding hereunder and the Bank
of Boston Agreement does not exceed $25,000,000, not including
interest on any of such borrowings. The Lender shall, and is
hereby irrevocably authorized by the Borrower to, endorse on the
schedule to the attached Promissory Note ("Note") or a
continuation of such schedule, an appropriate notation evidencing
advances and repayments of Loans pursuant to this Credit
Agreement.
On December 31, 1997, the outstanding principal balance on
the Loans will be due and payable.
Borrower may pay any and all amounts outstanding hereunder
at any time without penalty.
Section 2. The Note. The absolute and unconditional
obligation of the Borrower to repay to Lender the principal
amount of Loans pursuant to this Credit Agreement shall be
evidenced by a Note in the form attached. The obligations of
Borrower hereunder are not secured by any assets of Borrower.
Section 3. Procedure for Obtaining Loans. Whenever the
Borrower desires to receive a Loan, the Borrower will furnish to
the Lender a written or telephonic request therefor which shall
(1) be received by the Lender not less than one and not more than
ten Business Days prior to the date of such Loan, unless waived
by Lender, (2) state the amount of such Loan, (3) state the bank
account of the Borrower to which payment of the proceeds of such
Loan is to be made. Any telephonic application made by the
Borrower pursuant to the provisions of this Section 3 shall be
promptly confirmed in writing.
Section 4. Interest Payable on Note.
Interest shall be paid on the outstanding principal amount
of the Note until the principal sum or the unpaid portion thereof
shall have been fully paid. The applicable interest rate shall
be one-eighth of a percentage point less than the rate at which
Borrower could borrow under the Bank of Boston Agreement.
Section 5. Term, Conditions, Covenants, Representations,
Warranties and Provisions of this Agreement. Other than as set
forth in this Credit Agreement and except for Section 6 of the
Bank of Boston Agreement, all of the terms, conditions,
covenants, representations, warranties and provisions of the Bank
of Boston Agreement are incorporated by reference in this
Agreement, including, without limitation, provisions relating to
default and events of default.
Section 6. Binding Effect. This Credit Agreement shall be
binding upon and inure to the benefit of the Borrower and the
Lender and their respective successors and assigns. The Borrower
shall not have the right to assign its rights hereunder or any
interest herein without the prior written consent of the Lender.
The Lender shall have the right to assign all or any part of
its obligations to make the loan to any affiliate or subsidiary;
provided, however, such Assignment shall not relieve the Lender
of its obligations hereunder. In the event of such Assignment by
the Lender, the assignee, in addition to the Lender, shall be
deemed to have been named the "Lender" in the first paragraph of
this Credit Agreement and all representations, warranties and
covenants of the Borrower made herein shall be deemed to have
been made to and shall inure to the benefit of such assignee.
Section 7. Governing Law. The Loan Documents shall be
deemed to be contracts made under the laws of, executed and
delivered in the State of Ohio, and for all purposes shall be
construed in accordance with the laws of said State.
IN WITNESS WHEREOF, the parties hereto have executed this
Credit Agreement on the day and year first above written.
AMERICAN FINANCIAL ENTERPRISES, INC.
By: s/ FRED J. RUNK
Fred J. Runk
Vice President & Treasurer
AMERICAN FINANCIAL CORPORATION
By: s/ JAMES E. EVANS
James E. Evans
Sr. Vice President & General Counsel
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, 1995 No. 1-11632
AMERICAN ANNUITY GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Delaware No. 06-1356481
250 East Fifth Street, Cincinnati, Ohio 45202
(513) 333-5300
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
Common Stock, Par Value $1.00 Per Share New York
9-1/2% Senior Notes due August 15, 2001 New York
11-1/8% Senior Subordinated Notes
due February 1, 2003 New York
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and need not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this
Form 10-K. [X]
As of February 29, 1996, there were 43,074,038 shares of the
Registrant's Common Stock outstanding. The aggregate market value of Common
Stock held by non-affiliates at that date was approximately $96.2 million
based upon non-affiliate holdings of 8,014,043 shares and a market price of
$12.00 per share.
Documents Incorporated by Reference:
Proxy Statement for the 1996 Annual Meeting of Shareholders (portions of
which are incorporated by reference into Part III hereof).
AMERICAN ANNUITY GROUP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I
Page
Item 1. Business
Introduction 1
Great American Life Insurance Company 1
Prairie States Life Insurance Company 6
Loyal American Life Insurance Company 7
Annuity Investors Life Insurance Company 9
Other Subsidiaries 10
Investments 10
Independent Ratings 12
Competition 13
Regulation 13
Discontinued Manufacturing Operations 15
Employees 16
Item 2. Properties 16
Item 3. Legal Proceedings 17
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 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure *
Part III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management 26
Item 13. Certain Relationships and Related Transactions 26
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K S-1
* The response to this item is "none".
PART I
ITEM 1
Business
Introduction
American Annuity Group, Inc. ("AAG" or "the Company") was incorporated as a
Delaware corporation in 1987. AAG is a holding company whose primary asset
is the capital stock of Great American Life Insurance Company ("GALIC").
GALIC sells annuities primarily to employees of qualified not-for-profit
organizations under Section 403(b) of the Internal Revenue Code. AAG
acquired GALIC in December 1992.
In November 1995, AAG acquired Laurentian Capital Corporation ("LCC"). As a
result, the Company's subsidiaries now include (i) Prairie States Life
Insurance Company ("Prairie"), which markets individual life insurance and
annuity policies with the sponsorship of state associations of funeral
directors as well as individual funeral directors across the country and
(ii) Loyal American Life Insurance Company ("Loyal"), which specializes in
life and health insurance sold through payroll deduction plans and credit
unions.
AAG is an 81% owned subsidiary of American Financial Group, Inc. ("AFG").
Great American Life Insurance Company
GALIC, located in Cincinnati, 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
premiums, credits interest on the policy and pays out a benefit upon death,
surrender or annuitization.
Annuity contracts are generally classified as either fixed rate or variable.
With a fixed rate annuity, the interest crediting rate is initially set by
the issuer and thereafter may be changed from time to time by the issuer
based on market conditions, subject to any guaranteed interest crediting
rates in the policy. With a variable annuity, the value of the policy is
tied to an underlying securities portfolio. All annuities issued by GALIC
itself have been fixed rate annuities. A GALIC subsidiary began marketing
variable annuities in the fourth quarter of 1995. See "Annuity Investors
Life Insurance Company".
Employees of qualified not-for-profit organizations 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.
1
The following table (in millions) presents information concerning GALIC.
Statutory Accounting Principles Basis
1995 1994 1993 1992 1991
Total Assets (a) $5,414 $5,057 $4,758 $4,377 $4,541
Insurance Reserves:
Annuities $4,974 $4,655 $4,299 $4,011 $3,756
Life 22 21 22 23 21
Accident and Health - 1 1 1 1
$4,996 $4,677 $4,322 $4,035 $3,778
Capital and Surplus $ 273 $ 256 $ 251 $ 216 $ 219
Asset Valuation Reserve (b)(c) 90 80 70 71 112
Interest Maintenance Reserve (c) 32 28 36 17 -
Annuity Receipts:
Flexible Premium:
First Year $ 42 $ 39 $ 47 $ 48 $ 67
Renewal 196 208 223 232 240
238 247 270 280 307
Single Premium 219 196 130 80 153
Total Annuity Receipts $ 457 $ 443 $ 400 $ 360 $ 460
Generally Accepted Accounting Principles Basis
1995 1994 1993 1992 1991
Total Assets (a) $5,631 $5,044 $4,883 $4,436 $4,686
Annuity Benefits Accumulated 4,917 4,596 4,257 3,974 3,727
Stockholder's Equity 645 449 520 418 358
(a) Includes $557 million for securities purchased in December 1991 and
paid for in 1992.
(b) For 1991, amount represents the Mandatory Securities Valuation
Reserve.
(c) Allocation of surplus.
Single premium annuity receipts have increased each year since 1992 due
primarily to sales of newly introduced products and, in 1995, the
development of new distribution channels. This increase more than offset
the decline in flexible premium receipts. Receipts in 1992 were lower than
in 1991 due to (i) a reduction in annuity 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.
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.
2
Tax-qualified premiums represented the majority of GALIC's total premiums in
1995. Over the last several years, sales of non-qualified annuities have
represented an increasing percentage of premiums as GALIC has developed
products and distribution channels targeted to the non-qualified markets.
The following table summarizes GALIC's written premiums and insurance
reserves on a statutory basis by product line (dollars in millions).
1995 Premiums Written Insurance Reserves
First % of December 31, 1995
Year Renewal Total Amount %
Flexible Premium:
Single-tier - qualified $ 29 $ 41 15.3% $ 220 4.4%
Single-tier - non-qual - - - 17 0.3
Two-tier - qualified 13 155 36.6 3,131 62.7
Two-tier - non-qual - - - 3 0.1
Total 42 196 51.9 3,371 67.5
Single Premium:
Single-tier - qualified 95 - 20.7 214 4.3
Single-tier - non-qual 36 - 7.8 76 1.5
Two-tier - qualified 56 - 12.2 664 13.3
Two-tier - non-qual 32 - 7.0 328 6.6
Total 219 - 47.7 1,282 25.7
Annuities in Payout - - - 321 6.4
Life, Accident & Health - 2 0.4 22 0.4
Total $261 $198 100.0% $4,996 100.0%
At December 31, 1995, approximately 95% of GALIC's annuity policyholder
benefit reserves consisted of fixed rate annuities which offered a minimum
interest rate guarantee of 4%. The balance of the liabilities had a minimum
guaranteed rate of 3%. All of GALIC's annuity policies permit GALIC to
change the crediting rate at any time (subject to the minimum guaranteed
interest rate). In determining the frequency and extent of changes in the
crediting rate, GALIC takes into account the profitability of its annuity
business and the relative competitive position of its products.
GALIC seeks to maintain a desired spread between the yield on its investment
portfolio and the rate it credits to its policies. GALIC accomplishes this
by (i) offering crediting rates which it has the option to change, (ii)
designing annuity products that encourage persistency and (iii) maintaining
an appropriate matching of assets and liabilities. Tax-qualified annuity
policyholders maintain access to their funds without incurring penalties
through provisions in the contracts which allow policy loans.
In addition to its use of two-tier structures explained below, GALIC imposes
certain surrender charges and front-end fees during the first five to ten
years after issuance of a policy to discourage policyholders from
surrendering or withdrawing funds in those early years. Partly due to these
features, GALIC's annuity surrenders have averaged approximately 8% of
statutory reserves
3
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 1995 1994 1993 1992 1991
Flexible Premium 91.0% 92.5% 92.0% 90.6% 89.3%
Single Premium 93.6 93.5 93.3 93.8 92.8
Management believes that the favorable persistency rate has been enhanced by
GALIC's interest crediting policy and the high level of service offered to
agents and policyholders. GALIC's persistency rates, as well as the
policyholders' higher accumulation value, have been helped by 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 accumulate interest at different
rates. Other two-tier annuities credit the same interest rate to both the
surrender and the annuitization value but withhold a portion of the first-
year premiums when calculating the surrender value, but not the
annuitization value.
The annuitization value is paid only if the policyholder chooses to
annuitize (withdraw funds in a series of periodic payments for at least the
minimum number of years specified in the policy). If a lump sum payment is
chosen by the policyholder, the surrender value is paid.
GALIC's two-tier annuities are particularly attractive to policyholders who
intend to accumulate funds to provide retirement income since the
annuitization value is accumulated at a competitive long-term interest rate.
GALIC also offers single-tier products. 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. In 1995,
nearly 70% of first year FPDA premiums and SPDA premiums received were on
single-tier policies compared to 7% in 1991.
Marketing and Distribution
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,
(vii) alternative investment products and (viii) general economic
conditions.
GALIC markets its tax-deferred annuities principally to employees of
educational institutions in the kindergarten through high school ("K-12")
segment. Written premiums from the K-12 segment represented approximately
three-fourths of GALIC's total tax-qualified premiums in 1995. Management
believes that the K-12 segment is attractive because of its size and growth
potential, and the persistency rate it has demonstrated.
4
GALIC distributes its annuity products through over 80 managing general
agents ("MGAs") who, in turn, direct approximately 1,000 actively producing
independent agents. GALIC has developed its business 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 agents who are experienced and highly
motivated and who consistently sell a high volume of the types of annuities
offered by GALIC. Toward this end, GALIC has established a "President's
Advisory Council" consisting of leading producers who market primarily GALIC
products. The President's Advisory Council serves as a major influence on
new product design and marketing strategy.
To extend the distribution of GALIC annuities to a broader customer base,
GALIC has developed a Personal Producing General Agent ("PPGA")
distribution system. Approximately 120 PPGAs are contracted to sell GALIC
annuities in those territories not served by an MGA. AAG has also developed
two agency organizations to expand premium writings through banks, hospitals
and certain not-for-profit organizations. (See "Other Subsidiaries".)
GALIC is licensed to sell its products in all states (except New York) and
in the District of Columbia. The following table reflects the geographical
distribution of GALIC's annuity premiums in 1995 compared to 1991:
State 1995 1991 State 1995 1991
California 19.4% 20.1% Minnesota 3.8% *
Florida 7.8 9.8 Connecticut 3.4 6.2%
Massachusetts 6.5 9.1 Illinois 2.9 3.3
Ohio 6.4 5.1 Iowa 2.1 *
Michigan 6.2 9.4 Rhode Island * 2.8
Washington 5.4 * All others, each
North Carolina 4.8 2.9 less than 2% 22.6 20.0
Texas 4.6 5.0
New Jersey 4.1 6.3 100.0% 100.0%
* less than 2%
At December 31, 1995, GALIC had over 250,000 annuity policies in force,
nearly all of which were individual contracts.
5
Prairie States Life Insurance Company
Prairie, located in Rapid City, was incorporated in South Dakota in 1959.
In March 1996, Prairie will change its name to American Memorial Life
Insurance Company.
The following table (in millions) presents information concerning Prairie in
accordance with statutory accounting principles.
1995 1994 1993 1992 1991
Total Assets $359 $325 $305 $293 $285
Insurance Reserves:
Life $248 $228 $211 $201 $193
Annuities 72 58 55 57 56
$320 $286 $266 $258 $249
Capital and Surplus (a) $ 24 $ 24 $ 23 $ 22 $ 21
Asset Valuation Reserve (b)(c) 3 2 3 2 3
Interest Maintenance Reserve (c) 3 2 2 1 -
Premiums Written:
Life $ 52 $ 40 $ 35 $ 32 $ 32
Annuities 28 13 9 11 10
Total Premiums $ 80 $ 53 $ 44 $ 43 $ 42
(a) Represents capital and surplus of consolidated Prairie group of
companies.
(b) For 1991, amount represents the Mandatory Securities Valuation
Reserve.
(c) Allocation of surplus.
At December 31, 1995, Prairie and its subsidiaries had approximately $800
million of life insurance in force.
Since 1993, Prairie's premiums have increased and expanded geographically
due primarily to new relationships with corporate funeral homes.
Products
Prairie offers a variety of life insurance and annuity products to finance
pre-arranged funerals. In a typical arrangement, a consumer pays in advance
for certain goods and services to be provided by a funeral director. These
payments may be used by the funeral director to purchase a life insurance or
annuity contract or to invest in a trust fund. Approximately half of the
premiums received by Prairie are from single payment funding and half are
from payment plans of three to ten years. The policy values increase at a
rate geared to offset effects of inflation and thus provide for funeral
costs at time of death.
Marketing and Distribution
Prairie markets individual life insurance and annuity policies with the
sponsorship of state associations of funeral directors as well as individual
funeral directors in various locations. Prairie has approximately 875
actively producing agents and relationships with approximately 2,000 funeral
homes nationwide. More than two-thirds of Prairie's new sales of life
insurance and annuities in 1995 came from sales resulting from large
corporate accounts. As the funeral home industry continues to consolidate,
reliance on those corporate accounts will likely increase.
6
The following table reflects the geographical distribution of Prairie's
premiums in 1995 compared to 1991:
State 1995 1991 State 1995 1991
North Carolina 12.0% * Oregon 3.2% 4.4%
Washington 11.8 19.4% Pennsylvania 2.6 *
California 11.7 18.6 South Dakota * 3.8
Minnesota 11.6 18.0 Montana * 3.6
Tennessee 8.0 * Oklahoma * 3.2
Illinois 3.8 * Florida * 2.6
Louisiana 3.8 * Nebraska * 2.4
Wisconsin 3.7 2.3 All others, each
Texas 3.6 7.9 less than 2% 20.7 10.0
Missouri 3.5 3.8 100.0% 100.0%
* less than 2%
Loyal American Life Insurance Company
Loyal, located in Mobile, was incorporated in Alabama in 1955. The
following table (in millions) presents information concerning Loyal in
accordance with statutory accounting principles.
1995 1994 1993 1992 1991
Total Assets $252 $250 $244 $238 $188
Insurance Reserves:
Life $166 $163 $158 $154 $113
Accident and Health 28 28 29 29 28
Annuities 7 8 8 9 7
$201 $199 $195 $192 $148
Capital and Surplus $ 35 $ 34 $ 32 $ 29 $ 27
Asset Valuation Reserve (a)(b) 3 2 3 3 3
Interest Maintenance Reserve (b) 1 1 1 - -
Premiums Written:
Life $ 21 $ 23 $ 24 $ 23 $ 22
Accident and Health 20 19 19 17 16
Annuities - 1 - - -
Total Premiums $ 41 $ 43 $ 43 $ 40 $ 38
(a) For 1991, amount represents the Mandatory Securities Valuation
Reserve.
(b) Allocation of surplus.
At December 31, 1995, Loyal had approximately $2.1 billion of life insurance
in force.
7
Products
Loyal offers a variety of life and supplemental health insurance products
that are normally sold on a fixed dollar amount per pay period program. For
products sold through payroll deduction plans, the premiums are deducted
from the individual's paycheck and remitted to Loyal on a monthly basis.
For products sold through credit unions, the premiums are normally paid on a
monthly or quarterly basis through deductions from the member's credit union
account. The products currently being offered include traditional whole
life, universal life, term life, hospital indemnity, cancer and short-term
disability.
In 1996, Loyal will begin marketing certain annuity products and related
programs through payroll deduction plans and credit unions.
Marketing and Distribution
Loyal's marketing strategy emphasizes third party sponsorship to assist in
its selling process. In the payroll deduction market, with the approval of
the employer, Loyal's products are presented to the employees at the work
place and premiums are paid by payroll deduction with billings sent directly
to the employer for processing and remittance.
With credit unions, the products are offered with the endorsement of the
credit union management. The products are presented to the membership
through in-home sales, job-site or lobby enrollments and direct mail
solicitation.
The distribution channel for payroll deduction plans is comprised of
selective relationships with marketing companies who provide job-site
product presentation. The distribution channels for credit unions are
comprised of independent agents and marketing companies who provide
personnel for lobby sales and job-site enrollments.
The main advantages of Loyal's current methods of distribution are the
relatively low cost of home office administration, the ability to set up
relatively inexpensive producing units in the field, and the endorsement or
consent by the credit union or the employer in presenting products.
8
The following table reflects the geographical distribution of Loyal's
premiums in 1995 compared to 1991:
State 1995 1991 State 1995 1991
Alabama 12.6% 14.1% West Virginia 3.3% 3.4%
Tennessee 12.2 15.0 Indiana 3.2 3.2
Florida 8.5 9.8 Illinois 2.6 3.2
Mississippi 7.6 8.4 Louisiana 2.6 2.3
Georgia 4.2 3.9 California 2.4 2.4
North Carolina 4.1 * Texas 2.4 *
South Carolina 4.1 3.2 All others, each
Arkansas 3.3 3.3 less than 2% 23.6 23.9
Missouri 3.3 3.9 100.0% 100.0%
* less than 2%
Loyal has approximately 500 actively producing agents.
Annuity Investors Life Insurance Company ("AILIC")
AILIC (formerly Carillon Life Insurance Company), located in Cincinnati, was
acquired by the Company in 1994 to facilitate its entrance into the variable
annuity market. Industry sales of variable annuities have increased
substantially over the last ten years as investors have sought to obtain the
returns available in the equity markets while enjoying the tax-deferred
status of annuities. With a variable annuity, the earnings credited to the
policy varies based on the investment results of the underlying investment
options chosen by the policyholder. Policyholders may also choose to direct
all or a portion of their premiums to various fixed rate options. Premiums
directed to the variable options in policies issued by AILIC will be
invested in funds managed by independent investment managers, including
Dreyfus, Janus and Merrill Lynch. Variable annuities can be either tax-
qualified or non-qualified and be funded with either a single premium
payment or flexible premiums.
In December 1995, AILIC obtained all approvals necessary to begin offering a
group variable annuity. The first product is designed for sale to employees
of school districts, hospitals and other not-for-profit organizations.
AILIC expects to receive approvals in 1996 to begin marketing qualified and
non-qualified individual variable annuities.
As of February 29, 1996, AILIC was licensed to sell fixed annuities in 41
states and the District of Columbia and had licenses to sell variable
annuities in 28 states and the District of Columbia. Applications have been
filed to obtain licenses in the majority of the remaining states.
Under federal law and the laws of many states, variable annuities are
considered securities. As a result, variable annuities can be sold only by
agents who possess the requisite securities licenses and are affiliated with
a broker-dealer. Accordingly, not all agents who market fixed annuities
also market variable annuities. AILIC intends to market its products
through those
9
members of the GALIC agency force who possess the requisite licenses as well
as through new agents not currently licensed with GALIC. AILIC also intends
to market its products through other distribution channels including broker-
dealers and financial institutions. It is expected that Lifestyle Financial
Investments, Inc. ("LFI") and Retirement Resources Group, Inc. ("RRG"),
subsidiaries of AAG, will also market AILIC's products.
Other Subsidiaries
The Company owns several other insurance subsidiaries, none of which is
currently writing new business. AAG may utilize one or more of these
companies in the future to take advantage of specific product or
distribution channel opportunities. Collectively, these insurance
subsidiaries had statutory assets of $105 million at December 31, 1995.
Several non-insurance subsidiaries market additional funeral products as
well as administrative and co-operative purchasing services. One of these
subsidiaries, International Funeral Associates ("IFA") is a co-operative
buying service organization with approximately 1,900 independent members at
year-end 1995. Including corporate members, total membership is
approximately 3,000 funeral homes nationwide. IFA negotiates discounts with
organizations that service the funeral industry; members of IFA are able to
take advantage of these discounts, thereby enhancing their profitability
through lower cost of goods and services.
In addition to annuity and life insurance contracts, funeral contract funds
may also be held in trust. Laurentian Investment Services, Inc. ("LIS") was
established to provide financial services to funeral directors in managing
funds held in trust. LIS offers a variety of services, including state
master trusts, investment advisory services, administrative services, and
combinations thereof. CSW Management Services, Inc. specializes in
providing administrative services, including accounting, tax reporting,
commission accounting and income and expense allocations, for funeral trust
assets in excess of $100 million.
AAG Securities, Inc. is a broker-dealer licensed to sell stocks, bonds,
mutual funds and variable annuities through independent agents and financial
institutions.
In the last two years, AAG has developed two organizations designed to
market GALIC products to previously underserved markets. LFI and its
subsidiaries focus on the sale of single premium, non-qualified annuities
through financial institutions. These companies concentrate their efforts
on community banks primarily in the Midwest and Southeast. RRG was formed
in 1995 to market annuities and investment products to employees of
hospitals and not-for-profit organizations. Beginning in 1996, RRG intends
to begin marketing products through credit unions with which Loyal already
operates.
Collectively, these non-insurance subsidiaries had assets of $3.6 million at
December 31, 1995.
Investments
Investments comprise approximately 90% of assets and are the principal
source of income. Fixed income securities (including policy loans, mortgage
loans and short-term investments) comprise over 98% of the Company's
investment portfolio.
10
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 insurance laws of each of AAG's life insurance subsidiaries' domiciliary
states govern the types and amounts of investments which are permissible.
These rules are designed to ensure the safety and liquidity of the insurers'
investment portfolios by placing restrictions on the quality, quantity and
diversification of permitted investments.
The National Association of Insurance Commissioners ("NAIC") assigns quality
ratings to publicly traded as well as privately placed securities. These
ratings range from Class 1 (highest quality) to Class 6 (lowest quality).
The following table shows the Company's fixed maturity portfolio at market
value by NAIC designation (and comparable Standard & Poor's Corporation
rating) at December 31:
NAIC
Rating Comparable S&P Rating 1995 1994
1 AAA, AA, A 64% 59%
2 BBB 31 35
Total investment grade 95 94
3 BB 3 4
4 B 2 2
5 CCC, CC, C * *
6 D * -
Total non-investment grade 5 6
Total fixed maturities 100% 100%
* 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.
At December 31, 1995, the average maturity of AAG's fixed maturity
investments was approximately 7 years (including mortgage-backed securities,
which had an estimated average life of approximately 7-1/2 years). The
table below sets forth the maturities of the Company's fixed maturity
investments based on their carrying value.
Maturity 1995 1994
One year or less 1% *
After one year through five years 18 15%
After five years through ten years 40 44
After ten years 9 13
68 72
Mortgage-backed securities 32 28
100% 100%
* less than 1%
11
The following table shows the performance of AAG's investment portfolio,
excluding equity investments in affiliates (dollars in millions):
1995 1994 1993
Average cash and investments at cost $5,220 $4,750 $4,455
Gross investment income 411 377 358
Realized gains 16 - 35
Percentage earned:
Excluding realized gains 7.9% 7.9% 8.0%
Including realized gains 8.2% 7.9% 8.8%
Independent Ratings
The Company's principal insurance subsidiaries ("Insurance Companies") are
rated by A.M. Best as follows:
GALIC A (Excellent) Loyal A- (Excellent)
AILIC A (Excellent) Prairie B+ (Very Good)
In addition, GALIC is rated AA- (very high claims paying ability) by Duff &
Phelps.
In evaluating a company's financial and operating performance, independent
rating agencies review the company's (i) profitability, (ii) leverage and
liquidity, (iii) book of business, (iv) quality and estimated market value
of assets, (v) adequacy of policy reserves and (vi) experience and
competency of management. Such ratings generally are based on factors of
concern to policyholders and agents and are not directed toward the
protection of investors.
Management believes that the ratings assigned by independent insurance
rating agencies are important because potential policyholders often use a
company's rating as an initial screening device in considering annuity
products. Management also believes that the majority of purchasers of
403(b) annuities would not be willing to purchase annuities from an issuer
that had an A.M. Best rating below certain levels. In addition, some 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.
Management believes that a rating in the "A" category is necessary for GALIC
to successfully market tax-deferred annuities to public education employees
and other not-for-profit groups, the markets in which GALIC competes.
Prairie and Loyal compete in markets other than the sale of tax-deferred
annuities. While ratings are an important factor in competition between
insurers in Prairie's and Loyal's markets, management believes that insurers
can successfully compete in these markets with ratings of "B+" (Very Good)
or better.
Ratings are less of a competitive factor in the variable annuity market in
which AILIC competes, in part because a substantial portion of the insurers'
assets are invested in the mutual funds which underlie the variable
annuities rather than in the insurers' general accounts.
12
Although management of AAG believes that its Insurance Companies' ratings
are very stable, those companies' operations could be materially adversely
affected by a downgrade in ratings.
Competition
The Insurance Companies operate in highly competitive markets. They compete
with other insurers and financial institutions based on many factors,
including (i) ratings, (ii) financial strength, (iii) reputation, (iv)
service to policyholders, (v) product design (including interest rates
credited), (vi) commissions and (vii) service to agents. Since policies are
marketed and distributed primarily through independent agents, the Insurance
Companies must also compete for agents. Management believes that
consistently targeting the same market and emphasizing service to agents and
policyholders provides a competitive advantage.
More than 100 insurance companies offer tax-deferred annuities. 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 these are mutual insurance companies
having 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 AAG's Insurance Companies. In a broader
sense, AAG's Insurance Companies compete 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 the
Insurance Companies.
In recent years, several proposals have been made to change the federal
income tax system. These proposals have included a flat tax rate and
various types of consumption taxes. Many of these proposals include changes
in the method of treating investment income and tax-deferred income. It is
impossible to predict the effect on the Company's business of the adoption
of one of these new tax systems. To the extent that a new system reduces or
eliminates the tax-deferred status of annuities, the Company's business
could be adversely affected.
Regulation
The Insurance Companies are subject to comprehensive regulation under the
insurance laws of their states of domicile and the other states in which
they operate. These laws, in general, require approval of the particular
insurance regulators prior to certain actions such as the payment of
dividends in excess of statutory limitations, continuing service
arrangements with affiliates and certain other transactions. Regulation and
supervision are administered by a state insurance commissioner who has broad
statutory powers with respect to granting and revoking licenses, approving
forms of insurance contracts and determining types and amounts of business
which may be conducted in light of the financial strength and size of the
particular company.
State insurance departments periodically examine the business and accounts
of the Insurance Companies and require such companies to submit detailed
annual financial statements prepared in accordance with statutory
requirements. State insurance laws also regulate the character of each
insurance company's investments, reinsurance and security deposits.
13
The Insurance Companies may be required, under the solvency or guaranty laws
of most states in which they do 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 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 Company's 1992 purchase of GALIC
from Great American Insurance Company ("GAI"), a subsidiary of AFG, GALIC's
costs for state guaranty funds are set at $1 million per year for a five-
year period with respect to insurance companies in receivership,
rehabilitation, liquidation or similar situations at December 31, 1992. For
any year in which GALIC pays more than $1 million to the various states,
with respect to such companies, 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 $2.2 million and $2.0 million in assessments in 1995 and 1994,
respectively. Accordingly, GALIC recorded receivables from GAI of $1.2
million for 1995 and $1.0 million for 1994.
While the Ohio Department of Insurance is GALIC's principal regulatory
agency, GALIC is also deemed to be "commercially domiciled" in California
based on past premium volume written in the state. As a result, GALIC 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
model laws in all states. As part of the overall insurance regulatory
process, the NAIC forms numerous task forces to review, analyze and
recommend changes to a variety of areas affecting both the operating and
financial aspects of insurance companies. Recently, increased scrutiny has
been placed upon the insurance regulatory framework, and a number of state
legislatures have considered or enacted legislative proposals that alter,
and in many cases increase, state authority to regulate insurance companies
and their holding company systems. In light of recent legislative
developments, the NAIC and state insurance regulators have also become
involved in a process of re-examining existing laws and regulations and
their application to insurance companies. Legislation has also been
introduced in Congress which could result in the federal government's
assuming some role in the insurance industry, although none has been enacted
to date.
In 1990, the NAIC began an accreditation program to ensure that states have
adequate procedures in place for effective insurance regulation, especially
with respect to financial solvency. The accreditation program requires that
a state meet specific minimum standards in over 15 regulatory areas to be
considered for accreditation. The accreditation program is an ongoing
process and once accredited, a state must enact any new or modified
standards approved by the NAIC within two years following adoption. As of
December 31, 1995, 46 states and the District of Columbia were accredited,
including the states of domicile of AAG's principal subsidiaries.
14
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 each of the Insurance Companies' capital
significantly exceeds risk-based capital requirements. If more stringent
risk-based capital rules are adopted in the future, the Insurance Companies'
ability to pay dividends could be adversely affected.
The maximum amount of dividends which can be paid to stockholders by life
insurance companies domiciled in the State of Ohio without prior approval of
the Ohio Insurance Commissioner is the greater of 10% of policyholder
surplus or prior year's "net income", but only to the extent of earned
surplus as of the preceding December 31.
Under California law, approval is required for dividends which exceed the
greater of 10% of statutory surplus or prior year's "net gain from
operations", but only to the extent of statutory earned surplus as of the
preceding December 31.
Since 1991, the NAIC and some states have adopted additional requirements
relating to the marketing and sale of non-traditional life insurance and
annuities. To date, these additional requirements have not had a material
impact on GALIC's business. In December 1994, the NAIC adopted Actuarial
Guideline 33 (formerly called GGG), which clarifies the minimum statutory
reserving requirements for some annuity products. The impact of this new
reserving requirement is that GALIC added $17 million to its statutory
reserves as of December 31, 1995, as part of a three year phase-in allowed
by this guideline and approved by the Ohio Department of Insurance.
Management believes that these additional reserves are redundant and result
in additional conservatism in GALIC's statutory reserves. In connection
with AAG's purchase of GALIC, GAI is obligated to neutralize the financial
effects of any such guidelines on GALIC's statutory earnings and capital.
In satisfaction of its obligation, (i) GAI agreed to purchase, at AAG's
option, up to $57 million of AAG Preferred Stock and (ii) terms of GALIC's
investment management services contract with AFG were modified to reduce the
fees owed under certain circumstances. On December 31, 1995, GAI purchased
$17 million of newly issued Series B Preferred Stock from AAG; the proceeds
from this sale were contributed to GALIC.
The NAIC has under consideration numerous proposals related to the marketing
and sale of annuity products. In addition, the NAIC is considering a model
law covering insurance companies' investments.
Many of the Company's other subsidiaries are subject to regulation by
various state and federal regulatory authorities. LFI and RRG are licensed
as insurance agencies in various states, which subject them to licensing,
record keeping and similar requirements. AAG Securities is subject to the
rules of the National Association of Securities Dealers, Inc. and the laws
of the states in which it transacts business.
Discontinued Manufacturing Operations
AAG 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.
Certain manufacturing facilities are still owned by the Company. See
"Properties" below.
15
Employees
As of December 31, 1995, AAG and its subsidiaries employed approximately 850
persons. None of the employees are represented by a labor union. AAG
believes that its employee relations are satisfactory.
ITEM 2
Properties
Location
AAG and GALIC rent office space in Cincinnati totaling approximately 105,000
square feet under leases expiring in 1996 through 1999. Several of the
Company's non-insurance subsidiaries lease marketing and administrative
offices in locations throughout the United States.
Loyal's home office building in Mobile, Alabama, contains approximately
89,000 square feet, of which approximately two-thirds is utilized for
Company purposes. The remainder of the building is leased to unaffiliated
tenants.
Prairie's home office building in Rapid City, South Dakota, contains
approximately 44,000 square feet, of which approximately three-fourths is
utilized for Company purposes. The remainder of the building is leased to
unaffiliated tenants. Prairie also leases marketing and administrative
space in several locations throughout the United States.
Management believes that its corporate offices are generally well maintained
and adequate for the Company's present needs.
The remaining material properties of the Company's former manufacturing
operations are listed below.
Lease
Interior Expiration
Location Square Feet Use (if leased)
North Adams, MA 154,000 Manufacturing facility Owned
Hudson, NH 121,400 Manufacturing facility March 2003
Longwood, FL 60,000 Manufacturing facility Owned
North Adams, MA 44,000 R & D facility Owned
These facilities are currently being leased to companies using them for
manufacturing operations. The Company is attempting to sell these
facilities.
Environmental Matters
See "Item 3: Legal Proceedings" for a discussion concerning certain
environmental claims and litigation against the Company.
16
ITEM 3
Legal Proceedings
Federal and state laws and regulations, including the Federal Comprehensive
Environmental Response, Compensation, and Liability Act and similar state
laws, impose liability on the Company (as the successor to Sprague) for the
investigation and cleanup of hazardous substances disposed of or spilled by
its discontinued manufacturing operations, at facilities still owned by the
Company and facilities transferred in connection with the sales of certain
operations, as well as at disposal sites operated by third parties. In
addition, the Company has indemnified the purchasers of its former
operations for the cost of such activities. At several sites, the Company
is conducting cleanup activities of soil and ground water contamination in
accordance with consent agreements between the Company and state
environmental agencies. The Company has also conducted or is aware of
investigations at a number of other locations of its former operations that
have disclosed environmental contamination that could cause the Company to
incur additional investigative, remedial and legal costs. The Company has
also been identified by state and federal regulators as a potentially
responsible party at a number of other disposal sites.
Based on the costs incurred by the Company over the past several years and
discussions with its independent environmental consultants, management
believes that reserves recorded are sufficient in all material respects to
satisfy the estimated liabilities. However, the regulatory standards for
clean-up are continually evolving and may impose more stringent
requirements. In addition, many of the environmental investigations at the
Company's former operating locations and third-party sites are still
preliminary, and where clean-up plans have been proposed, they have not yet
received full approval from the relevant regulatory agencies. Further, the
presence of Company-generated wastes at third-party disposal sites exposes
the Company to joint and several liability for the potential additional
costs of cleaning up wastes generated by others. Accordingly, there can be
no assurance that the costs of environmental clean-up for the Company may
not be significantly higher in future years, possibly necessitating
additional charges.
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.
In 1991, the Company identified possible deficiencies in procedures for
reporting quality assurance information to the Defense Electronics Supply
Center with respect to AAG's former manufacturing operations. Over the last
several years, AAG has been engaged in negotiations with the United States
Government with respect to settlement of claims the Government might have
arising out of these reporting deficiencies. AAG believes it has sufficient
reserves to cover the estimated settlement amount of these claims. (See
Notes I and L to Consolidated Financial Statements.)
AAG is subject to other litigation and arbitration in the normal course of
business. AAG is not a party to any material pending litigation or
arbitration.
17
PART II
ITEM 5
Market for Registrant's Common Equity
and Related Stockholder Matters
AAG's Common Stock is listed and traded principally on the New York Stock
Exchange ("NYSE") under the symbol AAG. On February 29, 1996, there were
approximately 9,000 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.
1995 1994
High Low High Low
First Quarter $10.38 $ 9.38 $10.63 $8.75
Second Quarter 10.25 9.13 10.00 8.38
Third Quarter 11.13 9.50 10.00 8.88
Fourth Quarter 12.00 10.63 9.63 8.88
AAG's dividend paying capability is limited by certain customary debt
covenants to amounts based on cumulative earnings and losses, debt
repurchases, capital transactions and other items. The Company paid annual
dividends of $.07 per share in 1995 and $.06 per share in 1994. Although no
future dividend policy has been determined, management believes the Company
will continue to have the capability to pay similar dividend amounts.
In August 1995, AAG sold 3.92 million shares of Common Stock at $9.50 per
share under a rights offering to existing shareholders.
18
ITEM 6
Selected Financial Data
The following financial data have been summarized from, and should be read
in conjunction with, the Company's consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The data reflects the purchase of GALIC as of December 31,
1992 (as indicated by the vertical line) and the acquisition of Laurentian
as of November 13, 1995 (in millions, except per share amounts).
Income Statement Data: 1995 1994 1993 1992 1991
Total revenues $439.6 $372.7 $388.9 $3.6 $1.9
Income (loss) from continuing
operations 58.7 40.9 53.0 (9.0) (4.7)
Loss from discontinued operations (3.2) (2.6) (9.6) (16.8) (47.8)
Extraordinary items (0.2) (1.7) (3.4) - -
Changes in accounting principle - (0.5) - (3.1) -
Net income (loss) $ 55.3 $ 36.1 $ 40.0 ($28.9) ($52.5)
Earnings (loss) per common share:
Continuing operations $1.45 $1.05 $1.41 ($0.50) ($0.26)
Discontinued operations (0.08) (.07) (.27) (.94) (2.66)
Extraordinary items - (.05) (.10) - -
Changes in accounting principles - (.01) - (.17) -
Net income (loss) $1.37 $0.92 $1.04 ($1.61) ($2.92)
Cash dividends per common share $0.07 $0.06 $0.05 $0.05 $0.05
Balance Sheet Data:
Total assets $6,611.0$5,089.9$4,913.8 $4,480.4 $170.1
Notes payable 167.7 183.3 225.9 230.9 27.9
Net unrealized gains (losses)
included in stockholders' equity 89.3 (29.0) 56.9 28.4 -
Total stockholders' equity 429.3 204.4 250.3 186.6 108.5
Selected Financial Data of GALIC Prior to its Acquisition by AAG
(in millions)
Income Statement Data:
Total revenues * * * $342.5 $402.6
Income from continuing operations * * * 49.2 103.0
Net income * * * 42.5 64.3
Balance Sheet Data:
Total assets * * * *$4,685.5
Net unrealized gains (losses)
included in stockholders' equity * * * * (5.5)
Total stockholders' equity * * * * 358.2
* Included in the AAG data above.
On December 31, 1992, the Company purchased 100% of the capital stock of
GALIC from GAI for $468 million. The purchase was financed with (a) $230
million of borrowings, (b) $156 million of new equity raised from the sale
of common and preferred stock to GAI, and (c) available cash. AFG, the
parent of GAI, beneficially owned approximately 81% of AAG's Common Stock at
February 29, 1996.
19
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
the financial condition and results of operations of American Annuity Group,
Inc. ("AAG" or "the Company"). 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 its subsidiaries. The parent corporation, however, has
continuing expenditures for administrative expenses, corporate services,
liabilities in connection with discontinued operations and, most
importantly, for the payment of interest and principal on borrowings. Since
its continuing business is financial in nature, AAG does not prepare its
consolidated financial statements using a current-noncurrent format.
Consequently, certain traditional ratios and financial analysis tests are
not meaningful.
Liquidity and Capital Resources
Ratios AAG's ratio of earnings to fixed charges was 6.0 in 1995, 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 .49, .79 and 1.17 at December 31, 1995, 1994 and 1993, respectively.
These same ratios including the effects of unrealized gains and losses were
.39, .90 and .90, respectively.
The National Association of Insurance Commissioners' ("NAIC") model law for
risk-based capital ("RBC") formulas determines the amount of capital that an
insurance company needs to ensure that it has an acceptable expectation of
not becoming financially impaired. At December 31, 1995, the capital ratios
of each of AAG's principal insurance subsidiaries exceeded the RBC
requirements by substantial amounts.
Sources and Uses of Funds On December 31, 1992, AAG acquired Great American
Life Insurance Company ("GALIC") for $468 million. To finance the
acquisition, AAG used cash on hand, issued $156 million of Common and
Preferred Stock to Great American Insurance Company ("GAI") and borrowed
$230 million. The Company refinanced substantially all of that indebtedness
with the proceeds of the sale of $125 million principal amount of 11-1/8%
Notes in February 1993 and $100 million principal amount of 9-1/2% Notes in
August 1993.
In 1994, management concluded that the Company's operations would benefit
from a reduction in total indebtedness and the resulting reduction in debt
service requirements. The perceived benefits included (i) the ability to
retain cash to be utilized to expand the Company's operations, and (ii) the
prospect for better ratings for the Company's insurance subsidiaries. As a
result, in March 1994, AAG began to acquire its outstanding indebtedness,
primarily through privately negotiated transactions. In total (through
February 1996), the Company has repurchased $104 million principal amount of
Notes. The total consideration paid in these transactions was 810,000
shares of the Company's Common Stock and $98 million in cash.
20
The Company has financed a portion of the cost of its Note repurchases with
borrowings under its line of credit with a group of commercial banks. The
line of credit matures in 1999; the Company has no other scheduled principal
maturities until 2001.
The November 1995 acquisition of Laurentian Capital Corporation ("LCC") was
funded primarily with internal funds supplemented by bank borrowings and the
proceeds of the August stock offering.
In December 1995, AAG sold $17 million of newly issued 8.5% Series B
Preferred Stock to GAI. (See Note N to Consolidated Financial Statements.)
AAG's ability to pay interest and principal on its debt, dividends on its
preferred stock, obligations related to the Company's discontinued
manufacturing operations and other holding company costs is dependent on
payments from GALIC in the form of capital distributions and income tax
payments. In 1995, AAG received $41.0 million in tax allocation payments
and $54.2 million in capital distributions from GALIC. In 1995, AAG made
capital contributions of $31.5 million to GALIC.
The amount of capital distributions which can be paid by GALIC is subject to
restrictions relating to statutory surplus and earnings. In addition, any
dividend or distribution paid from other than earned surplus is considered
an extraordinary dividend and may be paid only after regulatory approval.
(See Note M to Consolidated Financial Statements.) The maximum amount of
dividends payable by GALIC in 1996 without prior regulatory approval is
approximately $58.6 million. In January 1996, GALIC paid a capital
distribution of $11.0 million to AAG.
Based upon the current level of operations and anticipated growth, AAG
believes that it will have sufficient resources to meet its liquidity
requirements.
Investments Insurance laws restrict the types and amounts of investments
which are permissible for life insurers. These restrictions are designed to
ensure the safety and liquidity of insurers' investment portfolios. The
NAIC is still considering the formulation of a model investment law. 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, 1995, 95% of AAG's fixed maturity
portfolio was comprised of investment grade bonds (NAIC rating of "1" or
"2"). Management believes that the high credit quality of AAG's investment
portfolio should generate a stable and predictable investment return.
AAG invests primarily in fixed income investments which, including loans and
short-term investments, comprised over 98% of its investment portfolio at
December 31, 1995. 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. At December 31, 1995, AAG had approximately $242
million in net unrealized gains on its fixed maturity portfolio compared to
net unrealized
21
losses of $279 million at December 31, 1994. This increase, representing
approximately 10% of the carrying value of AAG's bond portfolio, resulted
from a decrease in the general level of interest rates.
At December 31, 1995, AAG had approximately 1.7% of total assets invested in
mortgage loans and real estate. The majority of these investments were
purchased within the last three years.
At December 31, 1995, AAG's mortgage-backed securities ("MBSs") portfolio
represented approximately 32% of fixed maturity investments compared to 28%
at December 31, 1994. This increase resulted from the acquisition of LCC,
which had a higher concentration of invested assets in MBSs. As of December
31, 1995, interest only (I/O), principal only (P/O) and other "high risk"
MBSs represented less than six-tenths of one percent of total assets. AAG
invests primarily in MBSs which have a reduced risk of prepayment. In
addition, the majority of MBSs held by AAG were purchased at a discount.
Management believes that the structure and discounted nature of the MBSs
will minimize the effect of prepayments on earnings over the anticipated
life of the MBS portfolio.
Approximately 90% of AAG's MBSs are rated "AAA" with substantially all being
of investment grade quality. The majority are collateralized 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 The results of LCC and its principal subsidiaries, Prairie States
Life Insurance Company ("Prairie") and Loyal American Life Insurance Company
("Loyal"), are included in the Company's income statement subsequent to
their acquisition on November 13, 1995.
The following table (in millions) illustrates the Company's net operating
earnings, as analyzed by management.
AAG (Consolidated): 1995 1994 1993
Revenues per income statement $439.6 $372.7 $388.9
Less realized (gains) losses (15.7) 0.1 (35.5)
Operating revenues 423.9 372.8 353.4
Costs and expenses per income statement (348.9) (309.5) (308.9)
Less provision for GALIC relocation expenses - - 8.0
Operating expenses (348.9) (309.5) (300.9)
Operating earnings before taxes 75.0 63.3 52.5
Income tax expense 26.5 22.3 17.4
Net operating earnings $ 48.5 $ 41.0 $ 35.1
Management believes net operating earnings (or "core" earnings) is helpful
in comparing the operating performance of AAG with that of similar
companies. Net operating earnings for 1995 and 1994 were up 18% and 17%,
respectively, over the comparable prior years. Net operating earnings
should not be considered an alternative to net income as an indication of
AAG's overall performance.
22
Annuity receipts for GALIC were as follows (in millions):
GALIC: 1995 1994 1993
Annuity receipts:
Flexible Premium Deferred Annuities:
First year $ 42 $ 39 $ 47
Renewal 196 208 223
238 247 270
Single Premium Deferred Annuities 219 196 130
Total annuity receipts $457 $443 $400
GALIC's annuity receipts have increased primarily on the strength of sales
of newly introduced single premium products and the development of new
single premium distribution channels.
Life, Accident and Health Premiums and Benefits Life, accident and health
revenues and expenses reflect primarily premiums and benefits of Prairie and
Loyal since their acquisition in November 1995.
Net Investment Income Net investment income increased 9% in 1995 and 5% in
1994 due primarily to an increase in the Company's average invested asset
base. Investment income is reflected net of investment expenses of $5.4
million in 1995, and $4.9 million in both 1994 and 1993.
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 Earnings (Loss) of Affiliate Equity in net earnings (loss) of
affiliate represents AAG's proportionate share of Chiquita's earnings
(losses). Chiquita reported income before extraordinary items for 1995 of
$17 million compared to losses before extraordinary items of $49 million for
1994 and $51 million in 1993.
Annuity Benefits Annuity benefits reflects primarily interest credited to
annuity policyholders' funds accumulated. 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 market interest
rates and maintain a desired interest rate spread without a substantial
effect on persistency. Annuity benefits increased 5% in 1995 and 6% in 1994
primarily due to an increase in average annuity benefits accumulated.
Amortization of Insurance Acquisition Costs Amortization of insurance
acquisition costs increased to $12.7 million in 1995 from $7.1 million in
1994 due primarily to an increase in the average balance of deferred policy
acquisition costs ("DPAC").
DPAC amortization decreased 52% in 1994. This decrease reflects evaluations
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. The
overall effect of the evaluations was to increase the estimated effective
lives of the policies from approximately five years to approximately ten
years. Estimates of lives and expected gross profits were refined based on
actual experience of the Company.
Interest on Borrowings and Other Debt Expenses Interest on borrowings
decreased 18% in 1995 and 5% in 1994 due to repurchases of debt during 1995
and 1994. (See Note G to Consolidated Financial Statements.)
23
Other Expenses Other expenses increased 35% in 1995, reflecting additional
costs for Guaranty Association fees and expanded distribution networks, and
the operating and general expenses of Prairie and Loyal. In 1994, other
expenses increased 13%. Additional costs for information systems,
communications, rent and new distribution networks were partially offset by
lower employee costs; 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 all of its former
manufacturing operations. Certain properties utilized in the former
manufacturing operations continue to be held for sale, many of which are
currently leased to companies using them for manufacturing operations.
The Company has certain obligations related to its former business
activities. Among these obligations are the funding of pension plans,
environmental costs, settlement of government claims, lease payments for a
former plant site, certain retiree medical benefits, and certain obligations
associated with the sales of the Company's manufacturing operations. (See
Notes I and L to Consolidated Financial Statements.)
Extraordinary Items Extraordinary items reflect AAG's losses, net of tax,
on retirements of its debt in 1995 ($150,000), 1994 ($1.0 million) and 1993
($3.4 million). 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 debt in 1994.
Accounting Change 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.
24
ITEM 8
Financial Statements and Supplementary Data
PAGE
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1995 and 1994 F-2
Consolidated Income Statement:
Years Ended December 31, 1995, 1994 and 1993 F-3
Consolidated Statement of Changes in Stockholders' Equity:
Years Ended December 31, 1995, 1994 and 1993 F-4
Consolidated Statement of Cash Flows:
Years Ended December 31, 1995, 1994 and 1993 F-5
Notes to Consolidated Financial Statements F-6
"Selected Quarterly Financial Data" has been included in Note O to the
Consolidated Financial Statements.
25
PART III
The information required by the following Items will be included in AAG's
definitive Proxy Statement for the 1996 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
26
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Annuity Group, Inc.
We have audited the accompanying consolidated balance sheets of American
Annuity Group, Inc. and subsidiaries as of December 31, 1995 and 1994, 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, 1995. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American Annuity Group, Inc. and subsidiaries at December 31,
1995 and 1994, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in Note B to the consolidated financial statements, the Company
made an accounting change in 1994.
Ernst & Young LLP
Cincinnati, Ohio
February 29, 1996
F-1
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
December 31,
1995 1994
Assets
Investments:
Fixed maturities:
Held to maturity - at amortized cost
(market - $2,600.0 and $3,062.4) $2,497.2 $3,273.7
Available for sale - at market
(amortized cost - $2,787.6 and $1,326.4) 2,926.6 1,258.6
Equity securities - at market
(cost - $14.1 and $10.7) 32.6 21.7
Investment in affiliate 20.3 20.8
Mortgage loans on real estate 70.4 47.2
Real estate 39.9 28.0
Policy loans 241.4 185.5
Short-term investments 140.7 26.0
Total investments 5,969.1 4,861.5
Cash 28.7 36.7
Accrued investment income 87.4 77.7
Unamortized insurance acquisition costs, net 149.8 65.1
Other assets 137.5 48.9
Assets held in separate accounts 238.5 -
Total assets $6,611.0 $5,089.9
Liabilities and Stockholders' Equity
Annuity benefits accumulated $5,052.0 $4,618.1
Life, accident and health benefit reserves 538.3 19.9
Notes payable 167.7 183.3
Payable to affiliates, net 29.1 16.7
Deferred taxes (benefits) on unrealized
gains (losses) 48.0 (15.5)
Accounts payable, accrued expenses and other
liabilities 108.1 63.0
Liabilities related to separate accounts 238.5 -
Total liabilities 6,181.7 4,885.5
Series B Preferred Stock (at redemption value) 17.0 -
Common Stock, $1 par value
-100,000,000 shares authorized
- 43,071,882 and 39,141,080 shares outstanding 43.1 39.1
Capital surplus 361.1 330.8
Accumulated deficit at December 31, 1992 (212.6) (212.6)
Retained earnings since January 1, 1993 131.4 76.1
Unrealized gains (losses) on marketable
securities, net of deferred income taxes and
insurance adjustments 89.3 (29.0)
Total stockholders' equity 429.3 204.4
Total liabilities and
stockholders' equity $6,611.0 $5,089.9
See Notes to Consolidated Financial Statements.
F-2
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(In millions, except per share amounts)
Year ended December 31,
1995 1994 1993
Revenues:
Net investment income $405.5 $371.8 $353.3
Realized gains (losses) on sales
of investments 15.7 (0.1) 35.5
Life, accident and health premiums 15.7 2.2 2.4
Equity in net earnings (loss) of
affiliate 0.1 (2.8) (2.9)
Other income 2.6 1.6 0.6
439.6 372.7 388.9
Costs and Expenses:
Annuity benefits 254.7 241.9 228.6
Life, accident and health benefits 13.2 1.5 1.7
Amortization of insurance acquisition
costs 12.7 7.1 14.7
Interest on borrowings and other debt
expenses 17.6 21.4 22.6
Provision for GALIC relocation expenses - - 8.0
Other expenses 50.7 37.6 33.3
348.9 309.5 308.9
Income from continuing operations before
income taxes 90.7 63.2 80.0
Provision for income taxes 32.0 22.3 27.0
Income from continuing operations 58.7 40.9 53.0
Discontinued operations, net of tax (3.2) (2.6) (9.6)
Income before extraordinary items and
cumulative effect of accounting change 55.5 38.3 43.4
Extraordinary items, net of tax (0.2) (1.7) (3.4)
Cumulative effect of accounting change,
net of tax - (0.5) -
Net Income $ 55.3 $ 36.1 $ 40.0
Preferred dividend requirement - 0.9 3.6
Net income applicable to Common Stock $ 55.3 $ 35.2 $ 36.4
Average common shares outstanding 40.5 38.1 35.1
Earnings (loss) per common share:
Continuing operations $1.45 $1.05 $1.41
Discontinued operations (.08) (.07) (.27)
Extraordinary items - (.05) (.10)
Cumulative effect of accounting change - (.01) -
Net income $1.37 $0.92 $1.04
Cash dividends per common share $0.07 $0.06 $0.05
See Notes to Consolidated Financial Statements.
F-3
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions)
Year ended December 31,
1995 1994 1993
Preferred Stock:
Balance at beginning of year $ - $ 29.9 $ 29.4
Exchanged for Common Stock - (30.0) -
Issued during the year 17.0 - -
Accretion of discount - 0.1 0.5
Balance at end of year $ 17.0 $ - $ 29.9
Common Stock:
Balance at beginning of year $ 39.1 $ 35.1 $ 35.1
Issued during the year 4.0 4.0 -
Balance at end of year $ 43.1 $ 39.1 $ 35.1
Capital Surplus:
Balance at beginning of year $330.8 $301.0 $306.3
Common Stock issued during the year 33.3 33.0 -
Common dividends declared (3.0) (2.3) (1.7)
Preferred dividends declared - (0.8) (3.1)
Accretion of Preferred Stock discount - (0.1) (0.5)
Balance at end of year $361.1 $330.8 $301.0
Accumulated Deficit at December 31, 1992 ($212.6) ($212.6) ($212.6)
Retained Earnings Since January 1, 1993:
Retained earnings from January 1, 1993
to beginning of year $ 76.1 $ 40.0 $ -
Net income 55.3 36.1 40.0
Balance at end of year $131.4 $ 76.1 $ 40.0
Unrealized Gains (Losses), Net:
Balance at beginning of year ($ 29.0) $ 56.9 $ 28.4
Change during year 118.3 (85.9) 28.5
Balance at end of year $ 89.3 ($ 29.0) $ 56.9
See Notes to Consolidated Financial Statements.
F-4
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Year ended December 31,
1995 1994 1993
Cash Flows from Operating Activities:
Net income $ 55.3 $ 36.1 $ 40.0
Adjustments:
Discontinued operations 3.2 2.6 9.6
Loss on retirement of debt 0.2 1.7 3.4
Cumulative effect of accounting change - 0.5 -
Increase (decrease) in life, accident
and health reserves 17.5 (1.4) (0.6)
Benefits to annuity policyholders 254.7 241.9 228.6
Amortization of insurance acquisition
costs 12.7 7.1 14.7
Equity in net (earnings) loss of
affiliate (0.1) 2.8 2.9
Realized (gains) losses on
investing activities (15.7) 0.1 (35.5)
Increase in insurance acquisition costs (34.9) (30.5) (28.0)
Other, net (1.0) 1.5 (1.8)
291.9 262.4 233.3
Cash Flows from Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,107.5)(1,189.2)(2,015.1)
Equity securities - (0.7) (5.6)
Real estate, mortgage loans and
other assets (22.6) (27.9) (59.3)
Purchase of subsidiaries, net of
cash acquired (55.2) (14.0) -
Maturities and redemptions of
fixed maturity
investments 147.1 238.2 379.2
Sales of:
Fixed maturity investments 768.5 621.9 1,202.0
Equity securities 2.0 4.8 30.6
Real estate, mortgage loans and
other assets 8.2 27.2 2.5
Increase in policy loans (6.1) (16.1) (8.1)
Other, net - - 2.9
(265.6) (355.8) (470.9)
Cash Flows from Financing Activities:
Annuity receipts 457.5 442.7 400.1
Annuity benefits and withdrawals (412.8) (321.0) (337.9)
Additions to notes payable 33.5 34.7 225.0
Reductions of notes payable (49.1) (69.2) (230.0)
Issuance of Common Stock 37.3 - -
Issuance of Preferred Stock 17.0 - -
Cash dividends paid (3.0) (3.1) (4.1)
80.4 84.1 53.1
Net increase (decrease) in cash and
short-term investments 106.7 (9.3) (184.5)
Beginning cash and short-term investments 62.7 72.0 256.5
Ending cash and short-term investments $ 169.4 $ 62.7 $ 72.0
See Notes to Consolidated Financial Statements.
F-5
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. DESCRIPTION OF THE COMPANY
American Annuity Group, Inc. ("AAG" or "the Company") markets (i) individual
and group annuities nationwide to the savings and retirement markets, (ii)
individual life insurance and annuity policies with the sponsorship of state
associations of funeral directors as well as individual funeral directors
across the country and (iii) various forms of life, accident and health
insurance and annuities through payroll deduction plans and financial
institutions.
AAG's parent, American Financial Corporation ("AFC"), was acquired by
American Financial Group, Inc. ("AFG") in April 1995. AFG and its
subsidiaries owned 35,059,995 shares (81%) of AAG's Common Stock at December
31, 1995.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The accompanying consolidated financial statements
include the accounts of AAG and its subsidiaries. Intercompany transactions
and balances are eliminated in consolidation. Certain reclassifications
have been made to prior periods to conform to the current year's
presentation.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Changes in circumstances could cause actual results to
differ materially from those estimates.
AAG's acquisition of Laurentian Capital Corporation ("LCC") in November 1995
was recorded as a purchase. The results of LCC's operations have been
included in AAG's consolidated financial statements since its acquisition.
Investments Debt securities are classified as "held to maturity" and
reported at amortized cost if AAG has the positive intent and ability to
hold them to maturity. Debt and equity securities are classified as
"available for sale" and reported at fair value with unrealized gains and
losses reported as a separate component of stockholders' equity if the debt
or equity securities are not classified as held to maturity or bought and
held principally for selling in the near term. 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.
In accordance with guidance issued by the Financial Accounting Standards
Board in November 1995, AAG reassessed the classifications of its investment
securities and transferred approximately $1.1 billion of its fixed maturity
portfolio from "held to maturity" to "available for sale". The
reclassification resulted in an increase of $55.6 million in the carrying
value of fixed maturity investments and an increase of $36.1 million in
stockholders' equity. The transfer had no effect on net earnings.
Short-term investments are carried at cost; mortgage loans on real estate
are generally carried at amortized cost; policy loans are stated at the
aggregate unpaid balance.
F-6
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
Investment in Affiliate AAG's investments in equity securities of companies
that are 20% to 50% owned by AFG and its subsidiaries are carried at cost,
adjusted for a proportionate share of their undistributed earnings or
losses.
Insurance Acquisition Costs Unamortized insurance acquisition costs consist
primarily of deferred policy acquisition costs and the present value of
future profits of acquired companies.
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 to the extent that such costs are deemed recoverable.
Deferred costs related to annuities and universal life insurance products
are amortized, with interest, in relation to the present value of expected
gross profits on the policies. These expected gross profits consist
principally of estimated future net investment income and surrender,
mortality and other policy charges, less estimated future interest on
policyholders' funds, policy administration expenses and death benefits in
excess of account values. DPAC is reported net of unearned revenue relating
to certain policy charges that represent compensation for future services.
These unearned revenues are recognized as income using the same assumptions
and factors used to amortize DPAC.
Deferred costs related to traditional life and health insurance are
amortized over the expected premium paying period of the related policies,
in proportion to the ratio of annual premium revenues to total anticipated
premium revenues. Such anticipated premium revenues were estimated using
the same assumptions used for computing liabilities for future policy
benefits.
To the extent that realized gains and losses result in adjustments to the
amortization of DPAC, such adjustments are reflected as components of
realized gains.
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.
Present Value of Future Profits Included in Insurance Acquisition
Costs are amounts representing the present value of future profits on
business in force of the acquired insurance companies, which represent the
portion of the costs to acquire such companies that is allocated to the
value of the right to receive future cash flows from insurance contracts
existing at the date of acquisition. These amounts are amortized with
interest over the estimated remaining life of the acquired policies for
annuities and universal life products and over the expected premium paying
period for traditional life and health insurance products.
F-7
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Annuity Benefits Accumulated Annuity receipts and benefit payments are
generally recorded as increases or decreases in "annuity benefits
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.
Life, Accident and Health Benefit Reserves Liabilities for future policy
benefits under traditional ordinary life, accident and health policies are
computed using the net level premium method. Computations are based on
anticipated investment yields (primarily 7%), mortality, morbidity and
surrenders and include provisions for unfavorable deviations. Reserves are
modified as necessary to reflect actual experience and developing trends.
The liability for future policy benefits for interest sensitive life
policies is equal to the sum of the accumulated fund balances under such
policies.
Assets Held In and Liabilities Related To Separate Accounts Investment
annuity deposits and related liabilities represent deposits maintained by
several banks under a previously offered tax-deferred annuity program. The
Company receives an annual fee from each bank for sponsoring the program; if
depositors elect to purchase an annuity from the Company, funds are
transferred to the Company.
Income Taxes AAG, Great American Life Insurance Company ("GALIC") and all
other 80%-owned U.S. non-life subsidiaries are consolidated with AFC for
federal income tax purposes. The life insurance subsidiaries of LCC will
file separate federal income tax returns through the year 2000.
AAG and GALIC have separate tax allocation agreements with AFC which
designate how tax payments are shared by members of the tax group. In
general, both companies compute taxes on a separate return basis. GALIC is
obligated to make payments to (or receive benefits from) AFC based on
taxable income without regard to temporary differences. In accordance with
terms of AAG's indentures, AAG receives GALIC's tax allocation payments for
the benefit of AAG's deductions arising from current operations. If GALIC's
taxable income (computed on a statutory accounting basis) exceeds a current
period net operating loss of AAG, the taxes payable by GALIC associated with
the excess are payable to AFC. If the AFC tax group utilizes any of AAG's
net operating losses or deductions that originated prior to AAG's entering
AFC's consolidated tax group, AFC will pay to AAG an amount equal to the
benefit received.
Deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases and are measured using
enacted tax rates. The Company recognizes deferred tax assets if it is more
likely than not that a benefit will be realized. Current and deferred tax
assets and liabilities of companies in AFC's consolidated tax group are
aggregated with other amounts receivable from or payable to affiliates.
Life, Accident and Health Premiums and Benefits For traditional life,
accident and health products, premiums are recognized as revenue when
legally collectible from policyholders. Policy reserves have been
established in a manner which allocates policy benefits and expenses on a
basis consistent with the recognition of related premiums and generally
results in the recognition of profits over the premium-paying period of the
policies.
F-8
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For interest-sensitive life and universal life products, premiums are
recorded in a policyholder account which is reflected as a liability.
Revenue is recognized as amounts are assessed against the policyholder
account for mortality coverage and contract expenses. Surrender benefits
reduce the account value. Death benefits are expensed when incurred, net of
the account value.
Debt Issuance Costs Debt expenses are amortized over the terms of the
respective borrowings on the interest method.
Statement of Cash Flows For cash flow purposes, "investing activities" are
defined as making and collecting loans and acquiring and disposing of debt
or equity instruments and property and equipment. "Financing activities"
include annuity receipts, benefits and withdrawals and obtaining resources
from owners and providing them with a return on their investments. All
other activities are considered "operating". Short-term investments having
original maturities of three months or less when purchased are considered to
be cash equivalents for purposes of the financial statements.
Benefit Plans AAG sponsors an Employee Stock Ownership Retirement Plan
("ESORP") covering all employees who are qualified as to age and length of
service. The ESORP, which invests primarily in securities of AAG, is a
trusteed, noncontributory plan for the benefit of the employees of AAG and
its 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 certain benefits to eligible
retirees. Effective January 1, 1994, AAG implemented Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" which covers benefits to former or inactive employees (primarily
those on disability) who were not deemed retired under other Company plans.
The projected future cost of providing these benefits is expensed over the
period the employees earn such benefits.
C. ACQUISITION
On November 13, 1995, AAG acquired all of the outstanding shares of LCC.
Its principal insurance subsidiaries were Prairie States Life Insurance
Company ("Prairie") and Loyal American Life Insurance Company ("Loyal").
AAG paid approximately $106 million for the outstanding common stock of LCC
and repaid $45 million of LCC indebtedness concurrently with the
acquisition. GALIC provided approximately $90 million of the purchase price
in exchange for Prairie and Loyal. AAG funded the balance of the cost of
acquiring LCC with the proceeds from a Common Stock rights offering
completed in August 1995, borrowings under its line of credit, and cash on
hand.
F-9
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table provides certain unaudited consolidated proforma results
of operations assuming the acquisition of LCC had occurred at the beginning
of each period presented (in millions, except per share amounts).
1995 1994
Total revenues $563.6 $500.6
Income before extraordinary items 61.6 47.5
Net income 61.4 45.3
Net income per share 1.42 1.06
D. INVESTMENTS
Fixed maturity investments at December 31, consisted of the following (in
millions):
1995
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ - $ - $ - $ -
Public utilities 393.1 405.5 13.4 (1.0)
Mortgage-backed securities 659.6 686.0 27.0 (0.6)
All other corporate 1,444.5 1,508.5 64.1 (0.1)
$2,497.2 $2,600.0 $104.5 ($1.7)
1995
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ 162.5 $ 169.9 $ 7.5 ($ 0.1)
Public utilities 227.7 239.1 12.1 (0.7)
Mortgage-backed securities 1,045.2 1,073.8 32.2 (3.6)
All other corporate 1,352.2 1,443.8 97.9 (6.3)
$2,787.6 $2,926.6 $149.7 ($10.7)
1994
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ - $ - $ - $ -
Public utilities 461.2 424.0 0.8 (38.0)
Mortgage-backed securities 721.0 657.9 0.1 (63.2)
All other corporate 2,091.5 1,980.5 6.7 (117.7)
$3,273.7 $3,062.4 $7.6 ($218.9)
1994
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ 130.3 $ 125.3 $0.1 ($ 5.1)
Public utilities 66.2 63.7 0.2 (2.7)
Mortgage-backed securities 604.6 564.8 0.7 (40.5)
All other corporte 525.3 504.8 2.2 (22.7)
$1,326.4 $1,258.6 $3.2 ($71.0)
"Investing activities" related to fixed maturity investments during 1995
included in AAG's Consolidated Statement of Cash Flows consisted of the
following (in millions):
1995 1994
Held to Available Held to Available
Maturity for sale Total Maturity for Sale Total
Purchases ($280.7) ($826.8) ($1,107.5) ($713.6) ($475.6) ($1,189.2)
Maturities and
paydowns 50.5 96.6 147.1 54.8 183.4 238.2
Sales 1.4 767.1 768.5 5.6 616.3 621.9
Gross gains 0.8 23.2 24.0 0.8 7.9 8.7
Gross losses (0.6) (8.3) (8.9) (1.0) (9.8) (10.8)
Certain securities classified as "held to maturity" were sold for losses of
$0.2 million in 1995 and $0.6 million in 1994, respectively, due to
deterioration in the issuers' creditworthiness.
Gross gains of $45.3 million and gross losses of $11.0 million were realized
on sales of fixed maturity investments during 1993.
F-10
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The table below sets forth the scheduled maturities of AAG's fixed maturity
investments based on carrying value as of December 31:
1995
Held to Available 1994
Maturity Maturity for Sale Total Total
One year or less 1% * 1% *
After one year through five years 13 5% 18 15%
After five years through ten years 18 22 40 44
After ten years 2 7 9 13
34 34 68 72
Mortgage-backed securities 12 20 32 28
46% 54% 100% 100%
* less than 1%
Distribution based on market value is generally the same. Mortgage-backed
securities had an expected average life of approximately 7-1/2 years at
December 31, 1995.
Certain risks are inherent in connection with fixed maturity securities,
including loss upon default, price volatility in reaction to changes in
interest rates and general market factors and risks associated with
reinvestment of proceeds due to prepayments or redemptions in a period of
declining interest rates.
The carrying values of investments in any entity or mortgage-backed security
("MBS") issuer in excess of 10% of stockholders' equity at December 31,
1995, other than investments issued or guaranteed by the U.S. Government or
government agencies, consisted of the following fixed maturity investments
(in millions):
Issuer Amount
Prudential Home MBS (18 different issues) $118.9
Residential Funding MBS (16 different issues) 96.3
General Electric Capital MBS (10 different issues) 88.8
Countrywide MBS (17 different issues) 80.3
Resolution Trust Corporation MBS 58.2
Securitized Asset Sales, Inc. 56.1
Georgia-Pacific Corporation 43.6
F-11
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
At December 31, 1995 and 1994, respectively, gross unrealized gains on
marketable equity securities were $18.5 million and $11.1 million and gross
unrealized losses were zero and $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
MaturitiesSecurities Effects Total
1995
Realized $ 15.1 $ 0.6 ($ 5.5) $ 10.2
Change in unrealized 520.9 7.5 (184.9) 343.5
1994
Realized ($ 2.1) $ 2.0 $ 0.0 ($ 0.1)
Change in unrealized (485.3) (2.1) 170.6 (316.8)
1993
Realized $ 34.3 $ 1.2 ($ 12.4) $ 23.1
Change in unrealized 88.6 10.9 (34.8) 64.7
Major categories of net investment income were as follows (in millions):
1995 1994 1993
Fixed maturities $405.2 $372.7 $354.8
Other 5.7 4.0 3.4
Total investment income 410.9 376.7 358.2
Investment expenses (5.4) (4.9) (4.9)
Net investment income $405.5 $371.8 $353.3
AAG's investment portfolio is managed by a subsidiary of AFG. Investment
expenses included investment management charges of $4.7 million in 1995 and
$4.4 million in both 1994 and 1993 which represented approximately one-tenth
of one percent of AAG's invested assets in all three years.
E. INVESTMENT IN AFFILIATE
Investment in affiliate (carrying value of $20.3 million at December 31,
1995) 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. AFG and its other subsidiaries owned an additional 39%
interest in the common stock of Chiquita. Chiquita is a leading
international marketer, processor and producer of quality food products.
The market value of AAG's investment in Chiquita was approximately $36.7
million and $36.4 million at December 31, 1995 and 1994, and $41.8 million
at February 29, 1996.
Included in AAG's retained earnings (deficit) at December 31, 1995, was
approximately $5.8 million applicable to equity in undistributed net losses
of Chiquita.
In the first quarter of 1994, AAG recorded a pretax extraordinary charge of
$1.1 million ($0.7 million net of tax), representing its proportionate share
of Chiquita's loss on the retirement of debt.
F-12
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
F. UNAMORTIZED INSURANCE ACQUISITION COSTS
Unamortized insurance acquisition costs consisted of the following at
December 31, (in millions):
1995 1994
DPAC - annuities $224.6 $220.8
DPAC - life policies 3.6 3.1
Present value of future profits acquired 73.4 -
Unearned revenues (151.8) (158.8)
$149.8 $ 65.1
At December 31, 1995, the expected rate of amortization of the present value
of future profits acquired for the next five years was as follows: 10% in
1996; 9% in 1997; 9% in 1998; 8% in 1999; and 7% in 2000.
G. NOTES PAYABLE
Notes payable consisted of the following at December 31, (in millions):
1995 1994
Direct obligations of AAG:
11-1/8% Senior Subordinated Notes
due February 2003 $101.4 $103.9
9-1/2% Senior Notes due August 2001 41.5 44.0
Bank Credit Line due September 1999 20.5 30.0
Subsidiary debt 4.3 5.4
Total $167.7 $183.3
AAG has a $75 million revolving credit agreement with four banks. Loans
under the credit agreement bear interest at floating rates based on prime or
Eurodollar rates and are collateralized by 25% of the Common Stock of GALIC.
At December 31, 1995, the average rate on these borrowings was 6.83%.
In the first two months of 1996, the Company repurchased $22.1 million
principal amount of its 11-1/8% Senior Subordinated Notes realizing a pretax
extraordinary loss of approximately $2.5 million.
During 1995, AAG repurchased $2.4 million principal amount of its 11-1/8%
Notes and $2.5 million principal amount of its 9-1/2% Notes. As a result of
the repurchases, AAG realized a pretax extraordinary loss of $231,000.
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 ($1.0 million net of tax).
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 debt issue costs which were written off upon retirement of the
bank debt.
F-13
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
AAG has no scheduled principal payments on its 9-1/2% Notes and 11-1/8%
Notes until 2001. Interest payments were $17.2 million in 1995, $23.2
million in 1994 and $11.7 million in 1993.
H. STOCKHOLDERS' EQUITY
The Company is authorized to issue 25,000,000 shares of Preferred Stock, par
value $1.00 per share.
On December 28, 1995, AAG sold 170,000 shares of newly issued Series B
Preferred Stock to Great American Insurance Company ("GAI") for $17 million.
(See Note N to Consolidated Financial Statements.) The Series B Preferred
Stock has a redemption value of $100 per share and is redeemable at AAG's
option. Dividends are cumulative and payable at the rate of $8.50 per share
per annum.
In August 1995, AAG sold 3.92 million shares of common stock at $9.50 per
share under a rights offering to existing shareholders.
On March 31, 1994, AAG issued approximately 3.2 million shares of Common
Stock to GAI in exchange for all of AAG's outstanding $7.00 Series A
Preferred shares.
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.
I. DISCONTINUED OPERATIONS
All of the Company's former manufacturing businesses are reported as
discontinued operations. During 1995, the Company's last manufacturing
unit, Electromag NV, was sold and no gain or loss was recognized on the
sale.
In 1995, AAG recorded a $5.0 million pretax charge for discontinued
operations. This charge represents primarily additional reserves related to
possible deficiencies by AAG's predecessor in reporting quality assurance
information in connection with certain military related sales prior to 1991.
In 1994, AAG recorded a $4.0 million pretax charge for discontinued
operations, primarily related to environmental liabilities. In 1993, the
pretax loss from discontinued operations was $14.8 million which 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.
The Company has a defined benefit pension plan covering former U.S.
employees of its discontinued manufacturing operations. Pension benefits
are based upon past service with the Company and compensation levels.
Contributions are made by the Company in amounts necessary to satisfy
requirements of ERISA. At December 31, 1995, the actuarial value of the
benefit obligations, discounted at 6.75%, exceeded the plan assets by $11.8
million, which has been included in other liabilities in the balance sheet.
F-14
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
J. INCOME TAXES
Provision for income taxes consisted of (in millions):
1995 1994 1993
Federal:
Current $31.9 $21.2 $27.4
Deferred (1.7) (1.4) (7.4)
Total $30.2 $19.8 $20.0
The significant components of deferred tax assets and liabilities, excluding
the effects of unrealized gains and losses on marketable securities,
included in the Consolidated Balance Sheet were as follows (in millions):
December 31,
1995 1994
Deferred tax assets:
Net operating loss carryforwards $46.7 $47.6
Accrued expenses 13.9 13.3
Investment securities, including
affiliate 36.7 31.1
Valuation allowance for deferred
tax assets (48.4) (50.6)
Deferred tax liabilities:
Unamortized insurance
acquisition costs (52.4) (20.8)
Policyholder liabilities (17.1) (12.8)
At December 31, 1995, AAG had net operating loss carryforwards for federal
income tax purposes of approximately $131 million which are scheduled to
expire as follows: $1 million in 1996; $130 million in 2001 through 2005.
K. LEASES
Leases relate principally to certain administrative facilities and
discontinued operations. Future minimum lease payments, net of sublease
revenues, under operating leases having initial or remaining non-cancelable
lease terms in excess of one year at December 31, 1995 are payable as
follows: 1996 - $2.0 million; 1997 - $1.8 million; 1998 - $1.2 million;
1999 - $780,000; 2000 - $510,000; 2001 and beyond - $1.2 million.
Rental expense for operating leases was $1.6 million in 1995, $1.7 million
in 1994 and $900,000 in 1993.
L. CONTINGENCIES
The Company is continuing its clean-up activities at certain of its former
manufacturing operations and third-party sites, in some cases in accordance
with consent agreements with federal and state environmental agencies.
Changes in regulatory standards and further investigations could affect
estimated costs in the future. Management believes 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. Based on prior
costs and discussions with independent environmental consultants, the
Company believes the remaining
F-15
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
aggregate cost of environmental work at all sites for which it has
responsibility will range from $8.8 million to $13.6 million. The reserve
for environmental work was $10.3 million at December 31, 1995.
In 1991, the Company identified possible deficiencies in procedures for
reporting quality assurance information to the Defense Electronics Supply
Center 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. In March
1995, the Company received notification of additional alleged reporting
deficiencies and based on management's evaluations additional reserves were
established. The Company believes it has sufficient reserves to cover the
estimated settlement amount.
M. STATUTORY INFORMATION; RESTRICTIONS ON TRANSFERS OF FUNDS AND ASSETS OF
SUBSIDIARIES
Insurance companies are 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 for GALIC, Prairie and Loyal were as follows (in millions):
1995 1994 1993
GALIC
Policyholders' surplus $272.8 $255.9
Asset valuation reserve 90.2 79.5
Interest maintenance reserve 32.2 27.7
Pretax earnings from operations $ 85.8 $ 83.4 $73.1
Net earnings from operations 60.5 53.4 51.1
Net earnings 71.4 54.2 44.0
Prairie
Policyholders' surplus $ 24.4 $ 24.1
Asset valuation reserve 3.0 2.5
Interest maintenance reserve 2.6 1.8
Pretax earnings from operations $ 5.6 $ 6.0 $10.3
Net earnings from operations 4.6 5.6 10.4
Net earnings 4.3 7.1 7.9
Loyal
Policyholders' surplus $ 35.2 $ 33.6
Asset valuation reserve 2.9 2.4
Interest maintenance reserve 0.8 0.9
Pretax earnings from operations $ 4.3 $ 3.5 $ 1.3
Net earnings from operations 2.3 3.4 1.8
Net earnings 2.4 5.5 1.8
F-16
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The amount of dividends which can be paid by GALIC without prior approval of
regulatory authorities is subject to restrictions relating to capital and
surplus, statutory net gain from operations and statutory net income. GALIC
has been approved by the Ohio Department of Insurance to account for its
investments in Prairie and Loyal on the equity method. Accordingly, under
Ohio insurance regulations, GALIC's dividends are not dependent upon
dividends from Prairie and Loyal. Based on net gain from operations at
December 31, 1995, GALIC may pay approximately $58.6 million in dividends in
1996 without prior approval, according to the most restrictive dividend
requirements of GALIC's domiciliary states.
N. ADDITIONAL INFORMATION
Related Party Transactions In the fourth quarter of 1994, AAG purchased
Annuity Investors Life Insurance Company ("AILIC", formerly Carillon Life
Insurance Company) from GAI for $9.0 million in cash. At December 31, 1994,
AILIC had statutory assets of $9.0 million and statutory surplus of $6.3
million. AAG acquired AILIC primarily for its variable annuity licenses.
In connection with AAG's purchase of GALIC from GAI in 1992, GAI agreed to
neutralize the financial effects on GALIC of the adoption of an actuarial
guideline with respect to non-traditional life insurance and annuity
products. In satisfaction of this obligation, (i) GAI has agreed to
purchase, at AAG's option, up to $57 million of AAG Preferred Stock and (ii)
terms of GALIC's investment management services contract with AFG were
modified to reduce the fees owed under certain circumstances. On December
28, 1995, AAG sold $17 million of newly issued Series B Preferred Stock to
GAI; the proceeds were contributed to GALIC.
Net investment income includes approximately $1 million in 1995, 1994 and
1993 of payments from a subsidiary of AFG for the rental of an office
building owned by GALIC.
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.
1995 1994
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Assets
Fixed maturity investments $5,423.8 $5,526.6 $4,532.3 $4,321.0
Equity securities 32.6 32.6 21.7 21.7
Investment in affiliate 20.3 36.7 20.8 36.4
Liabilities
Annuity benefits accumulated (a)$4,979.3 $4,887.0 $4,556.1 $4,510.0
Notes payable (b) 164.1 177.7 179.2 182.6
(a) Carrying values are shown net of deferred policy acquisition
costs of $72.7 million at December 31, 1995 and $62.0
million at December 31, 1994.
(b) Carrying values are shown net of debt issue costs of $3.6 at
December 31, 1995 and $4.1 million at December 31, 1994.
F-17
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
When available, fair values are based on prices quoted in the most active
market for each security. If quoted prices are not available, fair value is
estimated based on present values, discounted cash flows, fair value of
comparable securities, or similar methods. The fair value of short-term
investments, mortgage loans on real estate and policy loans approximate
their carrying value. 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.
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):
Unadjusted
Asset Effect of Reported
(Liability) SFAS 115 Amount
1995
Fixed maturities - available for sale $2,787.6 $139.0 $2,926.6
Equity securities 14.1 18.5 32.6
Unamortized insurance acquisition
costs, net 155.0 (5.2) 149.8
Annuity benefits accumulated (5,037.0) (15.0) (5,052.0)
Deferred income taxes on net
unrealized gains - (48.0) (48.0)
Unrealized gains on marketable
securities, net $ 89.3
1994
Fixed maturities - available for sale $1,326.4 ($67.8) $1,258.6
Equity securities 10.7 11.0 21.7
Unamortized insurance acquisition
costs, net 61.9 3.2 65.1
Annuity benefits accumulated (4,627.2) 9.1 (4,618.1)
Deferred income taxes on net
unrealized losses - 15.5 15.5
Unrealized losses on marketable
securities, net ($29.0)
Other Several proposals have been made in recent years to change the
federal income tax system. Some proposals included changes in the method of
treating investment income and tax-deferred income. To the extent a new law
reduces or eliminates the tax-deferred status of annuities, the Company's
operations could be materially affected.
F-18
O. QUARTERLY FINANCIAL DATA (Unaudited)
The following table represents quarterly results of operations for the years
ended December 31, 1995 and 1994 (in millions, except per share data).
First Second Third Fourth Total
1995 Quarter Quarter Quarter Quarter Year
Realized gains $ 0.1 $ - $ 6.9 $ 8.7 $ 15.7
Total revenues(a) 98.6 101.2 109.4 130.4 439.6
Income from continuing operations 11.4 12.2 16.6 18.5 58.7
Discontinued operations - - - (3.2) (3.2)
Extraordinary item - - - (0.2) (0.2)
Net income 11.4 12.2 16.6 15.1 55.3
Earnings (loss) per common share(b)
Continuing operations $0.29 $0.31 $0.41 $0.43 $1.45
Discontinued operations - - - (.08) (.08)
Extraordinary item - - - - -
Net income per common share $0.29 $0.31 $0.41 $0.35 $1.37
Average common shares outstanding 39.1 39.1 40.8 43.1 40.5
1994
Realized gains (losses) $ 0.6 $ - $ 0.1 ($ 0.8) ($ 0.1)
Total revenues(a) 93.4 94.3 92.3 92.7 372.7
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
(a) As a result of the acquisition of LCC, AAG reclassified certain
life insurance revenues and expenses on its consolidated income
statement. As a result, reported revenues (and expenses)
increased by $400,000, $700,000 and $200,000 in the first,
second and third quarters of 1995, respectively; revenues (and
expenses) for the first through fourth quarters of 1994
increased by $500,000, $200,000, $600,000 and $200,000,
respectively.
(b) Quarterly earnings per share do not add to year-to-date amounts
due to issuance of shares in conjunction with the rights
offering.
F-19
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 O to the
Consolidated Financial Statements.
Schedules filed herewith:
For 1995, 1994 and 1993 Page
II - Condensed Financial Information of Registrant S-2
All other schedules for which provisions are made in the
applicable regulation of the Securities and Exchange
Commission have been omitted as they are not applicable, not
required, or the information required thereby is set forth in
the Financial Statements or the notes thereto.
3. Exhibits - See Exhibit Index on Page E-1.
(b) Reports on Form 8-K:
Date of Report Item Reported
November 28, 1995 Acquisition of Laurentian Capital Corporation
S-1
AMERICAN ANNUITY GROUP, INC. - PARENT ONLY
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
Condensed Balance Sheet
December 31,
Assets: 1995 1994
Cash and short-term investments $ 1.4 $ 1.9
Investment in subsidiaries(a) 687.0 457.4
Other assets 20.0 19.4
$708.4 $478.7
Liabilities and Capital:
Accounts payable, accrued expenses and
other liabilities $ 49.4 $ 41.6
Payables to affiliates 52.3 40.8
Notes payable(b) 177.4 191.9
Stockholders' equity(a) 429.3 204.4
$708.4 $478.7
Condensed Income Statement
Year ended December 31,
1995 1994 1993
Revenues:
Equity in undistributed earnings of
subsidiaries $ 64.7 $ 47.3 $ 97.2
Dividends from GALIC 54.2 44.0 18.2
Other revenues 1.7 0.4 0.5
120.6 91.7 115.9
Costs and Expenses:
Interest on borrowings and other debt expenses 19.0 21.9 22.5
Provision for GALIC relocation expenses - - 8.0
Other expenses 10.9 6.6 5.4
29.9 28.5 35.9
Income from continuing operations before
income taxes 90.7 63.2 80.0
Provision for income taxes 32.0 22.3 27.0
Income from continuing operations 58.7 40.9 53.0
Discontinued operations, net of tax (3.2) (2.6) (9.6)
Income before extraordinary items and
cumulative effect of accounting change 55.5 38.3 43.4
Extraordinary items, net of tax (0.2) (1.7) (3.4)
Cumulative effect of accounting change,
net of tax - (0.5) -
Net Income $ 55.3 $ 36.1 $ 40.0
(a) Includes unrealized gains (losses) of $89.3 million and ($29.0) million
in 1995 and 1994, respectively, and includes advances to subsidiaries.
x
(b) Includes $14.0 million principal amount of notes payable owned by GALIC.
S-2
AMERICAN ANNUITY GROUP, INC. - PARENT ONLY
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
Condensed Statement of Cash Flows
Year Ended December 31,
1995 1994 1993
Operating Activities:
Net income $55.3 $36.1 $40.0
Adjustments:
Discontinued operations 3.2 2.6 9.6
Extraordinary items 0.2 1.7 3.4
Accounting change - 0.5 -
Equity in net earnings of subsidiaries (77.0) (59.7) (77.6)
Depreciation and amortization 0.9 0.8 1.2
Decrease in other assets 0.1 2.7 0.4
Increase in balances with affiliates 13.5 13.1 40.0
Decrease (increase) in other liabilities 2.5 (12.8) (10.7)
Capital distributions from GALIC 54.2 44.0 18.2
Contributions to subsidiaries (33.0) - -
Other, net - - (0.1)
19.9 29.0 24.4
Investing Activities:
Purchase of Laurentian Capital Corporation,
net of cash acquired (63.6) - -
Additional investments in subsidiaries - (9.3) (13.0)
Sale of AILIC to GALIC 6.5 - -
(57.1) (9.3) (13.0)
Financing Activities:
Additions to notes payable 33.5 30.0 225.0
Reductions of notes payable (48.1) (55.1) (230.0)
Issuance of Common Stock 37.3 - -
Issuance of Preferred Stock 17.0 - -
Cash dividends paid (3.0) (3.1) (4.1)
36.7 (28.2) (9.1)
Net Increase (Decrease) in Cash and
Short-term Investments (0.5) (8.5) 2.3
Cash and short-term investments at beginning
of period 1.9 10.4 8.1
Cash and short-term investments at end
of period $ 1.4 $ 1.9 $10.4
S-3
AMERICAN ANNUITY GROUP, INC.
INDEX TO EXHIBITS
Number Exhibit Description
2.0 Agreement and Plan of Merger dated as of May 25, 1995 incorporated by
reference to the Schedule 13D filed by American Premier Group, Inc.
on June 2, 1995 with respect to the equity securities of Laurentian
Capital Corporation.
3.1 Certificate of Incorporation of Registrant
3.2 By-laws of Registrant
4.1 Indenture dated as of February 2, 1993, between the Registrant and
Star Bank, National Association, as Trustee, relating to the
Registrant's 11-1/8% Senior Subordinated Notes due 2003, incorporated
herein by reference to Exhibit 4.2 to the Registrant's Current Report
on Form 8-K, dated February 5, 1993.
4.2 Indenture dated as of August 18, 1993, between the Registrant and
NationsBank, National Association, as Trustee, relating to the
Registrant's 9-1/2% Senior Notes due 2001, incorporated herein by
reference to Exhibit 4.1 to the Registrant's Registration Statement
on Form S-2 dated August 11, 1993.
10.1 Agreement of Allocation of Payment of Federal Income Taxes ("American
Annuity Tax Allocation Agreement"), dated December 31, 1992, between
American Financial Corporation and the Registrant incorporated herein
by reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-2 dated January 7, 1993.
10.2 Assignment of Tax Allocation Payments dated December 31, 1992,
between American Financial Corporation and the Registrant
incorporated herein by reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form S-2 dated January 7, 1993.
10.3 Agreement for the Allocation of Federal Income Taxes dated May 13,
1974, between American Financial Corporation and Great American Life
Insurance Company, as supplemented on January 1, 1987 incorporated
herein by reference to Exhibit 10.16 to the Registrant's Registration
Statement on Form S-2 dated January 7, 1993.
10.4 Investment Services Agreement, dated December 31, 1992, between Great
American Life Insurance Company and American Money Management
Corporation incorporated herein by reference to Exhibit 10.17 to the
Registrant's Registration Statement on Form S-2 dated January 7,
1993.
10.5 Common Stock Registration Agreement, dated December 31, 1992, between
the Registrant and American Financial Corporation and its wholly
owned subsidiary Great American Insurance Company incorporated herein
by reference to Exhibit 10.22 to the Registrant's Registration
Statement on Form S-2 dated January 7, 1993.
10.6 Common Stock Registration Agreement, dated December 31, 1992 between
Chiquita Brands International, Inc. and Great American Life Insurance
Company incorporated herein by reference to Exhibit 10.24 to the
Registrant's Registration Statement on Form S-2 dated January 7,
1993.
10.7 American Annuity Group's 1993 Stock Appreciation Rights Plan,
incorporated herein by reference to Exhibit 10.8 to the Registrant's
Form 10-K for 1993.
E-1
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Auditors.
27.0 Financial Data Schedule for 1995 - included in Report filed
electronically with the Securities and Exchange Commission.
27.1 Financial Data Schedule for 1994 - reclassified to conform to the
current year's presentation - included in Report filed electronically
with the Securities and Exchange Commission.
99.1 Credit Agreement dated as of January 31, 1994 amended and restated as
of November 10, 1995.
E-2
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 18, 1996 BY:s/CARL H. LINDNER
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
s/CARL H. LINDNER Chairman of the Board March 18, 1996
Carl H. Lindner of Directors
s/S. CRAIG LINDNER Director March 18, 1996
S. Craig Lindner
s/ROBERT A. ADAMS Director March 18, 1996
Robert A. Adams
s/WILLIAM R. MARTIN Director March 18, 1996
William R. Martin*
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, 1995 No. 1-11453
AMERICAN FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-1422526
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
Common Stock 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,
and (2) has been subject to such filing requirements for the past
90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and need not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 29, 1996, there were 60,362,061 shares of the
Registrant's Common Stock outstanding, excluding 18,666,614
shares owned by subsidiaries. The aggregate market value of the
Common Stock held by non-affiliates at that date, was
approximately $1.1 billion (based upon non-affiliate holdings of
34,486,536 shares and a market price of $31.875 per share.)
_____________
Documents Incorporated by Reference:
Proxy Statement for the 1996 Annual Meeting of Shareholders
(portions of which are incorporated by reference into Part III
hereof).
<PAGE>
AMERICAN FINANCIAL GROUP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I Page
Item 1 - Business:
Introduction 1
Property and Casualty Operations 2
Annuity Operations 14
Other Companies 17
Investment Portfolio 17
Regulation 20
Item 2 - Properties 22
Item 3 - Legal Proceedings 22
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 24
Item 6 - Selected Financial Data 25
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Item 8 - Financial Statements and Supplementary Data 34
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 34
Part III
Item 10 - Directors and Executive Officers of the Registrant 35
Item 11 - Executive Compensation 35
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 35
Item 13 - Certain Relationships and Related Transactions 35
Part IV
Item 14 - Exhibits, Financial Statement Schedules and
Reports on Form 8-K S-1
* The response to this Item is "none".
<PAGE>
PART I
ITEM 1
Business
Introduction
American Financial Group, Inc. ("AFG") was incorporated as an
Ohio corporation in 1994. Its address is One East Fourth Street,
Cincinnati, Ohio 45202; its phone number is (513) 579-2121. AFG
is a holding company which, through its subsidiaries, is engaged
primarily in specialty and multi-line property and casualty
insurance businesses and in the sale of tax-deferred annuities.
AFG's property and casualty operations originated in 1872 and are
the fifteenth largest property and casualty group in the United
States based on 1994 statutory net premiums written of $3.1
billion. AFG was formed for the purpose of acquiring American
Financial Corporation ("AFC") and American Premier Underwriters,
Inc. ("APU" or "American Premier") in merger transactions
completed on April 3, 1995 (the "Mergers").
At December 31, 1995, Carl H. Lindner, members of his
immediate family and trusts for their benefit (collectively the
"Lindner Family") beneficially owned approximately 44% of AFG's
outstanding voting common stock.
The Mergers
At the date of the Mergers, AFC held 18.7 million shares of
APU (44% of the then-outstanding shares). In the Mergers, AFG
issued 71.4 million shares of its Common Stock in exchange for
all of the outstanding common stock of AFC and APU. The 18.7
million shares of Common Stock held by AFC and its subsidiaries
are accounted for by AFG as retired.
For financial reporting purposes, because the former
shareholders of AFC owned more than 50% of AFG following the
Mergers, the financial statements of AFG for periods prior to the
Mergers are those of AFC. The operations of APU are included in
AFG's financial statements from the effective date of the
Mergers.
<PAGE>
General
Generally, companies have been included in AFG's
consolidated financial statements when the ownership of voting
securities has exceeded 50%; for investments below that level but
above 20%, companies have been accounted for as investees. (See
Note F to AFG's financial statements.) The following table shows
AFG's percentage ownership of voting securities of its
significant affiliates over the past several years:
Ownership at December 31,
1995 1994 1993 1992 1991
American Financial Corporation 79% n/a n/a n/a n/a
American Premier Underwriters 100% 42% 41% 51% 50%
Great American Insurance Group 100% 100% 100% 100% 100%
American Annuity Group 81% 80% 80% 82% 39%
Great American Life Insurance Company (a) (a) (a) (a) 100%
American Financial Enterprises 83% 83% 83% 83% 82%
Chiquita Brands International 44% 46% 46% 46% 48%
Citicasters 38% 37% 20% 40% 40%
General Cable - (b) 45% 45% -
(a) Sold to American Annuity Group in December 1992.
(b) Sold in June 1994. 100%-owned by American Premier prior to
spin-off in July 1992. Ownership percentage excludes shares
held by American Premier for future distribution aggregating 12%.
1
<PAGE>
The following summarizes the more significant changes in
ownership percentages shown in the above table.
American Financial Corporation For financial reporting
purposes, AFC is the predecessor to AFG. In April 1995, AFC
became a subsidiary of AFG as a result of the Mergers. Holders
of AFC Series F and G Preferred Stock were granted voting rights
equal to approximately 21% of the total voting power of AFC
shareholders immediately prior to the Mergers.
American Premier Underwriters In 1993, American Financial
Enterprises, Inc. ("AFEI") sold 4.5 million shares of American
Premier common stock in a secondary public offering. In April
1995, APU became a subsidiary of AFG as a result of the Mergers.
American Annuity Group On December 31, 1992, American
Annuity purchased Great American Life Insurance Company ("GALIC")
from Great American Insurance Company ("GAI"). In connection
with the acquisition, GAI purchased 5.1 million shares of
American Annuity's common stock pursuant to a cash tender offer
and 17.1 million additional shares directly from American
Annuity.
Citicasters In December 1993, Great American Communications
Company ("GACC") completed a prepackaged plan of reorganization.
In the restructuring, AFC's previous holdings of GACC stock and
debt were exchanged for 20% of the new common stock. GACC
changed its name to Citicasters to reflect the nature of its
business. In June 1994, AFEI purchased approximately 10% of
Citicasters common stock. In the second half of 1994,
Citicasters repurchased and retired approximately 21% of its
common stock.
In February 1996, Citicasters entered into a merger agreement
with Jacor Communications, Inc. Under the agreement, each
Citicasters shareholder, including AFG and its subsidiaries, will
receive cash and warrants to purchase Jacor common stock.
Consummation of the transaction is subject to regulatory
approvals, and certain adjustments to the price will be made if
the transaction does not close by September 30, 1996.
General Cable In 1992, American Premier distributed to its
shareholders approximately 88% of the stock of General Cable,
which was formed to own certain of American Premier's
manufacturing businesses. AFC and its subsidiaries received
approximately 45% of General Cable in the spin-off. In 1994, an
unaffiliated company acquired all of the common stock of General
Cable including AFC's and the 12% which had been retained by
American Premier.
<PAGE>
Property and Casualty Insurance Operations
AFG manages and operates its property and casualty business
in three major business segments: Nonstandard Automobile
Insurance, Specialty Lines and Commercial and Personal Lines.
Each segment is comprised of multiple business units which
operate autonomously but with strong central financial controls
and full accountability. Decentralized control allows each unit
the autonomy necessary to respond to local and specialty market
conditions while capitalizing on the efficiencies of centralized
investment, actuarial, financial and legal support functions.
AFG's property and casualty insurance operations employ
approximately 7,600 persons.
Unless indicated otherwise, the financial information
presented for the property and casualty insurance operations is
presented based on generally accepted accounting principles
("GAAP") and includes the insurance operations of American
Premier for all periods.
2
<PAGE>
The following table presents AFG's major property & casualty
insurance subsidiaries showing their size (in millions), segment
and A.M. Best rating.
1995 Net Written Premiums
Commercial NSA A.M. Best
and Personal Specialty Group Rating
Great American $717 $ 672 $ - A
Republic Indemnity - 288 - A
Mid-Continent - 84 - A
American Empire Surplus Lines - 34 - A+
Atlanta Casualty - - 514 A
Windsor - - 352 A
Infinity - - 232 A
Leader National - - 84 A-
Transport - - 74 A
Other - 19 21
$717 $1,097 $1,277
The primary objective of the property and casualty insurance
operations is to achieve underwriting profitability.
Underwriting profitability is measured by the combined ratio
which is a sum of the ratios of underwriting expenses, losses,
and loss adjustment expenses to premiums. When the combined
ratio is under 100%, underwriting results are generally
considered profitable; when the ratio is over 100%, underwriting
results are generally considered unprofitable. The combined
ratio does not reflect investment income, other income or federal
income taxes.
Management's focus on underwriting performance has resulted
in a statutory combined ratio averaging 100.9% for the period
1991 to 1995, as compared to 109.3% for the property and casualty
industry over the same period (Source: "Best's Review -
Property/Casualty" - January 1996 Edition). 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.
For 1995, net written premiums were nearly $3.1 billion,
approximately the same level as in 1994. Premium growth in most
of the insurance lines has been offset by a decline in California
workers' compensation writings. Aside from the California
workers' compensation business, net written premiums grew 6% in
1995.
<PAGE>
The following table shows (in millions) the performance of
AFG's property and casualty insurance operations in various
categories. While financial data is reported on a statutory
basis for insurance regulatory purposes, it is reported in
accordance with GAAP for shareholder and other investment
purposes. In general, statutory accounting results in lower
capital surplus and net earnings than result from application of
GAAP. Major differences include charging policy acquisition
costs to expense as incurred rather than spreading the costs over
the periods covered by the policies; netting of reinsurance
recoverables and prepaid reinsurance premiums against the
corresponding liability; requiring additional loss reserves; and
charging to surplus certain assets, such as furniture and
fixtures and agents' balances over 90 days old.
1995 1994 1993
Statutory Basis
Premiums Earned $3,006 $2,915 $2,516
Admitted Assets 6,753 6,398 5,808
Unearned Premiums 1,160 1,093 912
Loss and Loss Adjustment
Expense ("LAE") Reserves 3,394 3,275 3,061
Capital and Surplus 1,595 1,586 1,454
3
<PAGE>
1995 1994 1993
GAAP Basis
Premiums Earned $3,031 $2,945 $2,517
Total Assets 9,002 8,617 7,869
Unearned Premiums 1,294 1,213 1,012
Loss and LAE Reserves 4,097 4,021 3,679
Shareholder's Equity 2,893 2,615 2,431
The following table presents certain information with
respect to AFG's property and casualty insurance operations
(dollars in millions):
1995 1994 1993
Net written premiums $3,092 $3,124 $2,667
Net earned premiums $3,031 $2,945 $2,517
Loss and LAE 2,265 2,077 1,734
Underwriting expenses 792 770 683
Policyholder dividends 8 84 95
Underwriting profit (loss) ($ 34) $ 14 $ 5
GAAP ratios:
Loss and LAE ratio 74.8% 70.5% 68.9%
Underwriting expense ratio 26.1 26.1 27.1
Policyholder dividend ratio .3 2.8 3.8
Combined ratio 101.2% 99.4% 99.8%
Statutory ratios:
Loss and LAE ratio 74.8% 71.0% 69.3%
Underwriting expense ratio 25.9 26.3 26.9
Policyholder dividend ratio 1.7 3.6 2.5
Combined ratio 102.4% 100.9% 98.7%
Industry statutory combined
ratio(a) 107.2% 108.5% 106.9%
(a) Ratios are derived from "Best's Review - Property/Casualty"
(January 1996 Edition).
Nonstandard Automobile Insurance
General. The Nonstandard Automobile Insurance segment
("NSA Group") underwrites private passenger automobile physical
damage and liability insurance policies for "nonstandard risks."
Nonstandard insureds are those individuals who are unable to
obtain insurance through standard market carriers due to factors
such as age, record of prior accidents, driving violations,
particular occupation or type of vehicle. Premium rates for
nonstandard risks are generally higher than for standard risks.
<PAGE>
Total private passenger automobile insurance premiums written by
insurance carriers in the United States in 1995 have been
estimated by A.M. Best to be approximately $103 billion. Because
it can be viewed as a residual market, the size of the
nonstandard private passenger automobile insurance market changes
with the insurance environment and grows when standard coverage
becomes more restrictive. When this occurs, the criteria which
differentiate standard from nonstandard insurance risks change.
The size of the voluntary nonstandard market is also affected by
rate levels adopted by state administered involuntary plans.
Although these factors make it difficult to estimate the size of
the nonstandard market, management believes that the voluntary
nonstandard market has accounted for approximately 15% of total
private passenger automobile insurance premiums written in recent
years.
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
nonstandard market, premium rate increases and its purchase of
Leader National. Management believes the nonstandard market has
experienced growth in recent years as standard insurers have
become more restrictive in the types of risks they write.
4
<PAGE>
The NSA Group writes business in 42 states and holds
licenses to write policies in 48 states and the District of
Columbia. The U.S. geographic distribution of the NSA Group's
statutory direct written premiums in 1995 compared to 1991, was
as follows:
State 1995 1991 State 1995 1991
Texas 12.2% * Alabama 2.9% 4.5%
Florida 11.2 19.3% Washington 2.7 *
Georgia 9.2 17.5 Missouri 2.6 2.1
Pennsylvania 8.0 * Kentucky 2.2 *
California 7.5 10.3 Virginia * 5.6
Connecticut 5.0 4.8 Ohio * 2.9
Arizona 4.1 2.3 Arkansas * 2.6
Tennessee 3.8 4.8 Oregon * 2.5
Oklahoma 3.5 * Other 18.7 13.4
Indiana 3.3 3.7 100.0% 100.0%
Mississippi 3.1 3.7
_____________
* less than 2%
In addition, AFG writes approximately $50 million (4%) of
its net premiums annually in the United Kingdom.
Management believes that the NSA Group's underwriting
success as compared to the automobile insurance industry as a
whole has been due, in part, to the refinement of various risk
profiles, thereby dividing the consumer market into more defined
segments which can be underwritten 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.
<PAGE>
The following table presents certain information with
respect to AFG's NSA Group insurance operations (dollars in
millions):
1995 1994 1993
Net written premiums $1,277 $1,186 $ 916
Net earned premiums $1,246 $1,097 $ 812
Loss and LAE 1,036 833 581
Underwriting expenses 273 265 208
Underwriting profit (loss) ($ 63) ($ 1) $ 23
GAAP ratios:
Loss and LAE ratio 83.2% 75.9% 71.6%
Underwriting expense ratio 22.0 24.1 25.6
Combined ratio 105.2% 100.0% 97.2%
Statutory ratios:
Loss and LAE ratio 83.1% 76.0% 72.5%
Underwriting expense ratio 21.6 23.9 24.5
Combined ratio 104.7% 99.9% 97.0%
Industry statutory combined
ratio(a) 102.3% 101.3% 101.7%
(a) This information refers to the private passenger
automobile industry statutory combined ratio derived from
"Best's Review - Property/Casualty" (January 1996 Edition).
Although AFG believes that there is no reliable regularly
published combined ratio data for the nonstandard automobile
insurance industry, AFG believes that such a combined ratio
would be lower than the private passenger automobile industry
average shown above.
5
<PAGE>
Marketing. Each of the 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 several thousand independent agents.
Of the approximately one million NSA Group policies in force
at December 31, 1995, approximately 90% had policy limits of $50,000
or less per occurrence. Most NSA Group policies are written for
policy periods of six months or less, with some as short as one
month.
Competition. A large number of national, regional and
local insurers write nonstandard 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. The NSA Group attempts to provide
selected pricing for a wider spectrum of risks and with a greater
variety of payment options, deductibles and limits of liability
than are offered by many of its competitors.
Specialty Lines
General. The Specialty Lines segment emphasizes the
writing of specialized insurance coverage where AFG personnel are
experts in particular lines of business or customer groups
including California workers' compensation, executive liability,
ocean and inland marine, agricultural-related coverages (allied
lines), non-profit liability, umbrella and excess and surplus
lines. The Specialty Lines workers' compensation operations
write coverage for statutory prescribed benefits payable to
employees (principally in California) who are injured on the job.
The executive and professional liability divisions market
liability coverage for lawyers and corporate directors and
officers. Ocean and inland marine businesses provide such
coverage as marine cargo, boat dealers, marina operators/dealers,
excursion vessels, builder's risk, contractor's equipment, excess
property and transportation cargo. The agricultural-related
businesses provide multi-peril crop insurance covering all
weather and disease perils as well as coverage for full-time
operating farms/ranches and agribusiness operations on a
nationwide basis through independent agents who specialize in the
rural market. The non-profit liability business provides
property, general/professional liability, automobile, trustee
liability, umbrella and crime coverage for a wide range of
non-profit organizations. These operations also provide excess
and surplus commercial property and casualty insurance in a
variety of industries.
<PAGE>
Specialization is the key element to the underwriting
success of these business units. Each unit has independent
management with significant operating autonomy to oversee the
important operational functions of its business such as
underwriting, pricing, marketing, policy processing and claims
service. These specialty lines are opportunistic and their
premium volume will vary based on current market conditions. AFG
continually evaluates new specialty markets.
The U.S. geographic distribution of the Specialty Lines
statutory direct written premiums in 1995 compared to 1991, was
as follows:
State 1995 1991 State 1995 1991
California 32.6% 45.2% Florida 3.1% *
Texas 8.4 4.1 New Jersey 2.8 2.4%
New York 5.4 5.4 Pennsylvania 2.3 2.8
Massachusetts 4.5 2.2 Ohio 2.1 2.3
Illinois 3.6 3.3 Michigan 2.1 2.2
Oklahoma 3.5 8.2 Other 29.6 21.9
100.0% 100.0%
_____________
* less than 2%
6
<PAGE>
The following table sets forth a distribution of statutory
net written premiums for AFG's Specialty Lines by NAIC annual
statement line for 1995 compared to 1991:
1995 1991
Workers' compensation 29.8% 47.7%
Other liability 20.4 15.5
Commercial multi-peril 8.5 3.1
Allied lines 8.4 4.4
Inland marine 7.9 6.0
Auto liability 7.6 9.4
Ocean marine 4.5 3.2
Surety 2.9 2.8
Fire 2.5 1.5
Auto physical damage 2.1 2.9
Other 5.4 3.5
100.0% 100.0%
The following table presents certain information with
respect to AFG's Specialty Lines insurance operations (dollars in
millions):
1995 1994 1993
Net written premiums $1,097 $1,250 $1,079
Net earned premiums $1,085 $1,185 $1,035
Loss and LAE 730 785 667
Underwriting expenses 302 291 235
Policyholder dividends (3) 76 93
Underwriting profit $ 56 $ 33 $ 40
GAAP ratios:
Loss and LAE ratio 67.2% 66.2% 64.4%
Underwriting expense ratio 27.9 24.6 22.7
Policyholder dividend ratio (.3) 6.4 9.0
Combined ratio 94.8% 97.2% 96.1%
Statutory ratios:
Loss and LAE ratio 67.5% 66.7% 64.8%
Underwriting expense ratio 28.1 25.2 23.3
Policyholder dividend ratio 4.2 8.5 6.0
Combined ratio 99.8% 100.4% 94.1%
Industry statutory combined
ratio(a) 107.2% 108.5% 106.9%
(a) Ratios are derived from "Best's Review - Property/Casualty"
(January 1996 Edition).
<PAGE>
Marketing. The Specialty Lines operations direct their
sales efforts primarily toward independent property and casualty
insurance agents and brokers. These businesses write insurance
through more than 5,000 agents and have more than 250,000
policies in force.
Competition. These businesses compete with other insurers
as well as the California State Fund in the California workers'
compensation insurance market. Because of the specialty nature
of these coverages, competition is based primarily on service to
policyholders and agents, specific characteristics of products
offered and reputation for claims handling. Price, commissions
and profit sharing terms are also important factors. Competitors
include individual insurers and insurance groups of varying
sizes, some of which are mutual insurance companies possessing
competitive advantages in that all their profits inure to their
policyholders. Management believes that sophisticated data
analysis for refinement of risk profiles, extensive specialized
knowledge and loss prevention service have helped these
businesses compete successfully.
7
<PAGE>
Commercial and Personal Lines
General. Major commercial lines of business are workers'
compensation, commercial multi-peril, umbrella (including primary
and excess layers) and general liability insurance. The workers'
compensation business has experienced solid growth and
profitability due to improved rate structures and favorable
trends in medical care costs and the success of its Drug-Free
Workplace program.
AFG's Drug-Free Workplace program for workers' compensation
customers assists insureds in setting up drug testing programs
(as permitted by law), drug and alcohol education programs and
work safety programs. At December 31, 1995, there were more than
650 insureds in 16 states with such programs producing
approximately $55 million in annual net written premiums.
Commercial business is written in 25 states where management
believes adequate rates can be obtained and where assigned risk
costs are not excessive. AFG's approach focuses on specific
customer groups, such as fine restaurants, light manufacturers,
high rise living units, hotels/motels and insureds with large
umbrella coverages. The approach also emphasizes site visits at
prospective customers to ensure underwriter familiarity with risk
factors relating to each insured and to avoid those risks which
have unacceptable frequency or severity exposures.
Personal lines of business consist primarily of standard
private passenger auto and homeowners' insurance and are written
in 38 states. AFG's approach is to develop tailored rates for
its personal automobile customers based on a wide variety of
factors, including make and model of the insured automobile and
the driving record of the insureds. The approach to homeowners
business is to limit writings in locations with catastrophic
exposures such as windstorms, earthquakes and hurricanes.
The U.S. geographic distribution of the Commercial and Personal
Lines statutory direct written premiums in 1995 compared to 1991,
was as follows:
State 1995 1991 State 1995 1991
Connecticut 14.1% 12.0% Florida 3.2% 2.8%
New York 11.9 7.7 California 2.3 9.1
North Carolina 10.6 11.7 Massachusetts 2.2 2.6
New Jersey 9.7 7.6 Illinois 2.2 3.2
Pennsylvania 6.5 2.5 Washington * 2.7
Texas 5.0 * Oregon * 2.5
Michigan 4.0 3.5 Virginia * 2.3
Maryland 3.8 3.5 Minnesota * 2.1
Ohio 3.8 4.5 Other 20.7 19.7
100.0% 100.0%
_____________
* less than 2%
<PAGE>
The following table sets forth a distribution of statutory
net written premiums for AFG's Commercial and Personal Lines by
NAIC annual statement line for 1995 compared to 1991:
1995 1991
Auto liability 28.8% 23.9%
Workers' compensation 18.0 13.3
Commercial multi-peril 17.2 24.7
Auto physical damage 12.3 12.0
Homeowners 11.1 12.1
Other liability 7.3 9.1
Inland marine 1.7 1.8
Other 3.6 3.1
100.0% 100.0%
8
<PAGE>
The following table presents certain information with
respect to AFG's Commercial and Personal Lines insurance
operations (dollars in millions):
1995 1994 1993
Net written premiums $ 717 $ 683 $666
Net earned premiums $ 698 $ 656 $664
Loss and LAE 468 430 430
Underwriting expenses 214 211 238
Policyholder dividends 11 8 2
Underwriting profit (loss) $ 5 $ 7 ($ 6)
GAAP ratios:
Loss and LAE ratio 66.9% 65.5% 64.8%
Underwriting expense ratio 30.6 32.2 35.9
Policyholder dividend ratio 1.6 1.2 .3
Combined ratio 99.1% 98.9% 101.0%
Statutory ratios:
Loss and LAE ratio 67.2% 67.0% 65.0%
Underwriting expense ratio 29.9 32.4 36.0
Policyholder dividend ratio .6 1.0 -
Combined ratio 97.7% 100.4% 101.0%
Industry statutory combined
ratio(a) 107.2% 108.5% 106.9%
(a) Ratios are derived from "Best's Review - Property/Casualty"
(January 1996 Edition).
Marketing. The Commercial and Personal Lines business
units direct their sales efforts primarily toward independent
agents and brokers. These businesses write insurance through
more than 4,000 agents and have more than 515,000 policies in
force.
Competition. These businesses compete with other insurers,
primarily on the basis of price (including differentiation on
policy limits, coverages offered and deductibles), agent
commissions and profit sharing terms. Customer service, loss
prevention and reputation for claims handling are also important
factors. Competitors include individual insurers and insurance
groups of varying sizes, some of which are mutual insurance companies
possessing competitive advantages in that all their profits inure
to their policyholders. Management believes that sophisticated
data analysis for refinement of risk profiles, disciplined
underwriting practices and aggressive loss prevention procedures
have enabled these businesses to compete successfully on the
basis of price without negatively affecting underwriting
profitability.
<PAGE>
Reinsurance
Consistent with standard practice of most insurance
companies, AFG reinsures a portion of its business with other
reinsurance companies and assumes a relatively small amount of
business from other insurers. Ceding reinsurance permits
diversification of risks and limits the maximum loss arising from
large or unusually hazardous risks or catastrophic events. AFG's
insurance companies enter into separate reinsurance programs due
to their differing exposures. The availability and cost of
reinsurance are subject to prevailing market conditions which may
affect the volume and profitability of business that is written.
AFG is subject to credit risk with respect to its reinsurers, as
the ceding of risk to reinsurers does not relieve AFG of its
liability to its insureds.
Due in part to the limited exposure on individual policies,
none of the insurance companies in the NSA Group is involved to a
material degree in reinsuring risks with third party insurance
companies.
9
<PAGE>
Republic Indemnity reinsures a portion of its exposure with
other insurance companies to limit its maximum loss arising out
of any one occurrence. 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 treaties provided by a group of more
than 50 reinsurance companies. 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.
Great American currently has treaty reinsurance programs
which generally provide reinsurance coverage above specified
retention maximums. For workers' compensation policies, the
retention maximum is $1 million per loss occurrence with
reinsurance coverage for the next $49 million. For all other
casualty policies, the retention maximum is $5 million per loss
occurrence with reinsurance coverage for the next $15 million.
For property coverages, a property per risk excess of loss treaty
is maintained with a retention maximum of $5 million per risk and
reinsurance coverage for the next $25 million. For catastrophe
coverage on property risks, the retention is $20 million with
reinsurance covering 95% of the next $130 million in losses with
an additional layer of reinsurance providing coverage for 76% of
the next $50 million for the peril of wind only. In addition,
GAI purchases facultative reinsurance providing coverage on a
risk by risk basis, both pro rata and excess of loss, depending
on the risk and available reinsurance markets.
Included in "recoverables from reinsurers and prepaid
reinsurance premiums" were $84 million on paid losses and LAE and
$704 million on unpaid losses and LAE at December 31, 1995. The
collectibility of a reinsurance balance is based upon the
financial condition of a reinsurer as well as individual claim
considerations. Market conditions over the past few years have
forced many reinsurers into financial difficulties or liquidation
proceedings. At December 31, 1995, AFG's insurance subsidiaries
had an allowance of approximately $81 million for doubtful
collection of reinsurance recoverables. AFG regularly monitors
the financial strength of its reinsurers. This process
periodically results in the transfer of risks to more financially
secure reinsurers. AFG's major reinsurers include American Re-
Insurance Company, Employers Reinsurance Corporation, NAC
Reinsurance Corporation, Mitsui Marine and Fire Insurance
Company, Ltd. and Taisho Marine & Fire Insurance Company.
Management believes that this present group of reinsurers is
financially sound.
<PAGE>
Premiums written for reinsurance ceded and assumed are
presented in the following table (in millions):
1995 1994 1993
Reinsurance ceded $482 $422 $342
Reinsurance assumed - including
involuntary pools and associations 98 119 135
Loss and Loss Adjustment Expense Reserves
The consolidated financial statements include the estimated
liability for unpaid losses and LAE of AFG's insurance
subsidiaries. This liability represents estimates of the
ultimate net cost of all unpaid losses and LAE and is determined
by using case-basis evaluations and actuarial projections. These
estimates are subject to the effects of changes in claim amounts
and frequency and are periodically reviewed and adjusted as
additional information becomes known. In accordance with
industry practices, such adjustments are reflected in current
year operations.
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.
10
<PAGE>
Generally, reserves for reinsurance and involuntary pools
and associations are reflected in AFG's results at the amounts
reported by those entities.
Unless otherwise indicated, the following discussion of
insurance reserves includes the reserves of American Premier's
subsidiaries for only those periods following the Mergers.
See Note P to the Financial Statements for an analysis of
changes in AFG's estimated liability for losses and LAE, net of
reinsurance (and grossed up), over the past three years on a GAAP
basis.
The following table presents the development of AFG's
liability for losses and LAE, net of reinsurance, on a GAAP basis
for the last ten years, excluding reserves of American Premier
subsidiaries prior to the Mergers. The top line of the table
shows the estimated liability (in millions) for unpaid losses and
LAE recorded at the balance sheet date for the indicated years.
The second line shows the re-estimated liability as of December
31, 1995. 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 deficiency (redundancy) which
represents the aggregate percentage increase (decrease) in the
liability initially estimated. The lower portion of the table
indicates the cumulative amounts paid as of successive periods as
a percentage of the original loss reserve liability.
<PAGE>
<TABLE>
<CAPTION>
1985 1986 1987 1988 1989 1990
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $1,605 $1,843 $2,024 $2,209 $2,246 $2,137
As re-estimated at
December 31, 1995 2,385 2,258 2,222 2,275 2,271 2,103
Liability re-estimated as of:
One year later 109.2% 102.7% 102.5% 99.8% 100.4% 98.6%
Two years later 116.7% 107.3% 103.6% 100.0% 99.3% 97.7%
Three years later 123.4% 109.7% 103.1% 99.7% 98.4% 97.4%
Four years later 129.9% 110.8% 102.5% 98.7% 98.2% 99.2%
Five years later 132.3% 111.8% 102.6% 99.1% 101.1% 98.4%
Six years later 134.8% 112.7% 103.5% 103.0% 101.1%
Seven years later 136.6% 115.3% 109.4% 103.0%
Eight years later 140.7% 122.1% 109.8%
Nine years later 148.2% 122.5%
Ten years later 148.6%
Cumulative deficiency
(redundancy) 48.6% 22.5% 9.8% 3.0% 1.1% (1.6%)
Cumulative paid as of:
One year later 45.5% 33.0% 29.2% 29.4% 32.3% 26.1%
Two years later 69.0% 52.5% 49.0% 48.6% 48.2% 43.2%
Three years later 84.6% 67.7% 63.5% 59.8% 59.2% 55.3%
Four years later 96.6% 79.3% 72.2% 67.9% 67.6% 64.8%
Five years later 106.4% 86.4% 78.5% 74.0% 74.3% 70.4%
Six years later 112.4% 91.9% 83.6% 79.5% 78.1%
Seven years later 117.3% 96.1% 87.7% 82.4%
Eight years later 121.3% 100.0% 90.3%
Nine years later 125.2% 102.7%
Ten years later 128.0%
1991 1992 1993 1994 1995
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $2,129 $2,123 $2,113 $2,187 $3,393
As re-estimated at
December 31, 1995 2,040 1,985 1,959 2,080 N/A
Liability re-estimated as of:
One year later 99.3% 99.9% 98.1% 95.1%
Two years later 98.7% 98.2% 92.7%
Three years later 97.4% 98.0% 93.5%
Four years later 99.2% 95.8%
Five years later 98.4%
Cumulative deficiency
(redundancy) (4.2%) (6.5%) (7.3%) (4.9%) N/A
Cumulative paid as of:
One year later 26.1% 26.4% 26.7% 25.2% 26.5%
Two years later 43.2% 43.0% 43.7% 40.1%
Three years later 55.3% 55.4% 53.6%
Four years later 64.8% 62.6%
Five years later 70.4%
</TABLE>
<PAGE>
The following table presents the development of the
liability (in millions) for losses and LAE, net of reinsurance,
including the reserves of American Premier's subsidiaries for
periods prior to the Mergers.
<TABLE>
<CAPTION>
1985 1986 1987 1988 1989 1990
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $1,605 $1,843 $2,024 $2,209 $2,616 $2,739
As re-estimated at
December 31, 1995 2,385 2,258 2,222 2,275 2,579 2,640
Cumulative deficiency
(redundancy) 48.6% 22.5% 9.8% 3.0% (1.4%) (3.6%)
1991 1992 1993 1994 1995
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $2,793 $2,886 $3,029 $3,267 $3,393
As re-estimated at
December 31, 1995 2,648 2,655 2,790 3,110 N/A
Cumulative deficiency
(redundancy) (5.2%) (8.0%) (7.9%) (4.8%) N/A
</TABLE>
These tables do not present accident or policy year
development data. Furthermore, in evaluating the re-estimated
liability and cumulative deficiency (redundancy), it should be
noted that each percentage includes the effects of changes in
amounts for prior periods. For example, a deficiency
11
<PAGE>
(redundancy) related to losses settled in 1995, but incurred in
1985, would be included in the re-estimated liability and
cumulative deficiency (redundancy) percentage for each of the
years 1985 through 1994. Conditions and trends that have
affected development of the liability in the past may not
necessarily exist in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies
based on this table.
The adverse development in earlier years in the tables above
was caused partially by the effect of higher than projected
inflation on medical, hospitalization, material, repair and
replacement costs. Additionally, changes in the legal
environment have influenced the development patterns over the
past ten years. Two significant changes in the early to
mid-1980s were the trend towards an adverse litigious climate and
the change from contributory to comparative negligence.
The adverse litigious climate is evidenced by an increase in
lawsuits and damage awards, changes in judicial interpretation of
legal liability and of the scope of policy coverage, and a
lengthening of time it takes to settle cases. In addition, a
trend has developed in the manner and timeliness of first claim
notices. Historically, the first notification of claim came
directly from the claimant; in recent years, however, there has
been a gradual increase in the number of notifications in the
form of direct legal action. Not only has this notification been
less timely, it has been more adversarial in nature.
The change in rules of negligence governing tort claims has
also influenced the loss development trend. During the early to
mid-1980s, most states changed from contributory to comparative
negligence rules. Under contributory negligence rules, a
plaintiff seeking damages is barred from recovering damages for a
loss if it can be demonstrated that the plaintiff's own
negligence contributed in any way to the cause of the injury.
Under comparative negligence rules, a plaintiff's negligence is
no longer a bar to recovery. Instead, the degree of plaintiff's
negligence is compared to the negligence of any other party.
Generally, if the plaintiff's negligence is 50% or less of the
cause of the injury, the plaintiff can recover damages, but in an
amount reduced by the portion of damage attributable to the
plaintiff's own negligence. Many claims which would have been
successfully defended under contributory negligence rules now
result in an award of damages or a settlement during suit under
the comparative negligence rules.
<PAGE>
The differences between the liability for losses and LAE
reported in the annual statements filed with the state insurance
departments in accordance with statutory accounting principles
("SAP") and that reported in the accompanying consolidated
financial statements in accordance with GAAP at December 31,
1995, are as follows (in millions):
Liability reported on a SAP basis $3,394
Additional discounting of GAAP reserves in excess
of the statutory limitation for SAP reserves (21)
Reserves of foreign operations 20
Reinsurance recoverables 704
Liability reported on a GAAP basis $4,097
Asbestos and Environmental Reserves. The insurance industry
typically includes only claims relating to polluted waste sites
and asbestos in defining environmental exposures. AFG extends
this definition to include claims relating to breast implants,
repetitive stress on keyboards, DES (a drug used in pregnancies
years ago alleged to cause cancer and birth defects) and other
latent injuries ("A&E").
Establishing reserves for A&E claims is subject to
uncertainties that are greater than those presented by other
types of claims. Factors contributing to those uncertainties
include a lack of sufficiently detailed historical data, long
reporting delays, uncertainty as to the number and identity of
insureds with potential exposure, unresolved legal issues
12
<PAGE>
regarding policy coverage, and the extent and timing of any such
contractual liability. Courts have reached different and
sometimes inconsistent conclusions as to when a loss is deemed to
have occurred, what policies provide coverage, what claims are
covered, whether there is an insured obligation to defend, how
policy limits are determined and other policy provisions.
Management believes these issues are not likely to be resolved in
the near future.
Prior to the fourth quarter of 1994, AFG maintained reserves
only on its reported A&E claims; reserves for claims incurred but
not reported ("IBNR") were not allocated to A&E claims.
Following completion of a detailed analysis in the fourth
quarter, AFG allocated a specific portion of its IBNR reserves to
A&E claims. Based on known facts, current law, and current
industry practices, management believes that its reserves for
such claims are appropriate.
The following table (in millions) is a progression of
reserves for A&E exposures for which AFG has been held liable
under general liability policies written years ago where
environmental coverage was not intended and, in many cases, was
specifically excluded.
1995 1994 1993
Reserves at beginning of year $226.8 $141.5 $142.6
Incurred losses and LAE (a) 25.6 118.3 36.4
Paid losses and LAE (32.1) (33.0) (37.5)
Reserves at end of year, net of
reinsurance recoverable 220.3 226.8 141.5
Reinsurance recoverable 163.5 155.0 106.9
Gross reserves at end of year $383.8 $381.8 $248.4
(a) Amounts in 1994 reflect an allocation of a specific portion
of IBNR reserves to A&E claims as described above.
Since the mid-1980's, AFG has also written certain
environmental coverages (asbestos abatement and underground
storage tank liability) in which the premium charged is intended
to provide coverage for the specific environmental exposures
inherent in these policies. The business has been profitable
since its inception. To date, approximately $174 million of
premiums has been written and reserves for unpaid losses and LAE
aggregated $48 million at December 31, 1995 (not included in the
above table).
13
<PAGE>
Annuity Operations
General. American Annuity Group ("AAG") is a holding
company whose primary asset is the capital stock of GALIC which
it acquired from GAI on December 31, 1992. GALIC sells annuities
primarily to employees of qualified not-for-profit organizations.
GALIC is currently rated "A" (Excellent) by A.M. Best. AAG and
its subsidiaries employ approximately 850 persons.
The following table (in millions) presents information
concerning GALIC.
1995 1994 1993
Statutory Accounting Principles Basis
Total Assets $5,414 $5,057 $4,758
Insurance Reserves:
Annuities $4,974 $4,655 $4,299
Life 22 21 22
Accident and Health - 1 1
$4,996 $4,677 $4,322
Capital and Surplus $ 273 $ 256 $ 251
Asset Valuation Reserve (a) 90 80 70
Interest Maintenance Reserve (a) 32 28 36
Annuity Receipts:
Flexible Premium:
First Year $ 42 $ 39 $ 47
Renewal 196 208 223
238 247 270
Single Premium 219 196 130
Total Annuity Receipts $ 457 $ 443 $ 400
Generally Accepted Accounting Principles Basis
Total Assets $5,631 $5,044 $4,883
Annuity Benefits Accumulated 4,917 4,596 4,257
Stockholder's Equity 645 449 520
(a) Allocation of surplus.
Annuity Products. Annuities are long-term retirement
savings plans that benefit from interest accruing on a
tax-deferred basis. Employees of qualified not-for-profit
organizations 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
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 AAG's insurance companies.
16
<PAGE>
Other Companies
AFEI is a holding company with assets consisting
primarily of investments in the common stock of AFG, American
Annuity and Citicasters.
Through subsidiaries, AFC is engaged in a variety of
other businesses, including The Golf Center at Kings Island
(golf and tennis facility) and Provident Travel Agency, both
in the Greater Cincinnati area; commercial real estate
operations in Cincinnati (office buildings and The
Cincinnatian Hotel), Louisiana (Le Pavillon Hotel),
Massachusetts (Chatham Bars Inn), Texas (Driskill Hotel) and
apartments in Florida, Kentucky, Louisiana, Minnesota,
Oklahoma, Pennsylvania, Texas and Wisconsin. These operations
employ approximately 700 full-time employees.
In March 1996, American Premier sold its interest in an
independent pipeline common carrier of refined petroleum
products for approximately $63 million.
In June 1994, AFC sold its investment in General Cable
common stock to an unaffiliated company for $27.6 million in
cash. General Cable was formed in 1992 to hold American
Premier's wire and cable and heavy equipment manufacturing
businesses.
AFC was engaged in the distribution and production of
filmed entertainment programming through Spelling
Entertainment Group. In 1993, AFC sold its common stock
investment in Spelling to Blockbuster Entertainment in
exchange for $151 million in Blockbuster securities.
In 1993, AFC sold its insurance brokerage operation,
American Business Insurance, Inc., to Acordia, Inc., an
Indianapolis-based insurance broker for $82 million in cash
and Acordia securities.
<PAGE>
Investment Portfolio
General. A breakdown of AFG's December 31, 1995,
investment portfolio by business segment follows (excluding
investment in equity securities of investee corporations) (in
millions).
<TABLE>
<CAPTION>
Total
Carrying Value Market
P&C Annuity Other Total Value
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 230 $ 169 $145 $ 544 $ 544
Bonds and redeemable preferred
stocks 4,261 5,272 5 9,538 9,679
Other stocks, options and
warrants 219 33 - 252 252
Loans receivable 148 464 19 631 631(a)
Real estate and other investments 140 40 40 220 220(a)
$4,998 $5,978 $209 $11,185 $11,326
</TABLE>
(a) Carrying value used since market values are not readily
available.
17
<PAGE>
The following tables present the percentage distribution and
yields of AFG's investment portfolio (excluding investment in equity
securities of investee corporations) as reflected in its financial
statements.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Cash and Short-term Investments 4.9% 2.2% 2.3% 9.3% 15.3%
Bonds and Redeemable Preferred Stocks:
U.S. Government and Agencies 3.7 4.0 2.8 5.7 5.3
State and Municipal .7 .8 .8 .6 .6
Public Utilities 9.7 9.1 9.3 8.5 10.7
Mortgage-Backed Securities 20.7 21.8 24.7 22.9 20.8
Corporate and Other 46.8 48.6 42.0 33.9 31.8
Redeemable Preferred Stocks 1.0 1.4 1.3 .8 .3
82.6 85.7 80.9 72.4 69.5
Net Unrealized Gains (Losses) on Bonds
and Redeemable Preferred Stocks held
Available for Sale 2.7 (1.0) 1.8 .8 -
85.3 84.7 82.7 73.2 69.5
Other Stocks, Options and Warrants 2.3 2.7 4.6 2.6 3.2
Loans Receivable 5.6 8.4 8.5 12.9 9.9
Real Estate and Other Investments 1.9 2.0 1.9 2.0 2.1
100.0% 100.0% 100.0% 100.0% 100.0%
Yield on Fixed Income Securities:
Excluding realized gains and losses 7.9% 8.1% 8.0% 8.8% 9.5%
Including realized gains and losses 8.8% 8.1% 8.7% 9.8% 9.0%
Yield on Stocks:
Excluding realized gains and losses 3.9% 5.1% 4.4% 6.4% 2.2%
Including realized gains and losses 8.4% 35.4% 16.9% 15.5% 29.7%
Yield on Investments (A):
Excluding realized gains and losses 7.9% 8.1% 7.9% 8.7% 9.2%
Including realized gains and losses 8.8% 8.8% 9.0% 10.0% 10.0%
</TABLE>
(A) Excludes "Real Estate and Other Investments".
<PAGE>
Fixed Maturity Investments. Unlike most insurance groups
which have portfolios that are invested heavily in tax-exempt
bonds, AFG's bond portfolio is invested primarily in taxable
bonds. The NAIC assigns quality ratings which range from Class 1
(highest quality) to Class 6 (lowest quality). The following
table shows AFG's bonds and mandatory redeemable preferred
stocks, by NAIC designation (and comparable Standard & Poor's
Corporation rating) as of December 31, 1995 (dollars in
millions):
NAIC Amortized Market Value
Rating Comparable S&P Rating Cost Amount %
1 AAA, AA, A $6,137 $6,428 66%
2 BBB 2,556 2,682 28
Total investment grade 8,693 9,110 94
3 BB 326 338 4
4 B 218 223 2
5 CCC, CC, C - 2 *
6 D - 6 *
Total non-investment grade 544 569 6
Total $9,237 $9,679 100%
_______________
(*)Less than 1%
Risks inherent in connection with fixed income securities
include loss upon default and market price volatility. Factors
which can affect the market price of securities include:
creditworthiness, changes in interest rates, the number of market
makers and investors, defaults by major issuers of securities and
public concern about concentrations in certain types of
securities by institutions.
18
<PAGE>
AFG's primary investment objective for bonds and mandatory
redeemable preferred stocks is to receive interest and dividend
income rather than to realize capital gains. AFG invests in
bonds and mandatory redeemable preferred stocks that have
primarily short-term and intermediate-term maturities. This
practice allows flexibility in reacting to fluctuations of
interest rates.
Equity Investments. AFG's equity investment practice
permits concentration of attention on a relatively limited number
of companies. Some of the equity investments, because of their
size, may not be as readily marketable as the typical small
investment position. Alternatively, a large equity position may
be attractive to persons seeking to control or influence the
policies of a company and AFG's concentration in a relatively
small number of companies may permit it to identify investments
with above average potential to increase in value.
The December 31, 1995, carrying values and market values of
AFG's investment in Chiquita and Citicasters, as well as its
ownership percentages in these investee corporations, were as
follows (dollars in millions):
AFG's
Ownership Carrying Market
Percentage Value Value
Chiquita 44% $232.4 $330.0
Citicasters 38% 74.1 178.8
$306.5 $508.8
Chiquita Chiquita is a leading international marketer,
producer and distributor of bananas and other quality fresh and
processed food products. In addition to bananas, these products
include tropical fruit and other fresh produce; fruit and
vegetable juices and beverages; processed fruits and vegetables;
salads; and edible oil-based consumer products. Sales of bananas
accounted for approximately 60% of Chiquita's net sales in each
of the last three years. In 1995, Chiquita sold approximately
one-half of its total banana volumes in Europe and over 40% of
its banana volumes in North America. Chiquita has generally been
able to obtain a premium price for its bananas due to its
reputation for quality and its innovative marketing techniques.
Banana marketing is highly competitive. Selling prices
which importers receive for bananas depend on the available
supplies of bananas and other fresh fruit in each market and on
the relative quality and wholesaler and retailer acceptance of
bananas offered by competing importers. Excess supplies may
result in increased price competition. Although production of
bananas tends to be relatively stable throughout the year,
competition comes not only from bananas sold by others, but also
from other fresh fruit which may be seasonal in nature. The
resulting seasonal variations in demand cause banana pricing to
be seasonal. As a result, quarterly results of Chiquita, and
<PAGE>
therefore AFG's equity in Chiquita's earnings, are subject to
significant seasonal variations with stronger quarterly results
occurring in the first six months of the calendar year.
A significant portion of Chiquita's operations are conducted
in foreign countries, and are subject to risks that are inherent
in operating in such foreign countries, including government
regulation, fluctuations in exchange rates, currency restrictions
and other restraints, risks of expropriation and burdensome
taxes.
In 1993, the European Union ("EU") implemented a new quota
restricting the volume of Latin American bananas imported into
the EU, which had the effect of decreasing Chiquita's volume and
market share in Europe. The quota grants preferred status to
producers and importers within the EU and its former colonies,
while imposing quotas and tariffs on bananas imported from other
sources, including Latin America, which is Chiquita's primary
source of fruit. In March 1994, four of the countries which had
previously filed actions against the EU banana policy (Costa Rica,
Colombia, Nicaragua and Venezuela) reached a settlement with the
EU by signing a "Framework
19
<PAGE>
Agreement." The Framework Agreement authorizes the imposition of
additional restrictive and discriminatory quotas and export
licenses on U.S. banana marketing firms, while leaving EU
firms exempt. Costa Rica and Colombia implemented this agreement
in 1995, significantly increasing Chiquita's cost to export
bananas from these sources.
In September 1995, based on a finding by the Office of the
U.S. Trade Representative ("USTR") that the EU regime unfairly
discriminates against U.S. banana marketing firms, the United
States, joined by Guatemala, Honduras and Mexico (and, in
February 1996, by Ecuador), commenced an international trade
challenge against the EU regime using the procedures of the World
Trade Organization. In January 1996, the USTR announced that it
had found the Framework Agreement export policies of Costa Rica
and Colombia to be unfair and further announced that it was not
imposing sanctions at that time, pending further consultations
with those countries to eliminate harm to U.S. commerce. There
can be no assurance as to the outcome of these proceedings or
their impact, if any, on the EU quota regime or the Framework
Agreement.
Citicasters Citicasters owns and operates two
network-affiliated television stations, 14 FM radio stations and
five AM radio stations. Substantially all of Citicasters'
broadcast revenues come from the sale of advertising time to
local and national advertisers. Local advertisements are sold by
each stations' sales personnel and national spots are sold by
independent national sales representatives.
Citicasters' AM radio stations offer their listeners a
wide range of programs including news, music, discussion,
commentary and sports. Citicasters' FM radio stations offer
programming more focused on music. Citicasters' television
stations receive a significant portion of their programming
from their respective networks; the networks sell commercial
advertising time within such programming. The competitive
position of the stations is directly affected by viewer
acceptance of network programs. Citicasters currently has one
CBS affiliated television station and one ABC affiliated
station. The ABC affiliate is scheduled to switch its
affiliation to CBS in June 1996. The non-network programs
broadcast by the stations are either produced by the stations
or acquired from other sources. Locally originated programs
include a wide range of show types such as news,
entertainment, sports, public affairs and religious programs.
In February 1996, AFG announced that it had entered into
an agreement to sell its common stock investment in
Citicasters to Jacor Communications, Inc. for $220 million in
cash plus warrants to purchase Jacor common stock.
<PAGE>
Regulation
AFG's insurance company subsidiaries are subject to
regulation in the jurisdictions where they do business. In
general, the insurance laws of the various states 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
material or extraordinary. In addition, while differing from
state to state, these regulations 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 AFG's
insurance subsidiaries during 1996 without seeking regulatory
clearance is approximately $210 million.
20
<PAGE>
Changes in state insurance laws and regulations have the
potential to materially affect the revenues and expenses of the
insurance operations. The Company is unable to predict whether
or when laws or regulations may be adopted or enacted in such
states or what the impact of such developments would be on the
future operations and revenues of its insurance businesses in
such states.
In 1994, the California Supreme Court upheld Proposition
103, an insurance reform measure passed by California voters in
1988. In addition to increasing rate regulation, Proposition 103
gives the California Insurance Commissioner power to mandate rate
rollbacks for most lines of property and casualty insurance. By
its terms, Proposition 103 does not affect workers' compensation
insurance. During 1995, GAI finalized a settlement agreement
setting its refund obligation at $19 million.
Prior to 1995, minimum premium rates for California workers'
compensation insurance were determined by the California
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 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 its filing with the California Commissioner unless
the rate is disapproved by the California Commissioner. Between
December 1, 1993 and January 1, 1995, when the "open rating"
policy went into effect, the California Commissioner ordered
additional rate decreases totalling more than 25%.
Most states have created insurance guarantee associations to
provide for the payment of claims of insurance companies that
become insolvent. Annual assessments for AFG's insurance
companies have not been material. In addition, many states have
created "assigned risk" plans or 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 otherwise.
Automobile insurers in those states are required to provide such
coverage to a proportionate number of those drivers applying as
assigned risks. 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. Assigned risks accounted for
approximately one half of one percent of AFG's net written
premiums in 1995.
The NAIC is an organization which is comprised of the chief
insurance regulator for each of the 50 states and the District of
Columbia. In 1990, the NAIC began an accreditation program to
ensure that states have adequate procedures in place for
effective insurance regulation, especially with respect to
financial solvency. The accreditation program requires that a
<PAGE>
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, 1995, the District of
Columbia and 46 states were accredited including states which
regulate AFG's largest insurance subsidiaries.
The NAIC model law for Risk Based Capital applies to both
life and property and casualty companies. The risk-based capital
formulas determine the amount of capital that an insurance
company needs to ensure that it has an acceptably low expectation
of becoming financially impaired. The model law provides for
increasing levels of regulatory intervention as the ratio of an
insurer's total adjusted capital and surplus decreases relative
to its risk-based capital, culminating with mandatory control of
the operations of the insurer by the domiciliary insurance department
at the so-called "mandatory control level". The risk-based capital
formulas became effective in 1993 for life companies and in 1995 for
property and casualty companies. Based on the 1995 results of
AFG's insurance companies, all such companies are adequately
capitalized.
21
<PAGE>
The NAIC has been considering the adoption of a model
investment law for several years. The current projection for
a new model investment law is 1996, at the earliest. It is
not yet determined whether the model investment law would be
added to the NAIC accreditation standards so that adoption of
the model would be required for the achievement or
continuation of any state's accreditation. It is not possible
to predict the impact of these activities on AFG's insurance
subsidiaries.
ITEM 2
Properties
Subsidiaries of AFG own several buildings in downtown
Cincinnati. AFG and its affiliates occupy about three-fifths
of the aggregate 580,000 square feet of commercial and office
space.
AFG's insurance subsidiaries lease the majority of their
office and storage facilities in numerous cities throughout
the United States, including GAI's and AAG's home offices in
Cincinnati. Two of AAG's subsidiaries own home office
buildings in Mobile, Alabama and Rapid City, South Dakota.
These companies occupy approximately two-thirds of the 133,000
square feet and lease the remaining space to unaffiliated
tenants.
ITEM 3
Legal Proceedings
AFG and its subsidiaries are involved in various
litigation, most of which arose in the ordinary course of
business. Except for the following, management believes that
none of the litigation meets the threshold for disclosure
under this Item.
<PAGE>
In May 1994, lawsuits were filed against American Premier
by USX Corporation ("USX") and its former subsidiary, Bessemer
and Lake Erie Railroad Company ("B&LE"), seeking contribution
by American Premier, as the successor to the railroad business
conducted by Penn Central Transportation Company ("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 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. 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 American Premier, 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
appealed the District Court's ruling to the U.S. Court of
Appeals for the Third Circuit. On December 13, 1995, the Court
of Appeals reversed the U.S. District Court decision. In its
opinion, the Court of Appeals only addressed American
Premier's procedural argument that the claims of USX could not
proceed because they are barred by the Consummation Order.
The Third Circuit expressly recognized in its opinion that it
was not deciding any of American Premier's defenses on the
merits.
On January 8, 1996, American Premier filed a petition for
rehearing en banc, requesting all of the judges of the Third
Circuit to review the three-judge panel's decision. That
petition was denied on February 16, 1996. As a result,
American Premier will petition the U.S. Supreme Court to
review the bankruptcy bar issue. In the event that subsequent
reviews do not reinstate the District Court's injunction and
USX's lawsuits are eventually permitted to go forward,
American Premier and its outside counsel believe that American
Premier has substantial defenses to these lawsuits and should
not suffer a material loss as a result of this litigation.
22
<PAGE>
American Premier 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 American
Premier 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
American Premier'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, American Premier believes that
its previously established loss accruals for potential pre-
reorganization environmental liabilities at such sites are
adequate to cover the probable amount of such liabilities,
based on American Premier'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
American Premier and are subject to future change as
additional information becomes available. Such estimates do
not assume any recovery from American Premier's insurance
carriers, although American Premier does intend to seek
reimbursement from certain insurers for such remediation costs
as American Premier incurs.
In terms of potential liability to American Premier, the
company believes that the most significant such site is the
railyard at Paoli, Pennsylvania ("Paoli Yard") which PCTC
transferred to Consolidated Rail Corporation ("Conrail") in
1976. 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. American Premier has accrued its 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 American Premier. In making this
assessment, management has taken into account previously
established loss accruals in its financial statements and
probable recoveries from third parties.
23
<PAGE>
PART II
ITEM 5
Market for Registrant's Common Equity and Related Stockholder Matters
AFG Common Stock is listed and traded on the New York Stock
Exchange ("NYSE") under the symbol AFG. The information
presented in the table below represents the high and low sales
prices per share reported on the NYSE Composite Tape. For
periods prior to the Second Quarter of 1995, the data listed
represents data of American Premier, known prior to March 1994 as
The Penn Central Corporation.
Price Per Share of
Common Stock Dividends
High Low Paid
1994
First Quarter $33 1/4 $23 3/8 $0.22
Second Quarter 30 23 3/4 0.22
Third Quarter 27 5/8 23 3/4 0.22
Fourth Quarter 27 21 5/8 0.22
1995
First Quarter 26 1/8 22 7/8 0.25
Second Quarter 26 1/4 23 1/4 0.25
Third Quarter 32 1/8 25 1/4 0.25
Fourth Quarter 30 5/8 27 3/4 0.25
There were approximately 19,000 shareholders of record of
AFG Common Stock at March 1, 1996. AFG's policy is to pay
quarterly dividends on its Common Stock, in amounts determined by
its Board of Directors. The Board has declared its intention
that AFG pay a dividend of $0.25 per share per quarter. The
ability of AFG 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.
24
<PAGE>
ITEM 6
Selected Financial Data
The following table sets forth certain data for the
periods indicated (dollars in millions, except per share
data).
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Operations Statement Data:
Total Revenues $3,630 $2,103 $2,721 $3,929 $5,219
Earnings (Loss) From
Continuing Operations
Before Income Taxes 247 44 262 (145) 119
Earnings (Loss) From:
Continuing Operations 190 19 225 (162) 56
Discontinued Operations - - - - 16
Extraordinary Items 1 (17) (5) - -
Cumulative Effect of
Accounting Change - - - 85 -
Net Earnings (Loss) 191 2 220 (77) 72
Earnings (Loss) Per Common Share (A):
Continuing Operations $3.87 ($.24) $7.01 ($6.66) $1.12
Discontinued Operations - - - - .56
Extraordinary Items .01 (.59) (.16) - -
Cumulative Effect of
Accounting Change - - - 3.02 -
Net Earnings (Loss) 3.88 (.83) 6.85 (3.64) 1.68
Cash Dividends Paid Per
Share of Common Stock $.75 (B) (B) (B) (B)
Ratio of Earnings to
Fixed Charges (C) 2.60 1.69 2.62 2.15 1.54
Balance Sheet Data:
Total Assets $14,954 $10,593 $10,077 $12,389 $12,057
Long-term Debt:
American Financial
Corporation (parent only) 311 490 572 557 559
American Premier
Underwriters (parent only) 337 - - 650 650
Great American Holding Corp. - 359 199 299 448
Other Subsidiaries 234 258 283 503 451
Capital Subject to
Mandatory Redemption - 3 49 28 82
Other Capital 1,440 396 537 280 262
</TABLE>
(A) The weighted average number of shares used for periods
prior to April 1995, is based upon the 28.3 million shares
issued in exchange for AFC shares in the Mergers discussed
in Note A.
<PAGE>
(B) Prior to the Mergers, AFC's common stock was privately
held by members of the Lindner family. American Premier
declared and paid cash dividends per share of $.25 prior
to the Mergers in 1995; it also declared cash dividends of
$.91 in 1994, $.85 in 1993, $.81 in 1992 and $.71 in 1991.
AFG declared two quarterly $.25 per share dividends
subsequent to the Mergers in 1995.
(C) Fixed charges are computed on a "total enterprise" basis.
For purposes of calculating the ratios, "earnings" have
been computed by adding to pretax earnings (excluding
discontinued operations) the fixed charges and the
minority interest in earnings of subsidiaries having fixed
charges and deducting (adding) the undistributed equity in
earnings (losses) of investees. Fixed charges include
interest (excluding interest on annuity benefits),
amortization of debt discount and expense, preferred
dividend requirements of subsidiaries and a portion of
rental expense deemed to be representative of the interest
factor.
25
<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 AFG's financial condition
and results of operations. This discussion should be read in
conjunction with the financial statements beginning on page
F-1.
As discussed in Note A to the Financial Statements, the
Mergers of AFC and American Premier in April 1995 were
accounted for as a reverse acquisition whereby AFC was deemed
to have acquired American Premier. Financial statements for
periods prior to the Mergers are those of AFC. The operations
of American Premier are included in AFG's financial statements
from the date of acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Ratios Since the Mergers to the end of the year, nearly $850
million of AFC and American Premier debt was retired or replaced
with lower cost debt, resulting in a net reduction of aggregate
debt by approximately half. Consequently, AFG's debt to total
capital ratio at the holding company level improved from nearly
60% at the date of the Mergers to approximately 30% at December
31, 1995. These debt reductions and replacements will also
reduce AFG's interest expense by approximately $75 million
annually.
AFG's ratio of earnings to fixed charges on a total
enterprise basis was 2.60, 1.69 and 2.62 for the years ended
December 31, 1995, 1994 and 1993, respectively. Assuming the
Mergers and related transactions occurred at the beginning of
each of these periods, these ratios would have been 2.93, 2.07
and 3.09, respectively.
The National Association of Insurance Commissioners' model
law for risk based capital ("RBC") applies to both life and
property and casualty companies. RBC formulas determine the
amount of capital that an insurance company needs to ensure
that it has an acceptable expectation of not becoming
financially impaired. At December 31, 1995, the capital
ratios of all AFG insurance companies substantially exceeded
the RBC requirements.
Sources of Funds AFG and its subsidiaries, AFC and American
Premier, are organized as holding companies with almost all of
their operations being conducted by subsidiaries. These
parent corporations, however, have continuing cash needs for
administrative expenses, the payment of principal and interest
on borrowings, and shareholder dividends. AFG, AFC and
American Premier rely primarily on dividends and tax payments
from their subsidiaries for funds to meet their obligations.
<PAGE>
Management believes AFG has sufficient resources to meet
the liquidity requirements of AFG, AFC and American Premier
through operations in the short-term and long-term future. If
funds generated from operations, including dividends from
subsidiaries, are insufficient to meet fixed charges in any
period, these companies would be required to generate cash
through borrowings, sales of securities or other assets, or
similar transactions.
Prior to the Mergers, American Premier had substantial
cash and short-term investments at the parent company level.
Subsequent to the Mergers, AFC entered into a credit agreement
with American Premier. At December 31, 1995, AFC had borrowed
$623 million under this agreement which it used for debt
retirements, capital contributions to subsidiaries, and other
26
<PAGE>
corporate purposes. In addition, AFG and American Premier
entered into a reciprocal credit agreement under which these
companies will make funds available to each other for general
corporate purposes.
Bank credit lines at several subsidiary holding companies
provide ample liquidity which can be used to obtain funds for
the operating subsidiaries or, if necessary, for the parent
companies, AFC, American Premier and ultimately AFG.
Agreements with the banks generally run for three to seven
years and are renewed before maturity. While it is highly
unlikely that all such amounts would ever be borrowed at one
time, up to $470 million is available under these bank
facilities.
In the past, funds have been borrowed under certain of
these bank facilities and used for working capital, capital
infusions into subsidiaries, and to retire other issues of
short-term or high-rate debt. Also, while little was drawn on
the bank lines at December 31, 1995, AFG believes it may be
prudent and advisable to borrow up to $200 million of bank
debt in the normal course and use the proceeds to retire
additional amounts of public or privately held fixed rate debt
over the next year or two.
Dividend payments from subsidiaries have been very
important to the liquidity and cash flow of the individual
holding companies in the past. However, the combination of
(i) strong capital at AFG's insurance subsidiaries (and the
related decreased likelihood of a need for investment in those
companies), (ii) the reductions of debt at the holding
companies (and the related decrease in ongoing cash needs for
interest and principal payments), (iii) AFG's ability to
obtain financing in capital markets, as well as (iv) the sales
of Buckeye and Citicasters, should lessen the reliance on such
dividend payments in the future.
For statutory accounting purposes, equity securities are
generally carried at market value. At December 31, 1995,
AFG's insurance companies owned publicly traded equity
securities with a market value of $1.3 billion, including
equity securities of AFG affiliates (including subsidiaries)
of $1.0 billion. Since significant amounts of these are
concentrated in a relatively small number of companies,
decreases in the market prices could adversely affect the
insurance group's capital, potentially impacting the amount of
dividends available or necessitating a capital contribution.
Conversely, increases in the market prices could have a
favorable impact on the group's dividend-paying capability.
<PAGE>
Following the Mergers, AFC and American Premier will each
continue to file separate consolidated tax returns. Under tax
allocation agreements with AFC, its 80%-owned U.S.
subsidiaries generally compute tax provisions as if filing
separate returns based on book taxable income computed in
accordance with generally accepted accounting principles.
American Premier has tax allocation agreements with its U.S.
insurance subsidiaries whereby such subsidiaries compute tax
provisions based on taxable income in accordance with
statutory accounting principles. In each case, the resulting
provision (or credit) is currently payable to (or receivable
from) AFC or American Premier. American Premier's federal
income tax loss carryforward is available to offset taxable
income and, as a result, American Premier's requirement to pay
federal income tax for 1996 is substantially eliminated.
Uncertainties Two lawsuits were filed in 1994 against
American Premier by USX Corporation ("USX") and a former USX
subsidiary. The lawsuits seek contribution from American
Premier for all or a portion of a $600 million final antitrust
judgment entered against a USX subsidiary in 1994. The
lawsuits argue that USX's liability for that judgment is
attributable to the alleged activities of American Premier's
predecessor in an unlawful antitrust conspiracy among certain
railroad companies. American Premier and its outside counsel
believe that American Premier has substantial defenses and
should not suffer a material loss as a result of this
litigation.
27
<PAGE>
Great American's liability for unpaid losses and loss
adjustment expenses includes amounts for various liability
coverages related to environmental and hazardous product
claims. The insurance industry typically includes only claims
relating to polluted waste sites and asbestos in defining
environmental exposures, whereas Great American extends this
definition to include claims relating to breast implants,
repetitive stress on keyboards, DES (a drug used in
pregnancies years ago alleged to cause cancer and birth
defects), and other latent injuries. At December 31, 1995,
Great American had recorded $220 million (net of
reinsurance recoverables of $164 million) for environmental
pollution and hazardous products claims on policies written
many years ago where, in most cases, coverage was never
intended. Due to inconsistent court decisions on many
coverage issues and the difficulty in determining standards
acceptable for cleaning up pollution sites, significant
uncertainties exist which are not likely to be resolved in the
near future.
AFG's subsidiaries are parties in a number of proceedings
relating to former operations. See Note L to the financial
statements.
While the results of all such uncertainties cannot be
predicted, based upon its knowledge of the facts,
circumstances and applicable laws, management believes that
sufficient reserves have been provided.
Investments Approximately two-thirds of AFG's consolidated
assets are invested in marketable securities. A diverse
portfolio of bonds and redeemable preferred stocks accounts
for 95% of these securities. AFG attempts to optimize
investment income while building the value of its portfolio,
placing emphasis upon long-term performance. AFG's goal is to
maximize return on an ongoing basis rather than focusing on
short-term performance.
Fixed income investment funds are generally invested in
securities with short-term and intermediate-term maturities
with an objective of optimizing total return while allowing
flexibility to react to changes in market conditions. At
December 31, 1995, the average life of AFG's bonds and
redeemable preferred stocks was approximately 6 years.
Approximately 94% of the bonds and redeemable preferred
stocks held by AFG were rated "investment grade" (credit
rating of AAA to BBB) by nationally recognized rating agencies
at December 31, 1995. Investment grade securities generally
bear lower yields and lower degrees of risk than those that
are unrated and non-investment grade. Management believes
that the high quality investment portfolio should generate a
stable and predictable investment return.
<PAGE>
Investments in mortgage-backed securities ("MBSs"),
represented approximately one-fourth of AFG's bonds and
redeemable preferred stocks at December 31, 1995. AFG invests
primarily in MBSs which have a reduced risk of prepayment.
Interest only (I/Os), principal only (P/Os) and other "high
risk" MBSs represented less than two percent of AFG's total
mortgage-backed securities portfolio. In addition, the
majority of MBSs held by AFG were purchased at a discount.
Management believes that the structure and discounted nature
of the MBSs will minimize the effect of prepayments on
earnings over the anticipated life of the MBS portfolio. More
than 90% of AFG's MBSs are rated "AAA" with substantially all
being of investment grade quality. The majority are
collateralized 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, AFG does not believe a material risk (relative to
earnings or liquidity) is inherent in holding such
investments.
Because most income of the property and casualty insurance
subsidiaries is currently sheltered from income taxes, non-
taxable municipal bonds represent only a small portion (less
than 1%) of the portfolio.
AFG's equity securities are concentrated in a relatively
limited number of major positions. This approach allows
management to more closely monitor the companies and
industries in which they operate.
28
<PAGE>
The realization of capital gains, primarily through sales
of equity securities, was an integral part of AFG's investment
program. Individual securities are sold creating gains or
losses as market opportunities exist. Pretax capital gains
recognized upon disposition of securities, including
investees, during the past five years have been: 1995 -
$84 million; 1994 - $50 million; 1993 - $165 million; 1992 -
$104 million and 1991 - $38 million. At December 31, 1995,
the net unrealized gain on AFG's bonds and redeemable
preferred stocks was $442 million; the net unrealized gain on
equity securities was $115 million.
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 1995
General As previously noted, financial statements for periods
prior to the April 1995, Mergers are those of AFC. The
operations of American Premier are included in AFG's financial
statements from the date of acquisition. AFC had accounted
for American Premier as a subsidiary in 1992 and the first
quarter of 1993 and as an investee from the second quarter of
1993 through the first quarter of 1995. Accordingly, current
year income statement components are not comparable to prior
years and are not indicative of future periods.
Pretax earnings were $247 million in 1995 compared to
$44 million in 1994 and $262 million in 1993.
In addition to the earnings contribution from the Mergers,
results for 1995 include $84 million in pretax gains on
the sale of securities.
Results for 1994 include AFC's share ($28 million) of
American Premier's loss on the sale of General Cable
securities, Great American's $19 million charge relating
to a rate rollback liability in California and a
$35 million charge related to payments under AFC's Book
Value Incentive Plan. These items were partially offset
by a $42 million decrease in interest expense.
Results for 1993 include (i) $155 million in gains from
the sales of AFC's insurance agency operations, Spelling
Entertainment Group and 4.5 million shares of American
Premier and additional proceeds received on the 1990 sale
of the NSA Group to American Premier, and (ii) AFC's share
($52 million) of a tax benefit recorded by American
Premier in the second, third and fourth quarters of 1993.
These items were partially offset by a write-off of debt
discount and expenses of $24 million.
<PAGE>
Property and Casualty Insurance - Underwriting AFG manages
and operates its property and casualty business as three major
sectors. The nonstandard automobile insurance companies (the
"NSA Group") insure risks not typically accepted for standard
automobile coverage because of the applicant's driving record,
type of vehicle, age or other criteria. The specialty lines
are a diversified group of over twenty-five business lines
that offer a wide variety of specialty insurance products.
Some of the more significant areas are California workers'
compensation, executive liability, inland and ocean marine,
U.S.-based operations of Japanese companies, agricultural-
related coverages, excess and surplus lines and fidelity and
surety bonds. The commercial and personal lines provide
coverages in commercial multi-peril, workers' compensation,
umbrella and commercial automobile, standard private passenger
automobile and homeowners insurance.
To understand the overall profitability of particular
lines, timing of claims payments and the related impact of
investment income must be considered. Certain "short-tail"
lines of business (primarily property coverages) have quick
loss payouts which reduce the time funds are held, thereby
limiting investment income earned thereon. On the other hand,
"long-tail" lines of business (primarily liability coverages
and workers' compensation) have payouts that are either
structured over many years or take many years to settle,
thereby significantly increasing investment income earned on
related premiums received.
29
<PAGE>
Underwriting profitability is measured by the combined
ratio which is a sum of the ratio of underwriting expenses,
losses, and loss adjustment expenses to premiums. When the
combined ratio is under 100%, underwriting results are
generally considered profitable; when the ratio is over 100%,
underwriting results are generally considered unprofitable.
The combined ratio does not reflect investment income, other
income or federal income taxes.
While AFG desires and seeks to earn an underwriting profit
on all of its business, it is not always possible to do so.
As a result, the company attempts to expand in the most
profitable areas and control growth or even reduce its
involvement in the least profitable ones.
Comparisons made in the following discussion of AFG's
insurance operations include American Premier's insurance
operations even though they were not consolidated in the
financial statements throughout the periods prior to the
Mergers.
Results for AFG's property and casualty insurance
subsidiaries are as follows (dollars in millions):
1995 1994 1993
Net Written Premiums (GAAP)
NSA Group $1,277 $1,186 $ 916
Specialty Operations 1,097 1,250 1,079
Commercial and Personal Operations 717 683 666
Other Lines 1 5 6
Aggregate $3,092 $3,124 $2,667
Combined Ratios (GAAP)
NSA Group 105.2% 100.0% 97.2%
Specialty Operations 94.8 97.2 96.1
Commercial and Personal Operations 99.1 98.9 101.0
Aggregate 101.2 99.4 99.8
In 1995, underwriting results of AFG's insurance
operations significantly outperformed the industry average for
the tenth consecutive year. AFG's insurance operations have
been able to exceed the industry's results by focusing on
highly specialized niche products, supplemented by commercial
lines coverages and personal automobile products.
<PAGE>
NSA Group 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 nonstandard market, premium rate increases and
the purchase of Leader National. The increase in the combined
ratio for 1995 compared with 1994 was due primarily to
inadequate rate levels in certain markets and weather-related
losses principally from hailstorms in Texas. These factors
were partially offset by a reduction in the underwriting
expense ratio due largely to cost control measures.
Underwriting conditions in the private passenger
automobile insurance marketplace in 1994 were affected by
competitive conditions and the pricing policies of insurers.
Improving economic conditions contributed to increased driving
activity resulting in an increase in the frequency of
accidents and severity of claims. These trends caused a
deterioration in the NSA Group's underwriting profit margins
during 1994. These factors were partially offset by
underwriting profit from the NSA Group's entry into certain
markets, as well as improved underwriting margins in several
markets where the book of business matured and a greater
portion of new premium was derived from renewal policies.
Premium rate increases were implemented in several states
during 1994 and 1995. Rate increases implemented in various
states during 1995 averaged approximately 10% across the NSA
Group's entire book of business. The higher rate levels and
competitive pressures in the nonstandard automobile insurance
industry adversely impacted premium growth during 1995.
30
<PAGE>
Specialty Operations Net written premiums for the
specialty operations declined 12% during 1995 due primarily to
a decrease in the California workers' compensation writings,
partially offset by increases in other specialty niche lines
(primarily crop hail, excess and surplus and executive
liability). The decline in California workers' compensation
premiums reflects (i) extremely competitive pricing in the
marketplace as a result of the repeal of the California workers'
compensation minimum rate law effective January 1, 1995 and
(ii) the impact of mandatory premium rate reductions which took
effect a year earlier. The combined ratio of the specialty
operations in 1995 reflects improved results experienced in the
crop hail and farm lines as well as coverages of U.S. operations of
Japanese companies. The 1995 combined ratio also includes
losses resulting from participation in a voluntary pool from
which AFG withdrew in 1995.
Commercial and Personal Operations Net written premiums
for the commercial and personal operations increased 5% in 1995 due
primarily to increased writing of workers' compensation and
commercial umbrella insurance. The profitability of both of
these lines improved in 1995. Workers' compensation improved
due to favorable rate action by rating bureaus, health care
cost containment programs, marketing emphasis on profitable
states and implementation of a Drug-Free Workplace program.
Commercial umbrella results improved due to a focus on low
hazard risks and more favorable pricing in the higher umbrella
layers. In addition, cost control measures reduced the
underwriting expense ratio. These improved results were
offset by an increase in the combined ratio of the personal
lines operations due primarily to weather-related losses,
start-up costs from its direct-to-consumer operation and
deteriorating automobile loss experience for accident years
1994 and 1995.
Investment Income Changes in investment income reflect
fluctuations in market rates and changes in average invested
assets.
1995 compared to 1994 AFC's investment income increased
$50 million (9%) from 1994 due to an increase in the average
amount of investments held. For the period following the
Mergers, investment income includes $117 million attributable
to American Premier.
1994 compared to 1993 Excluding American Premier, which
was included as a subsidiary for the first three months of
1993, investment income increased $20 million (4%) due to an
increase in average investments held.
Investee Corporations Equity in net earnings of investee
corporations (companies in which AFG owns a significant
portion of the voting stock) represents AFG's proportionate
share of the investees' earnings and losses.
<PAGE>
1995 compared to 1994 AFG's equity in net earnings of
investee corporations increased $32 million in 1995. Chiquita
reported a $105 million improvement in operating income
primarily due to net gains from the sale of non-core assets,
cost reductions in its core business and higher banana prices
outside the European Union.
1994 compared to 1993 AFG's equity in net earnings
(losses) of investee corporations in 1994 includes AFC's share
($28 million) of American Premier's loss on the sale of
General Cable securities and its share ($52 million) of
American Premier's tax benefit in 1993. Chiquita's loss
before extraordinary items was comparable in 1994 and 1993 as
improvements in Meat Division operations and banana pricing
were offset by charges and losses relating to farm closings
and banana cultivation write-downs in Honduras and a
substantial reduction of Chiquita's Japanese banana trading
operations.
31
<PAGE>
Gains on Sales of Investees The gain on sale of investees in
1994 represents a pretax gain on the sale of General Cable
common stock.
The gains on sales of investees in 1993 include (i) a
pretax gain of $52 million on the sale of Spelling
Entertainment and (ii) a pretax gain of $28 million on the
public sale by AFEI of 4.5 million shares of American Premier
common stock.
Gains on Sales of Subsidiaries The gains on sales of
subsidiaries in 1993 include pretax gains of (i) $44 million
from the sale of American Business Insurance, Inc. and (ii)
$31 million representing an adjustment on AFC's 1990 sale of
the nonstandard automobile insurance group to American
Premier.
Sales of Other Products and Services Sales of other products
and services represents American Premier's revenues from
systems and software engineering services and the manufacture
and supply of industrial products and services during the first
quarter of 1993.
Annuity Benefits For GAAP financial reporting purposes,
annuity receipts are generally accounted for as interest-
bearing deposits ("annuity benefits accumulated") rather than
as revenues. Under these contracts, policyholders' funds are
credited with interest on a tax-deferred basis until withdrawn
by the policyholder. Annuity benefits represent primarily
interest related to annuity policyholders' funds held. The
rate at which GALIC credits interest on annuity policyholders'
funds is subject to change based on management's judgment of
market conditions.
Annuity receipts totaled approximately $460 million in
1995, $440 million in 1994 and $400 million in 1993. Annuity
receipts have increased in 1995, 1994 and 1993 due to sales of
newly introduced single premium products and, in 1995, the
development of new distribution channels. Annuity surrender
payments have averaged approximately 8% of statutory reserves
over the past three years.
Annuity benefits increased $13 million (5%) in 1995 and
$13 million (6%) in 1994 primarily due to an increase in
average annuity benefits accumulated.
Interest on Borrowed Money Changes in interest expense result
from fluctuations in market rates as well as changes in
borrowings. AFG has generally financed its borrowings on a
long-term basis which has resulted in higher current costs.
1995 compared to 1994 Excluding $29 million attributable
to American Premier, interest expense decreased by $22 million
(19%) due primarily to the repayments of borrowings by AFC and
certain subsidiaries and the AFC debt exchange in 1994.
<PAGE>
1994 compared to 1993 Excluding $17 million attributable
to American Premier in 1993, AFG's interest expense decreased
$25 million (18%) in 1994 due to (i) the issuance of $204
million of 9-3/4% debentures in exchange for higher rate debt,
(ii) the repurchase of $79 million principal amount of
debentures and (iii) repayments of bank borrowings in 1993.
Other Operating and General Expenses Operating and general
expenses included the following charges (in millions):
1995 1994 1993
Minority interest $33 $ 9 $35
Allowance for bad debts - 18 10
Proposition 103 - 19 -
Writeoff of debt discount
and issue costs - - 24
Relocation expenses - - 8
32
<PAGE>
Allowance for bad debts includes charges for possible
losses on agents' balances, reinsurance recoverables and other
receivables. Beginning in April 1995, minority interest
includes AFC's quarterly preferred dividend requirement of $6.3
million. Relocation expenses represent the estimated costs of
moving GALIC's operations from Los Angeles to Cincinnati.
Income Taxes See Note J to the Financial Statements for an
analysis of other items affecting AFG's effective tax rate.
33
<PAGE>
ITEM 8
Financial Statements and Supplementary Data
Page
Reports of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1995 and 1994 F-4
Consolidated Statement of Earnings:
Years ended December 31, 1995, 1994 and 1993 F-5
Consolidated Statement of Cash Flows:
Years ended December 31, 1995, 1994 and 1993 F-6
Notes to Consolidated Financial Statements F-7
"Selected Quarterly Financial Data" has been included in Note
O to the Consolidated Financial Statements.
ITEM 9
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
AFG filed a report on Form 8-K on August 29, 1995, reporting
a change in its independent accountants. The report is
incorporated herein by reference.
34
<PAGE>
PART III
The information required by the following Items will be
included in AFG's definitive Proxy Statement for the 1996
Annual Meeting of Shareholders which will be filed with the
Securities and Exchange Commission within 120 days after the
end of Registrant's fiscal year and is incorporated herin 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
35
<PAGE>
REPORTS OF INDEPENDENT AUDITORS
Board of Directors
American Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of
American Financial Group, Inc. and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of earnings and
cash flows for each of the three years in the period ended
December 31, 1995. 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. The financial
statements of American Premier Underwriters, Inc. (1994 and 1993) and
General Cable Corporation (1993) have been audited by other auditors
whose reports have been furnished to us; insofar as our opinion on the
consolidated financial statements and schedules relates to data
included for those corporations, it is based solely on the reports of
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of American Financial Group, Inc. and subsidiaries at December 31,
1995 and 1994, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 15, 1996
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 year
ended December 31, 1994 (not presented separately herein).
These financial statements and the financial statement
schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on
the financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of American
Premier Underwriters, Inc. and Consolidated Subsidiaries at
December 31, 1994 and the results of its operations and its
cash flows for each of the two years in the period ended
December 31, 1994 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly
in all material respects the information shown therein.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
February 15, 1995
(March 23, 1995 with respect to the
acquisition of American Financial
Corporation as discussed in Note B 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
consolidated financial statements and related schedules are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these
consolidated financial statements and related schedules
based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial
position of General Cable Corporation and subsidiaries at
December 31, 1993 and the results of their operations and
their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our
opinion, such consolidated financial statement schedules,
when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all
material respects the information shown therein.
DELOITTE & TOUCHE
Cincinnati, Ohio
February 18, 1994
F-3
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Assets
Cash and short-term investments $ 544,408 $ 171,335
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,729,300 and $4,336,700) 3,588,943 4,629,633
Available for sale - at market
(amortized cost - $5,648,060 and $1,938,853) 5,949,260 1,862,653
Other stocks - principally at market
(cost - $136,944 and $137,106) 252,244 208,706
Investment in investee corporations 306,545 832,637
Loans receivable 631,408 641,964
Real estate and other investments 220,135 154,262
10,948,535 8,329,855
Recoverables from reinsurers and prepaid
reinsurance premiums 923,080 902,063
Agents' balances and premiums receivable 703,274 363,156
Deferred acquisition costs 419,919 231,343
Other receivables 270,263 197,119
Deferred tax asset 200,392 42,600
Assets held in separate accounts 238,524 -
Prepaid expenses, deferred charges and other assets 391,339 179,314
Cost in excess of net assets acquired 314,136 175,866
$14,953,870 $10,592,651
<PAGE>
Liabilities and Capital
Unpaid losses and loss adjustment expenses $ 4,096,703 $ 2,916,985
Unearned premiums 1,294,054 824,691
Annuity benefits accumulated 5,051,959 4,618,108
Life, accident and health benefit reserves 538,274 19,879
Long-term debt:
Direct obligations of AFG Parent Company - -
Obligations of AFG subsidiaries:
American Financial Corporation (parent only) 311,202 490,065
American Premier Underwriters (parent only) 337,334 -
Great American Holding Corporation - 359,185
American Annuity Group 167,734 183,242
Other subsidiaries 65,793 74,255
Liabilities related to separate accounts 238,524 -
Accounts payable, accrued expenses and other
liabilities 1,097,766 601,872
Minority interest 314,390 105,506
13,513,733 10,193,788
AFC Mandatory Redeemable Preferred Stock (at
redemption value) - 2,880
Other AFC Preferred Stock (redemption
value - $278,719) - 168,484
AFC Common Stock without par value - 904
Common Stock, $1 par value
- 200,000,000 shares authorized
- 60,139,303 shares outstanding 60,139 -
Capital surplus 741,355 -
Retained earnings 387,143 223,095
Net unrealized gain on marketable securities,
net of deferred income taxes 251,500 3,500
$14,953,870 $10,592,651
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Income:
Property and casualty insurance premiums $2,648,703 $1,378,628 $1,494,796
Investment income 750,640 582,931 601,900
Realized gains on sales of securities 84,028 48,342 82,265
Equity in net earnings (losses) of
investee corporations 15,237 (16,573) 69,862
Gains on sales of investee corporations 335 1,694 83,211
Gains on sales of subsidiaries - - 75,309
Sales of other products and services - - 152,100
Other income 130,666 107,758 161,260
3,629,609 2,102,780 2,720,703
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 1,977,395 986,996 1,064,108
Commissions and other underwriting
expenses 707,340 428,590 467,293
Annuity benefits 254,650 241,811 228,609
Interest charges on borrowed money 122,568 115,162 157,219
Cost of sales - - 134,900
Book Value Incentive Plan - 34,740 991
Other operating and general expenses 320,737 251,913 405,598
3,382,690 2,059,212 2,458,718
Earnings before income taxes and
extraordinary items 246,919 43,568 261,985
Provision for income taxes 56,489 24,650 37,296
Earnings before extraordinary items 190,430 18,918 224,689
Extraordinary items, net of income taxes 817 (16,818) (4,559)
Net Earnings $ 191,247 $ 2,100 $ 220,130
Preferred dividend requirement of predecessor
company 6,349 25,709 26,122
Net earnings (loss) available to Common Shares $ 184,898 $ (23,609) $ 194,008
Earnings (loss) per Common Share:
Before extraordinary items $3.87 ($.24) $7.01
Extraordinary items .01 (.59) (.16)
Net earnings (loss) $3.88 ($.83) $6.85
Average number of Common Shares 47,620 28,324 28,324
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Operating Activities:
Net earnings $ 191,247 $ 2,100 $ 220,130
Adjustments:
Extraordinary (gains) losses from retirement
of debt (817) 16,818 4,559
Depreciation and amortization 47,760 30,729 52,117
Annuity benefits 254,650 241,811 228,609
Equity in net (earnings) losses of investees (15,237) 16,573 (69,862)
Changes in reserves on assets 2,302 17,094 11,440
Realized gains on investing activities (84,995) (59,609) (242,529)
Writeoff of debt discount and issue costs - - 30,054
Decrease (increase) in reinsurance and other
receivables 23,192 (223,113) (238,166)
Increase in other assets (11,503) (96,596) (90,022)
Increase in insurance claims and reserves 137,180 345,542 241,704
Increase (decrease) in other liabilities (247,938) 67,799 50,479
Increase in minority interest 7,877 6,773 37,057
Dividends from investees 9,568 21,567 25,575
Other, net (673) (1,488) (37,062)
312,613 386,000 224,083
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (2,378,427) (1,726,318) (3,062,435)
Equity securities (1,034) (7,315) (20,224)
Investees and subsidiaries (68,591) (29,306) (27,578)
Real estate, property and equipment (42,579) (27,185) (41,762)
Maturities and redemptions of fixed maturity
investments 309,581 420,945 757,473
Sales of:
Fixed maturity investments 2,310,837 694,947 1,498,432
Equity securities 17,379 127,181 221,467
Investees and subsidiaries - 27,621 255,517
Real estate, property and equipment 27,759 6,151 65,782
Cash and short-term investments of acquired
(former) subsidiaries 392,100 - (310,225)
Decrease (increase) in other investments (11,466) (5,571) 1,435
555,559 (518,850) (662,118)
<PAGE>
Financing Activities:
Annuity receipts 457,525 442,703 400,141
Annuity payments (412,854) (321,038) (337,878)
Additional long-term borrowings 337,076 244,311 338,010
Reductions of long-term debt (1,061,187) (193,481) (601,040)
Issuances of common stock 211,557 - -
Repurchases of preferred stock (17) (6,738) (2,643)
Cash dividends paid (27,199) (29,522) (28,034)
(495,099) 136,235 (231,444)
Net Increase (Decrease) in Cash and Short-term
Investments 373,073 3,385 (669,479)
Cash and short-term investments at beginning of
period 171,335 167,950 837,429
Cash and short-term investments at end of period $ 544,408 $ 171,335 $ 167,950
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES
A. Mergers I. Capital Stock
B. Accounting Policies J. Income Taxes
C. Acquisitions and Sales of Subsidiaries K. Extraordinary Items
and Investees L. Commitments and Contingencies
D. Segments of Operations M. Benefit Plans
E. Investments N. Transactions with Affiliates
F. Investment in Investee Corporations O. Quarterly Operating Results
G. Cost in Excess of Net Assets Acquired P. Insurance
H. Long-Term Debt Q. Additional Information
R. Subsequent Event
A. Mergers
American Premier Group, Inc. was formed in December 1994 for the
purpose of acquiring American Financial Corporation ("AFC") and
American Premier Underwriters, Inc. ("American Premier"). In
Mergers completed on April 3, 1995, American Premier Group issued
71.4 million shares of its Common Stock in exchange for all of the
outstanding common stock of AFC and American Premier. The 18.7
million shares held by AFC and its subsidiaries are accounted for
herein as retired. In June 1995, American Premier Group, Inc.
changed its name to American Financial Group, Inc. ("AFG"), to
better reflect its core property and casualty insurance and
annuity businesses.
For financial reporting purposes, because the former shareholders
of AFC owned more than 50% of AFG following the Mergers, the
Mergers were accounted for as a reverse acquisition whereby AFC
was deemed to have acquired American Premier. Financial
statements for periods prior to the Mergers are those of AFC. The
operations of American Premier are included in AFG's financial
statements from the date of the Mergers.
The valuation of American Premier's net assets was determined
based on the fair market value of the AFG shares issued to
shareholders other than AFC and was allocated to American
Premier's assets and liabilities based on their fair values at the
date of acquisition. The following unaudited pro forma data is
presented as if the Mergers occurred on January 1 of each year (in
millions, except per share data).
1995 1994
Revenues $4,049 $3,832
Earnings before Extraordinary Items 216 59
Extraordinary Items 1 (17)
Net Earnings 217 42
Earnings Per Share $ 4.04 $ .79
F-7
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
B. Accounting Policies
Basis of Presentation The consolidated financial statements
include the accounts of AFG and its subsidiaries. Mergers and
changes in ownership levels of subsidiaries and investees have
resulted in certain differences in the financial statements and
have affected comparability between years. Certain
reclassifications have been made to prior years to conform to the
current year's presentation. All significant intercompany
balances and transactions have been eliminated. All acquisitions
have been treated as purchases. The results of operations of
companies since their formation or acquisition are included in the
consolidated financial statements.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Changes in
circumstances could cause actual results to differ materially from
those estimates.
AFG's ownership of subsidiaries and significant investees with
publicly traded common shares at December 31, was as follows:
1995 1994 1993
American Annuity Group, Inc. ("AAG") 81% 80% 80%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Premier Underwriters, Inc. (a) 42% 41%
Chiquita Brands International, Inc. 44% 46% 46%
Citicasters Inc. (formerly GACC) 38% 37% 20%
General Cable Corporation - (b) 45%
(a) Became a 100%-owned subsidiary on April 3, 1995.
(b) Sold in June 1994.
<PAGE>
Investments Debt securities are classified as "held to maturity"
and reported at amortized cost if AFG has the positive intent and
ability to hold them to maturity. Debt and equity securities are
classified as "available for sale" and reported at fair value with
unrealized gains and losses reported as a separate component of
shareholders' equity if the debt or equity securities are not
classified as held to maturity or bought and held principally for
selling in the near term. 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.
In accordance with guidance issued by the Financial Accounting
Standards Board in November 1995, AFG reassessed the
classifications of its investments and transferred fixed maturity
securities with an amortized cost of approximately $2.8 billion to
"available for sale." This "one-time" reclassification resulted
in an increase of $167 million in carrying value of fixed maturity
investments and an increase of $109 million in shareholders'
equity. The transfer had no effect on net earnings.
Premiums and discounts on mortgage-backed securities are amortized
over their expected average lives using the interest method.
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.
Short-term investments are carried at cost; loans receivable are
stated primarily at the aggregate unpaid balance.
F-8
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Investment in Investee Corporations Investments in securities of
20%- to 50%-owned companies are carried at cost, adjusted for
AFG's proportionate share of their undistributed earnings or
losses. Investments in less than 20%-owned companies are
accounted for by the equity method when, in the opinion of
management, AFG can exercise significant influence over operating
and financial policies of the investee.
Cost in Excess of Net Assets Acquired The excess of cost of
subsidiaries and investees over AFG's equity in the underlying net
assets ("goodwill") is being amortized over 40 years. The excess
of AFG's equity in the net assets of other subsidiaries and
investees over its cost of acquiring these companies ("negative
goodwill") is allocated to AFG's basis in these companies' fixed
assets, goodwill and other long-term assets and is amortized on a
10- to 40-year basis.
Insurance As discussed under "Reinsurance" below, unpaid losses
and loss adjustment expenses and unearned premiums have not been
reduced for reinsurance recoverable.
Reinsurance In the normal course of business, AFG's insurance
subsidiaries cede reinsurance to other companies to diversify risk
and limit maximum loss arising from large claims. To the extent
that any reinsuring companies are unable to meet obligations under
the agreements covering reinsurance ceded, AFG's insurance
subsidiaries would remain liable. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsurance policies. AFG's
insurance subsidiaries report as assets (a) the estimated
reinsurance recoverable on unpaid losses, including an estimate
for losses incurred but not reported, and (b) amounts paid to
reinsurers applicable to the unexpired terms of policies in force.
AFG's insurance subsidiaries also assume reinsurance from other
companies. Income on reinsurance assumed is recognized based on
reports received from ceding reinsurers.
Deferred Acquisition Costs Policy acquisition costs (principally
commissions, premium taxes and other underwriting expenses)
related to the production of new business are deferred ("DPAC").
For the property and casualty companies, the deferral of
acquisition costs is limited based upon their recoverability
without any consideration for anticipated investment income. DPAC
is charged against income ratably over the terms of the related
policies. For the annuity companies, DPAC is amortized, with
interest, in relation to the present value of expected gross
profits on the policies.
<PAGE>
Unpaid Losses and Loss Adjustment Expenses The net liabilities
stated for unpaid claims and for expenses of investigation and
adjustment of unpaid claims are based upon (a) the accumulation of
case estimates for losses reported prior to the close of the
accounting period 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; (d) estimates based on experience of expenses for
investigating and adjusting claims and (e) the current state of
the law and coverage litigation. 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 liabilities for unpaid
losses and loss adjustment expenses are adequate. Changes in
estimates of the liabilities for losses and loss adjustment
expenses are reflected in the Statement of Earnings in the period
in which determined.
F-9
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Premium Recognition Premiums are earned over the terms of the
policies on a pro rata basis. Unearned premiums represent that
portion of premiums written which is applicable to the unexpired
terms of policies in force. On reinsurance assumed from other
insurance companies or written through various underwriting
organizations, unearned premiums are based on reports received
from such companies and organizations.
Policyholder Dividends Dividends payable to policyholders are
included in "Accounts payable, accrued expenses and other
liabilities" and represent estimates 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.
Annuity Benefits Accumulated Annuity receipts and benefit
payments are generally recorded as increases or decreases in
"annuity benefits 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.
Life, Accident and Health Benefits Reserves Liabilities for
future policy benefits under traditional ordinary life, accident
and health policies are computed using a net level premium method.
Computations are based on anticipated investment yields (primarily
7%), mortality, morbidity and surrenders and include provisions
for unfavorable deviations. Reserves are modified as necessary to
reflect actual experience and developing trends.
Assets Held In and Liabilities Related to Separate Accounts
Investment annuity deposits and related liabilities represent
deposits maintained by several banks under a previously offered
tax deferred annuity program. AAG receives an annual fee from
each bank for sponsoring the program; depositors can elect to
purchase an annuity from AAG with funds in their account.
Income Taxes AFC and American Premier file consolidated federal
income tax returns which include all 80%-owned U.S. subsidiaries,
except for certain life insurance subsidiaries. Because voting
rights aggregating 21% were extended to holders of AFC Series F
and G Preferred Stock in connection with the Mergers, AFC
continues to file a separate consolidated return. AFG (parent) is
included in American Premier's consolidated return. Deferred
income taxes are calculated using the liability method. Under
this method, deferred income tax assets and liabilities are
determined based on differences between financial reporting and
tax bases and are measured using enacted tax rates. Deferred tax
assets are recognized if it is more likely than not that a benefit
will be realized.
<PAGE>
Benefit Plans AFG provides retirement benefits, through
contributory and noncontributory defined contribution plans, to
qualified employees of participating companies. Contributions to
benefit plans are charged against earnings in the year for which
they are declared. Both AFC and American Premier have Employee
Stock Ownership Retirement Plans ("ESORP") which are
noncontributory, qualified plans invested in securities of AFG and
affiliates for the benefit of their employees.
F-10
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFG and many of its subsidiaries provide health care and life
insurance benefits to eligible retirees. AFG also provides
postemployment benefits to former or inactive employees (primarily
those on disability) who were not deemed retired under other company
plans. The projected future cost of providing these benefits is
expensed over the period the employees qualify for such benefits.
Under AFG's stock option plan, options are granted to officers,
directors and key employees at exercise prices equal to the fair
value of the shares at the dates of grant. No compensation
expense is recognized for stock option grants.
In connection with the Mergers, full vesting was granted to
holders of units under AFC's Book Value Incentive Plan and the
plan was terminated. Cash payments, which were made in April
to holders of the units, were accrued at December 31, 1994.
Debt Discount and Premium Debt discount, premium and expenses are
amortized over the lives of respective borrowings, generally on
the interest method.
Minority Interest For balance sheet purposes, minority interest
represents the interests of noncontrolling shareholders in AFG
subsidiaries and includes AFC preferred stock for periods
subsequent to the Mergers. For income statement purposes,
minority interest (included in "Other operating and general
expenses") represents those shareholders' interest in the earnings
of AFG subsidiaries and includes AFC preferred dividends following
the Mergers.
Earnings Per Share 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, if
material, of assumed conversion of common stock equivalents (stock
options and convertible preferred stock). The weighted average
number of shares used for periods prior to April 1995, is based
upon the 28.3 million shares issued in exchange for AFC shares in
the Mergers discussed in Note A.
Statement of Cash Flows For cash flow purposes, "investing
activities" are defined as making and collecting loans and
acquiring and disposing of debt or equity instruments and property
and equipment. "Financing activities" include obtaining resources
from owners and providing them with a return on their investments,
borrowing money and repaying amounts borrowed. Annuity receipts,
benefits and withdrawals are also reflected as financing
activities. 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.
Fair Value of Financial Instruments Methods and assumptions used
in estimating fair values are described in Note Q to the financial
statements. These fair values represent point-in-time estimates
of value that might not be particularly relevant in predicting
AFG's future earnings or cash flows.
<PAGE>
C. Acquisitions and Sales of Subsidiaries and Investees
General Cable In June 1994, AFC sold its investment in General
Cable common stock to an unaffiliated company for $27.6 million in
cash. AFC realized a $1.7 million pretax gain on the sale
(excluding its share of American Premier's loss on its sale of
General Cable securities).
F-11
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
American Business Insurance In 1993, AFC sold its insurance
brokerage operation, American Business Insurance, Inc., to
Acordia, Inc., an Indianapolis-based insurance broker, for cash
and Acordia common stock and warrants. AFC recognized a pretax
gain of approximately $44 million on the sale.
American Premier In 1993, AFEI, whose assets consisted primarily
of investments in American Premier, General Cable and AAG, sold
4.5 million shares of American Premier common stock in a secondary
public offering. AFC recognized a pretax gain of $28.3 million,
before minority interest, on the sale, including recognition of a
portion of previously deferred gains related to sales of assets to
American Premier from AFC subsidiaries. In anticipation of the
reduction of AFC's ownership of American Premier below 50%, AFC
ceased accounting for it as a subsidiary and began accounting for
it as an investee in April 1993.
In 1993, American Premier paid AFC $52.8 million (including
$12.8 million in interest) representing an adjustment on the 1990
sale of AFC's nonstandard automobile group to American Premier.
AFC recorded an additional pretax gain of $31.4 million on this
transaction after deferring $21.4 million based on its then
current ownership of American Premier.
Citicasters In December 1993, GACC completed a plan of
reorganization under which AFC received approximately 20% of new
common stock in exchange for its previous holdings of GACC stock
and debt. In connection with the plan, AFC also invested an
additional $7.5 million in GACC common stock and debt securities.
In June 1994, AFEI purchased approximately 10% of Citicasters
common stock from a third party for $23.9 million in cash.
In February 1996, Citicasters entered into a merger agreement with
Jacor Communications, Inc. providing for the acquisition of
Citicasters by Jacor. Under the agreement, AFG and its
subsidiaries would receive approximately
$220 million in cash plus warrants to buy approximately 1.5
million shares of Jacor common stock at $28 per share. AFG
expects to realize a pretax gain of approximately $150 million on
the sale. Consummation of the transaction is subject to
regulatory approvals, and certain adjustments to the price will be
made if the transaction does not close by September 30, 1996.
Spelling In 1993, AFC sold its common stock investment in
Spelling to Blockbuster Entertainment in exchange for Blockbuster
common stock and warrants. AFC realized a $52 million pretax gain
on the sale.
<PAGE>
D. Segments of Operations AFG operates its property and casualty
insurance business in three major segments: nonstandard
automobile, specialty lines and commercial and personal lines.
AFG's annuity business sells tax-deferred annuities principally to
employees of primary and secondary educational institutions and
hospitals. These insurance businesses operate throughout the
United States. AFG also owns significant portions of the voting
equity securities of certain companies (investee corporations -
see Note F).
F-12
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following tables (in thousands) show AFG's assets, revenues
and operating profit (loss) by significant business segment.
Capital expenditures, depreciation and amortization are not
significant. Operating profit (loss) represents total revenues
less operating expenses. Goodwill and its amortization have been
allocated to the various segments to which they apply. General
corporate assets and expenses have not been identified or
allocated by segment.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Assets
Property and casualty insurance (a) $ 7,443,115 $ 4,576,591 $ 4,192,908
Annuities 6,600,377 5,078,928 4,898,419
Other 603,833 104,495 86,361
14,647,325 9,760,014 9,177,688
Investment in investee corporations 306,545 832,637 899,800
$14,953,870 $10,592,651 $10,077,488
Revenues (b)
Property and casualty insurance:
Premiums earned:
Nonstandard automobile $ 954,210 $ 24,974 $ 175,046
Specialty lines 995,528 698,365 651,836
Commercial and personal lines 697,512 648,222 661,910
Other lines (c) 1,453 7,067 6,004
2,648,703 1,378,628 1,494,796
Investment and other income 465,998 314,731 481,548
3,114,701 1,693,359 1,976,344
Annuities (d) 444,082 378,010 395,871
Other 55,589 47,984 278,626
3,614,372 2,119,353 2,650,841
Equity in net earnings (losses)
of investee corporations 15,237 (16,573) 69,862
$ 3,629,609 $ 2,102,780 $ 2,720,703
<PAGE>
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Nonstandard automobile ($ 60,316) ($ 3,080) $ 4,498
Specialty lines 50,690 (12,598) 18,994
Commercial and personal lines 5,315 7,087 (6,493)
Other lines (c) (31,721) (24,914) (51,100)
(36,032) (33,505) (34,101)
Investment and other income 370,579 199,292 321,701
334,547 165,787 287,600
Annuities 79,579 58,748 63,388
Other (e) (182,444) (164,394) (158,865)
231,682 60,141 192,123
Equity in net earnings (losses) of
investee corporations 15,237 (16,573) 69,862
$ 246,919 $ 43,568 $ 261,985
</TABLE>
(a) Not allocable to segments.
(b) Revenues include sales of products and services as well as
other income earned by the respective segments.
(c) Includes discontinued insurance lines.
(d) Represents primarily investment income and realized
gains.
(e) Includes holding company expenses.
F-13
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Investments Bonds, redeemable preferred stocks and other stocks at
December 31, consisted of the following (in millions):
<TABLE>
<CAPTION>
1995
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
<S> <C> <C> <C> <C>
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ - $ - $ - $ -
States, municipalities and
political subdivisions 55.0 56.6 1.7 (.1)
Foreign government 13.1 12.8 1.0 (1.3)
Public utilities 528.8 545.3 17.7 (1.2)
Mortgage-backed securities 945.7 980.3 35.3 (.7)
All other corporate 2,042.1 2,129.8 87.8 (.1)
Redeemable preferred stocks 4.2 4.5 .3 -
$3,588.9 $3,729.3 $143.8 $ (3.4)
1995
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ 413.9 $ 431.3 $ 17.5 ($ .1)
States, municipalities and
political subdivisions 20.6 20.3 .3 (.6)
Foreign government 87.5 89.9 2.4 -
Public utilities 561.3 591.0 32.3 (2.6)
Mortgage-backed securities 1,373.2 1,407.8 40.7 (6.1)
All other corporate 3,087.1 3,304.3 219.8 (2.6)
Redeemable preferred stocks 104.5 104.7 1.9 (1.7)
$5,648.1 $5,949.3 $314.9 ($13.7)
Other stocks $ 136.9 $ 252.2 $115.9 ($ .6)
<PAGE>
1994
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ - $ - $ - $ -
States, municipalities and
political subdivisions 23.4 23.2 .7 ( .9)
Foreign government 16.0 14.0 - (2.0)
Public utilities 614.9 566.4 .8 (49.3)
Mortgage-backed securities 952.7 872.3 .1 (80.5)
All other corporate 2,917.7 2,761.6 5.7 (161.8)
Redeemable preferred stocks 104.9 99.2 .4 (6.1)
$4,629.6 $4,336.7 $ 7.7 ($300.6)
1994
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
Bonds and redeemable
preferred stocks:
United States Government
and government agencies
and authorities $ 306.9 $ 293.0 $ .4 ($14.3)
States, municipalities and
political subdivisions 36.8 36.3 1.4 (1.9)
Foreign government 44.0 42.4 .1 (1.7)
Public utilities 84.1 79.3 .2 (5.0)
Mortgage-backed securities 721.4 671.5 .6 (50.5)
All other corporate 745.7 740.2 2.9 (8.4)
Redeemable preferred stocks - - - -
$1,938.9 $1,862.7 $ 5.6 ($81.8)
Other stocks $ 137.1 $ 208.7 $ 72.0 ($ .4)
</TABLE>
<PAGE>
The table below sets forth the scheduled maturities of bonds and
redeemable preferred stocks based on carrying value as of
December 31, 1995. Data based on market value is generally the
same. Mortgage-backed securities had an average life of
approximately 7 years at December 31, 1995.
Held to Available
Maturity Maturity for Sale
One year or less 2% 1%
After one year through five years 30 19
After five years through ten years 38 42
After ten years 4 14
74 76
Mortgage-backed securities 26 24
100% 100%
F-14
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Certain risks are inherent in connection with fixed maturity
securities, including loss upon default, price volatility in
reaction to changes in interest rates and general market factors
and risks associated with reinvestment of proceeds due to
prepayments or redemptions in a period of declining interest
rates.
Realized gains (losses) and changes in unrealized appreciation
(depreciation) on fixed maturity and equity security investments
are summarized as follows (in thousands):
Fixed Equity Tax
Maturities Securities Effects Total
1995
Realized $ 77,963 $ 6,065 ($ 13,915) $ 70,113
Change in Unrealized 810,690 43,400 (287,896) 566,194
1994
Realized (1,107) 49,449 30 48,372
Change in Unrealized (673,001) (60,500) 256,725 (476,776)
1993
Realized 52,915 29,350 (12,348) 69,917
Change in Unrealized 125,112 83,700 (73,084) 135,728
Transactions in fixed maturity investments included in the
Statement of Cash Flows consisted of the following (in millions):
1995
Held to Available
Maturity for Sale Total
Purchases $774.8 $1,603.6 $2,378.4
Maturities and redemptions 176.3 133.3 309.6
Sales 12.9 2,297.9 2,310.8
Gross Gains 1.9 88.0 89.9
Gross Losses (2.3) (9.6) (11.9)
1994
Held to Available
Maturity for Sale Total
Purchases $1,090.0 $636.3 $1,726.3
Maturities and redemptions 216.0 204.9 420.9
Sales 8.0 686.9 694.9
Gross Gains 3.3 9.4 12.7
Gross Losses (2.5) (11.3) (13.8)
<PAGE>
Securities classified as "held to maturity" having an amortized
cost of $14.7 million and $8.7 million were sold for a loss of $1.8
million and $712,000 in 1995 and 1994, respectively, due to
significant deterioration in the issuers' creditworthiness.
Gross gains of $69.4 million and gross losses of $16.5 were
realized on sales of fixed maturity investments during 1993.
F-15
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. Investment in Investee Corporations Investment in investee
corporations represents AFG's ownership of securities of certain
companies. All of the companies named in the following table are
subject to the rules and regulations of the SEC. Market value of
the investments was approximately $509 million and $890 million at
December 31, 1995 and 1994, respectively.
AFG's investment (and common stock ownership percentage) and
equity in net earnings and losses of investees are stated below
(dollars in thousands):
<TABLE>
<CAPTION>
Investment (Ownership %) Equity in Net Earnings (Losses)
12/31/95 12/31/94 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Chiquita (a) $232,466 (44%) $237,015(46%) $ 3,628 ($26,670) ($24,038)
Citicasters (b) 74,079 (38%) 69,695(37%) 4,702 8,950 -
American Premier(c) - 525,927(42%) 6,907 1,147 91,700
Other - - - - 2,200
$306,545 $832,637 $15,237 ($16,573) $69,862
</TABLE>
(a) Excludes AFG's share of Chiquita's extraordinary losses on
prepayment of debt in 1995 and 1994.
(b) AFC resumed equity accounting for its investment in GACC
following GACC's reorganization at the end of 1993. See
Note C concerning agreement to sell Citicasters.
(c) Accounted for as an investee beginning April 1, 1993; became a
100%-owned subsidiary on April 3, 1995.
Chiquita is a leading international marketer, processor and
producer of quality food products. Citicasters owns and operates
radio and television stations in major markets throughout the
country.
Included in AFG's consolidated retained earnings at December 31,
1995, was approximately $35 million applicable to equity in
undistributed net earnings of investees.
F-16
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summarized financial information for AFG's investees at
December 31, 1995, is shown below (in millions). See "Investee
Corporations" in Management's Discussion and Analysis.
Chiquita Brands International, Inc. (*)
1995 1994 1993
Current Assets $ 877 $ 804
Non-current Assets 1,747 1,970
Current Liabilities 510 574
Non-current Liabilities 1,442 1,555
Shareholders' Equity 672 645
Net Sales of Continuing Operations $2,566 $2,506 $2,533
Operating Income 176 71 104
Income (Loss) from Continuing Operations 28 (84) (51)
Discontinued Operations (11) 35 -
Extraordinary Item (8) (23) -
Net Income (Loss) 9 (72) (51)
(*) Amounts for 1994 and 1993 were reclassified by Chiquita in
1995 to reflect discontinued operations.
<TABLE>
<CAPTION>
Citicasters Inc.
1995 1994 1993
<S> <C> <C> <C>
Contracts, Broadcasting Licenses
and Other Intangibles $313 $275
Other Assets 103 128
Long-term Debt 132 122
Shareholders' Equity 160 151
Net Revenues $136 $197 $205
Operating Income 37 52 40
Earnings (Loss) before Extraordinary Items 14 63 (67)
Extraordinary Items - - 408(**)
Net Earnings 14 63 341
</TABLE>
(**) Extraordinary items include a $414 million gain on debt
discharged in the reorganization of Citicasters' predecessor.
F-17
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. Cost in Excess of Net Assets Acquired At December 31, 1995 and
1994, accumulated amortization of the excess of cost over net
assets of purchased subsidiaries amounted to approximately
$110 million and $100 million, respectively. Amortization
expense was $9.2 million in 1995, $6.1 million in 1994 and
$15.0 million in 1993.
H. Long-Term Debt Long-term debt consisted of the following at
December 31, (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
American Financial Corporation (Parent Company):
9-3/4% Debentures due April 2004, less discount
of $1,249 and $0 (imputed rate - 9.8%) $302,510 $203,759
12% Debentures due September 1999 - 120,463
10% Debentures due October 1999 - 89,620
12-1/4% Debentures due September 2003 - 51,556
Other, less discount of $0 and $456 8,692 24,667
$311,202 $490,065
American Premier Underwriters, Inc. (Parent Company):
9-3/4% Subordinated Notes due August 1999,
including premium of $4,403 (imputed rate - 8.8%) $161,531
10-5/8% Subordinated Notes due April 2000,
including premium of $7,210 (imputed rate - 8.8%) 120,222
10-7/8% Subordinated Notes due May 2011,
including premium of $5,082 (imputed rate - 9.6%) 55,581
Notes payable to banks by Pennsylvania Company -
$337,334
Great American Holding Corporation:
Notes payable to banks $ - $160,000
11% Notes due 1998, less discount of $737 - 149,263
Floating Rate Notes due 1995, less discount of $78 - 49,922
$ - $359,185
American Annuity Group, Inc.:
11-1/8% Senior Subordinated Notes due February 2003 $101,443 $103,868
9-1/2% Senior Notes due August 2001 41,490 43,990
Notes payable to banks due September 1999 20,500 30,000
Other 4,301 5,384
$167,734 $183,242
Other Subsidiaries:
Notes payable secured by real estate $ 53,066 $ 45,354
Notes payable to banks due December 1997 - 16,000
Other 12,727 12,901
$ 65,793 $ 74,255
</TABLE>
F-18
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At December 31, 1995, sinking fund and other scheduled
principal payments on debt for the subsequent five years were
as follows (in thousands):
American
AFC Premier
(Parent) (Parent) Other Total
1996 $ - $ - $ 2,538 $ 2,538
1997 5,910 - 2,498 8,408
1998 - - 2,761 2,761
1999 - 157,128 22,848 179,976
2000 - 113,012 8,608 121,620
Debentures purchased in excess of scheduled payments may be
applied to satisfy any sinking fund requirement. The
scheduled principal payments shown above assume that
debentures purchased are applied to the earliest scheduled
retirements.
Great American Holding Corporation ("GAHC"), a wholly-owned
subsidiary of AFC, and Pennsylvania Company ("Pennco"), a
wholly-owned subsidiary of American Premier, have revolving
loan agreements with groups of banks under which they can
borrow up to $300 million and $75 million, respectively.
Borrowings bear interest at floating rates based on prime or
LIBOR and are collateralized by certain stock of operating
subsidiaries. Each facility is guaranteed by the respective
immediate parent company.
AAG and AFEI have revolving credit agreements with banks
under which they can borrow up to $75 million and $20
million, respectively. Borrowings bear interest at floating
rates based on prime or LIBOR and are collateralized.
<PAGE>
Following the Mergers, American Premier agreed to lend up to
$675 million to AFC under a line of credit, and subsequently
advanced funds which, along with other funds available, were
used by AFC to redeem $279 million of its various debentures,
repay $187 million of GAHC's bank debt, and redeem $200
million of GAHC's Notes. Also during 1995, AFC sold an
aggregate of $100 million of its 9-3/4% debentures due in
2004 for cash.
In a 1994 exchange offer, AFC issued $204 million of its 9-
3/4% debentures for a like amount of its various other
debenture issues. The related unamortized original issue
discount and debt issue costs ($24.3 million) were written
off in 1993. In connection with the offer, all of AFC's
13-1/2% debentures not tendered for exchange were redeemed
for $63.2 million in cash.
As the result of the Mergers and a subsequent ratings
downgrade, holders of American Premier's Notes had the right
to "Put" their Notes to American Premier at face amount.
Approximately $44 million of the Notes were tendered under
the Put Right. In addition, American Premier repurchased
$136 million of the Notes for $142.7 million in cash.
In connection with its acquisition of GALIC in 1992, AAG
borrowed $230 million from several banks. In 1993, AAG sold
$225 million of Notes to the public and repaid the bank loans.
During 1994, AAG repurchased $77.1 million of the Notes in
exchange for $69 million in cash plus 810,000 shares of its
common stock. During 1995, AAG repurchased
$4.9 million of the Notes for $5.0 million in cash.
F-19
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In the first two months of 1996, AFC repurchased $48.3 million
of its debentures for $52.4 million; American Premier
repurchased $28.7 million of its Notes for $31.1 million; and
AAG repurchased $22.1 million of its Notes for $24.1 million.
Cash interest payments of $137 million, $115 million and
$133 million were made on long-term debt in 1995, 1994 and
1993, respectively.
I. Capital Stock In connection with the Mergers discussed in Note
A, AFG issued 51.3 million shares (net of 18.7 million shares
held by AFC and its subsidiaries, which are shown herein as
retired) of Common Stock on April 3, 1995. During 1995, AFG sold
7.4 million newly issued shares of its Common Stock for an aggregate
of $202.8 million cash in connection with (i) exercises of Stock
Options, (ii) issuances under AFG's new Dividend Reinvestment Plan
and its Employee Stock Purchase Plan, and (iii) sales to the AFC ESORP
and in a public offering.
At December 31, 1995, there were 60,139,303 shares of AFG
Common Stock outstanding or issuable, including 1,373,081
shares held by American Premier for issuance to certain
creditors and other claimants pursuant to a plan of
reorganization relating to American Premier's predecessor.
AFG is authorized to issue 12.5 million shares of Voting
Preferred Stock and 12.5 million shares of Nonvoting Preferred
Stock, each without par value. At December 31, 1995, AFG had
212,698 shares of convertible preferred stock outstanding with
a stated value of $469,000 (included in Capital Surplus, net
of related notes receivable). At that date, there were
446,799 shares of AFG Common Stock reserved for issuance upon
conversion of the Preferred Stock. See Note R - Subsequent
Event.
F-20
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At December 31, 1995, there were 6.0 million shares of AFG
Common Stock reserved for issuance upon exercise of stock
options. Options become exercisable at the rate of 20% per
year commencing one year after grant; those granted to non-
employee directors of AFG are generally fully exercisable upon
grant. All options expire ten years after the date of grant.
Stock option data for AFG is as follows:
Option Price
Shares per share
Outstanding at April 3, 1995 2,931,948 $17.24 to $31.38
Granted 2,142,681 23.97 to 30.06
Exercised (883,974) 17.24 to 28.19
Terminated (250,669) 19.20 to 28.19
Outstanding at December 31, 1995 3,939,986 17.24 to 31.38
Exercisable at December 31, 1995 1,395,175
Available for grant at December 31, 1995 2,107,988
A progression of AFG's Shareholders' Equity is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Common Stock
Common and Capital Retained
Shares(*) Surplus Earnings Unrealized
<S> <C> <C> <C> <C>
Balance at December 31, 1992 18,971,217 $ 904 $ 42,402 $ 68,100
Net earnings - - 220,130 -
Dividends on:
Preferred Stock - - (26,137) -
Common Stock - - (1,897) -
Increase in capital subject
to put option - - (23,652) -
Change in unrealized - - - 88,800
Balance at December 31, 1993 18,971,217 904 210,846 156,900
<PAGE>
Net earnings - - 2,100 -
Purchase of Preferred Stock - - (56) -
Dividends on:
Preferred Stock - - (25,728) -
Common Stock - - (3,794) -
Decrease in capital subject
to put option - - 7,225 -
Transfer from capital subject
to put option - - 32,502 -
Change in unrealized - - - (153,400)
Balance at December 31, 1994 18,971,217 904 223,095 3,500
Dividends on AFC Preferred Stock - - (191) -
Exercise of AFC stock options 762,500 8,721 - -
Restatement of AFC equity in
terms of AFG Common Stock 8,590,159 - - -
Shares issued in Mergers to
holders of APU Common Stock 24,376,667 588,492 - -
Net earnings - - 191,247 -
Change in unrealized - - - 248,000
Dividends on Common Stock - - (27,008) -
Shares issued:
Exercise of stock options 883,974 18,875 - -
Dividend reinvestment plan 200,381 5,859 - -
Employee stock purchase plan 32,972 918 - -
Public offering 4,600,000 127,180 - -
Sale to AFC ESORP 1,703,000 50,004 - -
Employee gift shares 19,050 494 - -
Shares repurchased (617) (17) - -
Change in foreign currency
translation - 64 - -
Balance at December 31, 1995 60,139,303 $801,494 $387,143 $251,500
</TABLE>
(*) Prior to the Mergers, Carl H. Lindner and certain members of the
Lindner family owned all of the outstanding common stock of AFC.
F-21
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Under a 1983 agreement, certain members of the Lindner family
(the "Group") had the right to "put" to AFC their shares of AFC
common stock or options at a defined value. In anticipation of
the extinguishment of the Group's rights due to the Mergers, the
allocation of capital equal to that value
($32.5 million) was reclassified to Retained Earnings at
December 31, 1994.
AFC Mandatory Redeemable Preferred Stock At December 31, 1994,
there were 274,242 shares of $10.50 par value Series E Preferred
Stock outstanding. These shares were retired, at par, in
December 1995. During 1994, AFC redeemed all 150,212
outstanding shares of Series I Preferred Stock and 230,469
shares of Series E Preferred Stock for approximately $6.6
million. During 1993, AFC purchased 75,106 shares of Series I
Preferred Stock for approximately $2.1 million.
Other AFC Preferred Stock Subsequent to the Mergers, AFC's
Preferred Stock is included in "Minority interest." At December
31, 1995, AFC's Preferred Stock was voting, cumulative, and
consisted of the following:
Series F, $1 par value; annual dividends per share
$1.80; 10% may be retired at AFC's option at $20 per share
in 1996; 13,744,754 shares (stated value - $167.9 million)
outstanding at December 31, 1995 and 1994.
Series G, $1 par value; annual dividends per share $1.05;
may be retired at AFC's option at $10.50 per share;
364,158 shares (stated value - $600,000) outstanding at
December 31, 1995 and 1994.
In 1994, AFC purchased 8,500 shares of Series F Preferred Stock
from a subsidiary's profit sharing plan for $159,000.
F-22
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
J. Income Taxes The following is a reconciliation of income taxes
at the statutory rate of 35% and income taxes as shown in the
Statement of Earnings (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Earnings before income taxes
and extraordinary items $246,919 $43,568 $261,985
Extraordinary items before income taxes 536 (17,192) (4,559)
Adjusted earnings before income taxes $247,455 $26,376 $257,426
Income taxes at statutory rate $ 86,609 $ 9,232 $ 90,099
Effect of:
Losses (utilized) not utilized (40,292) 19,267 (59,141)
Dividends received deduction (7,823) (8,528) (8,336)
Minority interest 11,673 2,998 12,082
Amortization of intangibles 3,015 1,987 2,658
Tax exempt interest (897) (689) (659)
Foreign income taxes 359 6 76
State income taxes 81 149 820
Other 3,483 (146) (303)
Total provision 56,208 24,276 37,296
Amounts applicable to extraordinary items 281 374 -
Provision for income taxes as shown
on the Statement of Earnings $ 56,489 $24,650 $ 37,296
Adjusted earnings (loss) before income taxes consisted of the
following (in thousands):
1995 1994 1993
Subject to tax in:
United States $250,423 $28,422 $255,682
Foreign jurisdictions (2,968) (2,046) 1,744
$247,455 $26,376 $257,426
The total income tax provision consists of (in thousands):
1995 1994 1993
Current taxes (credits):
Federal $38,512 $21,028 $43,592
Foreign (1,213) - 503
State 124 226 1,843
Deferred taxes (credits):
Federal 18,233 3,012 (8,256)
Foreign 552 10 (386)
$56,208 $24,276 $37,296
</TABLE>
F-23
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For income tax purposes, certain members of the AFC and American
Premier consolidated tax groups had the following carryforwards
available at December 31, 1995 (in millions):
AFC Tax Group Expiring Amount
{ 1996 - 2001 $ 22
Operating Loss { 2002 - 2006 143
{ 2007 - 2010 103
American Premier Tax Group
Operating Loss 1996 $476
Capital Loss 1997 - 1999 311
Other - Tax Credits 23
Deferred income taxes reflect the impact of temporary
differences between the carrying amounts of assets and
liabilities recognized for financial reporting purposes and the
amounts recognized for tax purposes. The significant components
of deferred tax assets and liabilities for AFG's tax groups
included in the Balance Sheet at December 31, were as follows
(in millions):
<TABLE>
<CAPTION>
1995
American
AFC Premier
Tax Group Tax Group 1994
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 93.8 $166.5 $ 80.0
Capital loss carryforwards - 108.7 -
Insurance claims and reserves 195.9 102.9 202.1
Other, net 41.2 91.3 53.5
330.9 469.4 335.6
Valuation allowance for deferred
tax assets (91.9) (214.0) (111.1)
239.0 255.4 224.5
Deferred tax liabilities:
Deferred acquisition costs (89.8) (31.2) (78.3)
Investment securities (210.8) (23.8) (103.6)
(300.6) (55.0) (181.9)
Net deferred tax asset (liability) ($ 61.6) $200.4 $ 42.6
</TABLE>
The gross deferred tax asset has been reduced by a valuation
allowance based on an analysis of the likelihood of realization.
Factors considered in assessing the need for a valuation
allowance include: (i) recent tax returns, which show neither a
history of large amounts of taxable income nor cumulative losses
in recent years, (ii) opportunities to generate taxable income
from sales of appreciated assets, and (iii) the likelihood of
generating larger amounts of taxable income in the future. The
likelihood of realizing this asset will be reviewed
periodically; any adjustments required to the valuation
allowance will be made in the period in which the developments
on which they are based become known.
<PAGE>
Cash payments for income taxes, net of refunds, were
$14.8 million, $30.0 million and $49.6 million for 1995, 1994
and 1993, respectively.
F-24
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
K. Extraordinary Items Extraordinary items represent AFG's
proportionate share of gains (losses) recorded by the following
companies from their debt retirements. Amounts shown are net of
minority interest and income tax benefits (in thousands):
1995 1994 1993
Subsidiaries:
AFC (parent) ($1,713) ($ 6,454) $ -
APU (parent) 6,137 - -
GAHC (611) - -
AAG (201) (1,328) (4,559)
Investee:
Chiquita (2,795) (9,036) _-
$ 817 ($16,818) ($4,559)
L. Commitments and Contingencies Loss accruals have been recorded
for various environmental and occupational injury and disease
claims and other contingencies arising out of the railroad
operations disposed of by American Premier's predecessor, Penn
Central Transportation Company ("PCTC"), prior to its bankruptcy
reorganization in 1978. Any ultimate liability arising
therefrom in excess of previously established loss accruals
would normally be attributable to pre-reorganization events and
circumstances and accounted for as a reduction in capital
surplus. However, under purchase accounting in connection with
the Mergers, any such excess liability will be charged to
earnings in AFG's financial statements.
American Premier's liability for environmental claims ($64.3
million at December 31, 1995, before claims for recovery of $9.5
million) consists of a number of proceedings and claims seeking
to impose responsibility for hazardous waste remediation costs
at certain railroad sites formerly owned by PCTC and certain
other sites where hazardous waste was allegedly generated by
PCTC's railroad operation. It is difficult to estimate
remediation costs for a number of reasons, including the number
and financial resources of other potentially responsible
parties, the range of costs for remediation alternatives,
changing technology and the time period over which these matters
develop. American Premier's liability is based on information
currently available and is subject to change as additional
information becomes available.
American Premier's liability for occupational injury and disease
claims ($80.6 million at December 31, 1995, before claims for
recovery of
$62.1 million) includes pending and expected claims by former
employees of PCTC for injury or disease allegedly caused by
exposure to excessive noise, asbestos or other substances in the
railroad workplace. Recorded amounts are based on the
accumulation of estimates of reported and unreported claims and
related expenses and estimates of probable recoveries from
insurance carriers.
<PAGE>
In exchange for $5 million, AFC has agreed to indemnify a former
subsidiary for up to $35 million in excess of a threshold amount
of $25 million of the costs it may incur in the 12 years
beginning April 1, 1993 to resolve environmental matters,
bankruptcy claims and certain other matters. In connection with
the 1994 sale of securities of a former subsidiary, American
Premier assumed responsibility for certain environmental and
other liabilities in consideration for an indemnity payment of
$19.2 million. Additionally, another subsidiary has accrued
$10.3 million at December 31, 1995, for environmental costs
associated with the sales of former manufacturing properties.
F-25
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In management's opinion, the outcome of the items discussed
under "Uncertainties" in Management's Discussion and Analysis,
beginning on page 26 of this Form 10-K, and the above claims and
contingencies will not, individually or in the aggregate, have a
material adverse effect on AFG's financial condition or results
of operations.
M. Benefit Plans AFG expensed ESORP contributions of $14.5 million
in 1995, $6.2 million in 1994 and $9.4 million in 1993. AFG
expensed postretirement benefits of $3.4 million in 1995, $2.4
million in 1994 and $3.1 million in 1993.
N. Transactions With Affiliates In 1993, AFC sold stock of an
affiliate to certain of its officers and employees for $1.8
million in cash and $270,000 in 5.25% unsecured notes due in
five equal annual installments beginning in 1996. At Decemb
er 31, 1993, an AFC real estate subsidiary owed $452,000 to The
Provident Bank under a loan purchased by Provident in 1991 from
an unrelated bank. The loan was repaid in 1994. Members of the
Lindner family are majority owners of Provident's parent. In
1995, a subsidiary of AFC sold a house to its Chairman for $1.8
million. All of the above transactions have taken place at
approximate market rates or values and, in the opinion of
management, all amounts receivable are fully collectible.
F-26
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
O. Quarterly Operating Results (Unaudited) The operations of certain
of AFG's business segments are seasonal in nature. While
insurance premiums are recognized on a relatively level basis,
claim losses related to adverse weather (snow, hail, hurricanes,
tornados, etc.) may be seasonal. Quarterly results necessarily
rely heavily on estimates. These estimates and certain other
factors, such as the nature of investees' operations and
discretionary sales of assets, cause the quarterly results not to
be necessarily indicative of results for longer periods of time.
See Notes A and C for changes in ownership of companies whose
revenues are included in the consolidated operating results and
for the effects of gains on sales of subsidiaries and investees in
individual quarters. The following are quarterly results of
consolidated operations for the two years ended December 31, 1995
(in millions, except per share amounts).
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
1995
Revenues $553.2 $1,005.9 $1,002.5 $1,068.0 $3,629.6
Earnings before
extraordinary items 29.8 33.0 51.0 76.6 190.4
Extraordinary items - .5 2.0 (1.7) .8
Net earnings 29.8 33.5 53.0 74.9 191.2
Earnings per common share:
Before extraordinary
items $.83 $.63 $.95 $1.36 $3.87
Extraordinary items - .01 .04 (.03) .01
Net earnings .83 .64 .99 1.33 3.88
Average number of Common
Shares 28.3 52.7 53.4 56.1 47.6
<PAGE>
1994
Revenues $523.6 $508.0 $537.5 $533.7 $2,102.8
Earnings (loss) before
extraordinary items 26.7 23.2 7.5 (38.5) 18.9
Extraordinary items (15.7) (.7) (.5) .1 (16.8)
Net earnings (loss) 11.0 22.5 7.0 (38.4) 2.1
Earnings (loss) per
common share:
Before extraordinary
items $.70 $.60 $.04 ($1.58) ($.24)
Extraordinary items (.54) (.03) (.02) - (.59)
Net earnings (loss) .16 .57 .02 (1.58) (.83)
Average number of Common
Shares 28.3 28.3 28.3 28.3 28.3
</TABLE>
Quarterly earnings per share do not add to year-to-date amounts
due to changes in shares outstanding during 1995. Results for
1994 included credits of $3.9 million and $5.3 million in the
second and third quarters and a fourth quarter charge of
$43.9 million for units outstanding under AFC's Book Value
Incentive Plan.
Realized gains on sales of securities amounted to (in millions):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
1995 $ 3.5 $7.9 $23.6 $49.0 $84.0
1994 14.9 8.2 20.0 5.2 48.3
</TABLE>
F-27
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
P. Insurance Securities owned by insurance subsidiaries having a
carrying value of approximately $1.6 billion at December 31,
1995, were on deposit as required by regulatory authorities.
Other income includes life, accident and health premiums of
$15.7 million in 1995, $2.2 million in 1994 and $2.4 million in
1993.
During the third quarter of 1994, the California Supreme Court
upheld Proposition 103, an insurance reform measure passed by
California voters in 1988. In addition to increasing rate
regulation, Proposition 103 gives the California insurance
commissioner power to mandate rate rollbacks for most lines of
property and casualty insurance. GAI recorded a charge of
$26 million (included in "Other operating and general expenses")
in the third quarter of 1994 in response to the California court
decision. This charge was revised at December 31, 1994 to
reflect a settlement agreement signed in March 1995 setting
GAI's refund obligation at $19 million. The agreement was
finalized in 1995 following a required waiting period.
Several proposals have been made in recent years to change the
federal income tax system. Some proposals included changes in
the method of treating investment income and tax deferred
income. To the extent a new tax law reduces or eliminates the
tax deferred status of AFG's annuity products, that segment
could be materially affected.
Insurance Reserves The liability for losses and loss adjustment
expenses for certain long-term scheduled payments under workers'
compensation, auto liability and other liability insurance has
been discounted at rates ranging from 4% to 8%. As a result,
the total liability for losses and loss adjustment expenses at
December 31, 1995, has been reduced by $67 million.
<PAGE>
The following table provides an analysis of changes in the
liability for losses and loss adjustment expenses, net of
reinsurance (and grossed up), over the past three years on a
GAAP basis (in millions):
1995 1994 1993
Balance at beginning of period $2,187 $2,113 $2,886
Reserves of American Premier:
At date of deconsolidation - - (785)
At date of the Mergers 1,090 - -
Provision for losses and loss
adjustment expenses occurring in
the current year 2,116 1,027 1,103
Net decrease in provision for claims
occurring in prior years (139) (40) (39)
1,977 987 1,064
Payments for losses and loss adjustment
expenses occurring during:
Current year (987) (381) (363)
Prior years (874) (532) (689)
(1,861) (913) (1,052)
Balance at end of period $3,393 $2,187 $2,113
Add back reinsurance recoverables 704 730 611
Unpaid losses and loss adjustment
expenses included in Balance Sheet,
gross of reinsurance $4,097 $2,917 $2,724
F-28
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Net Investment Income The following table shows (in millions)
investment income earned and investment expenses incurred by
AFG's insurance companies.
1995 1994 1993
Insurance group investment income:
Fixed maturities $727.3 $560.6 $566.2
Equity securities 5.3 8.3 9.9
Other 7.9 6.7 4.7
740.5 575.6 580.8
Insurance group investment expenses(*) (33.8) (32.0) (38.9)
$706.7 $543.6 $541.9
(*) Included primarily in "Other operating and general expenses" in the
Statement of Earnings.
Statutory Information AFG's insurance subsidiaries are required
to file financial statements with state insurance regulatory
authorities prepared on an accounting basis prescribed or
permitted by such authorities (statutory basis). Net earnings
and policyholders' surplus on a statutory basis for the
insurance subsidiaries were as follows (in millions):
Policyholders'
Net Earnings Surplus
1995 1994 1993 1995 1994
Property and casualty
companies $200 $63 $179 $1,595 $943
Life insurance companies 76 54 44 273 256
Reinsurance In the normal course of business, AFG's insurance
subsidiaries assume and cede reinsurance with other insurance
companies. The following table shows (in millions) (i) amounts
deducted from property and casualty premium income accounts in
connection with reinsurance ceded, (ii) amounts included in
income for reinsurance assumed and (iii) reinsurance recoveries
deducted from losses and loss adjustment expenses.
1995 1994 1993
Reinsurance ceded to:
Non-affiliates $476 $402 $333
Affiliates 33 161 89
Reinsurance assumed - including
non-voluntary pools and associations 93 83 61
Reinsurance recoveries 304 429 343
<PAGE>
Q. Additional Information Total rental expense for various leases
of railroad rolling stock, office space and data processing
equipment was $35 million, $22 million and $24 million for 1995,
1994 and 1993, respectively. Sublease rental income related to
these leases totaled $6.2 million in 1995, $6.4 million in 1994
and $6.6 million in 1993.
Future minimum rentals, related principally to office space and
railroad rolling stock, required under operating leases having
initial or remaining noncancelable lease terms in excess of one
year at December 31, 1995, were as follows: 1996 - $43 million,
1997 - $37 million, 1998 - $27 million, 1999 - $19 million; 2000
- $10 million and $18 million thereafter. At December 31, 1995,
minimum sublease rentals to be received through the expiration
of the leases aggregated $27 million.
F-29
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Other operating and general expenses included charges for
possible losses on agents' balances, reinsurance recoverables
and other receivables in the following amounts: 1995 - $0,
1994 - $18 million and 1993 - $10 million. The aggregate
allowance for such losses amounted to approximately $144 million
and $109 million at December 31, 1995 and 1994, respectively.
Fair Value of Financial Instruments The following table
presents (in millions) the carrying value and estimated fair
value of AFG's financial instruments at December 31.
1995 1994
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Bonds and redeemable
preferred stocks $9,538 $9,679 $6,492 $6,199
Other stocks 252 252 209 209
Liabilities:
Annuity benefits
accumulated $5,052 $4,887 $4,618 $4,510
Long-term debt:
AFC (parent company) 311 325 490 473
APU (parent company) 337 344 - -
Other subsidiaries 234 243 617 618
When available, fair values are based on prices quoted in the
most active market for each security. If quoted prices are not
available, fair value is estimated based on present values,
discounted cash flows, fair value of comparable securities, or
similar methods. The fair value of the liability for annuities
in the payout phase is assumed to be the present value of the
anticipated cash flows, discounted at current interest rates.
Fair value of annuities in the accumulation phase is assumed to
be the policyholders' cash surrender amount.
Financial Instruments with Off-Balance-Sheet Risk On occasion,
AFG and its subsidiaries have entered into financial instrument
transactions which may present off-balance-sheet risks of both
credit and market risk nature. These transactions include
commitments to fund loans, loan guarantees and commitments to
purchase and sell securities or loans. At December 31, 1995,
AFG and its subsidiaries had commitments to fund credit
facilities and contribute limited partnership capital totaling
$17 million.
<PAGE>
Restrictions on Transfer of Funds and Assets of Subsidiaries
Payments of dividends, loans and advances by AFG's subsidiaries
are subject to various state laws, federal regulations and debt
covenants which limit the amount of dividends, loans and
advances that can be paid. The maximum amount of dividends
payable (without prior approval from state insurance regulators)
in 1996 from AFG's insurance subsidiaries is approximately
$210 million. Total "restrictions" on intercompany transfers
from AFG's subsidiaries cannot be quantified due to the
discretionary nature of the restrictions.
R. Subsequent Event (Unaudited) In January 1996, AFG announced
that it has agreed to sell its subsidiary, Buckeye Management
Company, to Buckeye management (including an AFG director who
resigned in March 1996) and employees for $63 million in cash.
In connection with the sale, the AFG director has converted his
AFG convertible preferred stock into 446,799 shares of AFG
Common Stock and sold such shares in the open market. The sale
of Buckeye is expected to close in late March 1996.
F-30
<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 O to the
Consolidated Financial Statements.
B. Schedules filed herewith for 1995, 1994 and 1993:
Page
I - Condensed Financial Information of Registrant S-2
V - Supplemental Information Concerning
Property-Casualty Insurance Operations S-4
All other schedules for which provisions are made in the
applicable regulation of the Securities and Exchange Commission
have been omitted as they are not applicable, not required, or
the information required thereby is set forth in the
Financial Statements or the notes thereto.
3. Exhibits - see Exhibit Index on page E-1.
(b) Reports on Form 8-K:
Date of Reports Items Reported
December 13, 1995 Court of Appeals Ruling - USX
Litigation
February 14, 1996 Agreement to sell Citicasters
Common Stock
S-1
<PAGE>
AMERICAN FINANCIAL GROUP, INC. - PARENT ONLY (*)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In Thousands)
Condensed Balance Sheet
December 31,
Assets: 1995 1994
Cash and short-term investments $ 96,207 $ 4,896
Investment in securities - 1,786
Receivables from affiliates 85,055 288,271
Investment in subsidiaries 1,260,690 976,151
Investment in investee corporations - 233,908
Other assets 6,204 49,747
$1,448,156 $1,554,759
Liabilities and Capital:
Accounts payable, accrued expenses and other
liabilities $ 8,019 $ 83,783
Payables to affiliates - 582,048
Long-term debt - 490,065
Capital subject to mandatory redemption - 2,880
Other capital 1,440,137 395,983
$1,448,156 $1,554,759
<PAGE>
Condensed Statement of Earnings
Year Ended December 31,
Income: 1995 1994 1993
Dividends from:
Subsidiaries $ 37,044 $ 25,571 $248,168
Investees 879 3,514 4,035
37,923 29,085 252,203
Equity in undistributed earnings of
subsidiaries and investees 224,921 113,631 65,435
Realized gains (losses) on sales of:
Securities - 7,477 (1,743)
Investees - (5,555) 59,182
Investment and other income 9,131 26,546 21,370
271,975 171,184 396,447
Costs and Expenses:
Interest charges on borrowed money 13,997 60,439 74,793
Book Value Incentive Plan - 44,166 596
Other operating and general expenses 11,059 23,011 59,073
25,056 127,616 134,462
Earnings before income taxes and
extraordinary items 246,919 43,568 261,985
Provision for income taxes 56,489 24,650 37,296
Earnings before extraordinary items 190,430 18,918 224,689
Extraordinary items, net of income
taxes 817 (16,818) (4,559)
Net Earnings $191,247 $ 2,100 $220,130
(*) Financial statements for periods prior to the Mergers are those of
AFC. Results for 1995 include the earnings of AFC (parent only) for
the period prior to the Mergers.
S-2
<PAGE>
AMERICAN FINANCIAL GROUP, INC. - PARENT ONLY (*)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(In Thousands)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S>
Operating Activities: <C> <C> <C>
Net earnings $191,247 $ 2,100 $220,130
Adjustments:
Extraordinary losses from retirement of debt (817) 16,818 4,559
Equity in earnings of subsidiaries (193,206) (88,060) (172,803)
Equity in net earnings of investees (4,462) (2,872) (1,963)
Depreciation and amortization 123 612 3,778
Realized gains on sales of subsidiaries
and investments - (1,929) (57,421)
Writeoff of debt discount and issue costs - - 24,814
Change in receivables from and payables to
affiliates (100,225) 125,427 (196,338)
Increase (decrease) in payables (10,861) 37,051 (13,146)
Dividends from subsidiaries and investees 36,649 20,504 131,914
Other 7,414 (2,194) (16,943)
(74,138) 107,457 (73,419)
Investing Activities:
Purchases of subsidiaries and other
investments (30) - (29,501)
Sales of subsidiaries and other investments - 20,975 126,196
Other, net 255 (788) 344
225 20,187 97,039
Financing Activities:
Additional long-term borrowings 70 732 9,984
Reductions of long-term debt (325) (89,901) (9,062)
Issuances of common stock 211,557 - -
Repurchases of common and preferred stock (17) (6,738) (2,643)
Cash dividends paid (36,532) (29,522) (28,034)
Cash of predecessor company at date of merger (9,529) - -
165,224 (125,429) (29,755)
Net Increase (Decrease) in Cash and
Short-term Investments 91,311 2,215 (6,135)
Cash and short-term investments at beginning
of period 4,896 2,681 8,816
Cash and short-term investments at end
of period $ 96,207 $ 4,896 $ 2,681
</TABLE>
(*) Financial statements for periods prior to the Mergers are those of AFC.
Results for 1995 include the cash flows of AFC (parent only) for the period
prior to the Mergers.
S-3
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE V - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
<S> <C> <C> <C> <C> <C>
(a)
AFFILIA- RESERVES (b)
TION WITH DEFERRED FOR UNPAID DISCOUNT (c)
WITH POLICY CLAIMS AND DEDUCTED UNEARNED EARNED
REGISTRANT ACQUISITION CLAIMS AD- COLUMN C PREMIUMS PREMIUMS
COSTS JUSTMENT
EXPENSES
CONSOLIDATED PROPERTY-CASUALTY ENTITIES
1995 (d) $270 $4,097 $67 $1,294 $2,649
1994 $166 $2,917 $71 $ 825 $1,379
1993 (d) $1,495
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
AMORTIZATION PAID NET
INVESTMENT ADJUSTMENT EXPENSES POLICY AND CLAIM WRITTEN
INCOME INCURRED RELATED TO ACQUISITION ADJUSTMENT
COSTS EXPENSES
CURRENT PRIOR
YEAR YEAR
CONSOLIDATED PROPERTY-CASUALTY ENTITIES
1995 (d) $303 $2,116 ($139) $577 $1,861 $2,688
1994 $177 $1,027 ($ 40) $329 $ 913 $1,481
1993 (d) $206 $1,103 ($ 39) $345 $1,052 $1,587
</TABLE>
(a) Grossed up for reinsurance recoverables of $704 and $730 at
December 31, 1995 and 1994, respectively.
(b) Discounted at rates ranging from 4% to 8%.
(c) Grossed up for prepaid reinsurance premiums of $143 and $172 at
December 31, 1995 and 1994, respectively.
(d) Includes American Premier's Insurance Group through March 31, 1993,
and after April 1, 1995.
S-4
<PAGE>
INDEX TO EXHIBITS
AMERICAN FINANCIAL GROUP, INC.
Number Exhibit Description
2 Agreement and Plan of Acquisition
and Reorganization filed as
Exhibit 2 to AFG's Registration
Statement on Form S-4 effective
February 17, 1995. (*)
3(a) Amended and Restated Articles of
Incorporation. _____
3(b) Amended Code of Regulations. _____
4 Instruments defining the The rights of holders of
rights of security holders. Registrant's Preferred Stock are
defined in the Articles of Incor-
poration. Registrant has no out-
standing debt issues.
Management Contracts:
10(a) Stock Option Plan filed as (*)
Exhibit (10)(iii)(a)(i) to AFG's
Registration Statement on Form 8-B
filed on April 17, 1995.
10(b) Form of certain stock option agreement. _____
10(c) Stock Option Loan Program. _____
10(d) Bonus Plan for 1996. _____
10(e) Retirement program for outside directors. _____
10(f) Directors' Compensation Plan. _____
10(g) Severance Agreement between American
Premier and an AFG executive officer. _____
10(h) Agreement relating to the sale of
Buckeye Management Company. _____
11 Computation of earnings per share. _____
12 Computation of ratios of earnings
to fixed charges. _____
16 Letter from Deloitte & Touche LLP included
in AFG's Form 8-K filed on August 29, 1995. (*)
21 Subsidiaries of the Registrant. _____
23 Consents of independent auditors. _____
27 Financial data schedule. (**)
28 Information from reports furnished to
state insurance regulatory authorities. _____
<PAGE>
(*) Incorporated herein by reference.
(**) Copy included in Report filed electronically with the Securities
and Exchange Commission.
E-1
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1995
(In Thousands, Except Per Share Amounts)
Earnings before extraordinary items $190,430
Preferred dividend requirement of predecessor company (6,349)
Net earnings before extraordinary items
available to common shareholders 184,081
Extraordinary items 817
Net earnings available to common shareholders $184,898
Computation of primary earnings per common share
Shares used in calculation of per share data:
Weighted average common shares outstanding 47,620
Dilutive effect of assumed exercise of certain stock options 503
Weighted average common shares used to calculate
primary earnings per share 48,123
Primary earnings per common share Dilution less than 3%
Computation of fully diluted earnings per common share
Shares used in calculation of per share data:
Weighted average common shares outstanding 47,620
Dilutive effect of assumed exercise of certain stock options 608
Weighted average common shares used to calculate
fully diluted earnings per share 48,228
Fully diluted earnings per common share Dilution less than 3%
Reported earnings per share based on
weighted average common shares outstanding
Before extraordinary items $3.87
Extraordinary items .01
Net earnings $3.88
E-2
<PAGE>
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
EXHIBIT 12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Pretax income (loss) excluding
discontinued operations $247,455 $ 26,376 $257,426 ($144,854) $118,710
Minority interest in subsidiaries
having fixed charges(*) 33,190 8,565 34,800 37,685 44,369
Less undistributed equity in (earnings)
losses of investees (1,559) 49,010 (25,067) 376,020 5,817
Fixed charges:
Interest expense 124,633 114,803 153,836 212,150 245,757
Debt discount (premium) and expense (1,023) 1,240 5,273 4,698 6,961
One-third of rentals 9,471 5,119 5,801 16,341 45,286
EARNINGS $412,167 $205,113 $432,069 $502,040 $466,900
Fixed charges:
Interest expense $124,633 $114,803 $153,836 $212,150 $245,757
Debt discount (premium) and expense (1,023) 1,240 5,273 4,698 6,961
One-third of rentals 9,471 5,119 5,801 16,341 45,286
Pretax preferred dividend requirements
of subsidiaries 25,376 - - - 598
Capitalized interest - - - - 5,495
FIXED CHARGES $158,457 $121,162 $164,910 $233,189 $304,097
Ratio of Earnings to Fixed Charges 2.60 1.69 2.62 2.15 1.54
Earnings in excess of Fixed Charges $253,710 $ 83,951 $267,159 $268,851 $162,803
</TABLE>
(*) Amounts include preferred dividends of subsidiaries.
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<PAGE>
AMERICAN FINANCIAL GROUP, INC.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AFG at December 31, 1995.
All corporations are subsidiaries of AFG and, if indented,
subsidiaries of the company under which they are listed.
Percentage of
State of Common Equity
Name of Company Incorporation Ownership
American Financial Corporation Ohio 100
Great American Holding Corporation Ohio 100
Great American Insurance Company Ohio 100
American Annuity Group, Inc. Delaware 81
Great American Life Insurance Company Ohio 100
American Empire Surplus Lines Insurance
Company Delaware 100
American National Fire Insurance Company New York 100
Great American Management Services, Inc. Ohio 100
Mid-Continent Casualty Company Oklahoma 100
Stonewall Insurance Company Alabama 100
Transport Insurance Company Ohio 100
American Financial Enterprises, Inc. Connecticut 83
American Premier Underwriters, Inc. Pennsylvania 100
Pennsylvania Company Delaware 100
Atlanta Casualty Company Illinois 100
Infinity Insurance Company Florida 100
Leader National Insurance Company Ohio 100
Republic Indemnity Company of America California 100
Republic Indemnity Company of California California 100
Windsor Insurance Company Indiana 100
The names of certain subsidiaries are omitted, as such subsidiaries
in the aggregate would not constitute a significant subsidiary.
See Part I, Item 1 of this Report for a description of certain
companies in which AFG owns a significant portion and accounts for
under the equity method.
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<PAGE>
AMERICAN FINANCIAL GROUP, INC.
EXHIBIT 28 - INFORMATION FROM REPORTS FURNISHED
TO STATE INSURANCE REGULATORY AUTHORITIES
Schedule P of Annual Statements
A. CONSOLIDATED PROPERTY AND CASUALTY ENTITIES - See Attached
Schedules
Schedule P (prepared in accordance with the rules prescribed by
the National Association of Insurance Commissioners) includes
the reserves of AFG's consolidated property and casualty
subsidiaries. The following is a summary of Schedule P reserves
(in millions):
Schedule P - Part 1 Summary - col. 33 $2,815
- col. 34 579
Statutory Loss and Loss Adjustment Expense Reserves $3,394
B. UNCONSOLIDATED SUBSIDIARIES None
C. 50% OR LESS OWNED PROPERTY AND CASUALTY INVESTEES None
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<PAGE>
AMERICAN FINANCIAL GROUP, INC.
EXHIBIT 23 - CONSENTS OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration
Statement No. 33-58825 on Form S-8, Registration Statement No. 33-58827 on Form
S-8, and Registration Statement No. 33-59989 on Form S-3 of our report
dated March 15, 1996, with respect to the consolidated financial
statements and schedules of American Financial Group, Inc. included in
the Annual Report on Form 10-K for the year ended December 31, 1995.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 27, 1996
_________________________________________________________________
We consent to the incorporation by reference in Registration
Statement No. 33-58825 on Form S-8, Registration Statement No. 33-58827 on Form
S-8, and Registration Statement No. 33-59989 on Form S-3 of our report
dated February 15, 1995 (March 23, 1995 with respect to the
acquisition of American Financial Corporation as discussed in Note B
to the financial statements), appearing in the Annual Report on Form
10-K of American Financial Group, Inc. for the year ended December 31,
1995.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
March 27, 1996
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<PAGE>
Signatures
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, American Financial Group, Inc. has duly caused
this Report to be signed on its behalf by the undersigned, duly
authorized.
American Financial Group, Inc.
Signed: March 27, 1996 BY:s/CARL H. LINDNER
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
s/CARL H. LINDNER Chairman of the Board March 27, 1996
Carl H. Lindner of Directors
s/THEODORE H. EMMERICH Director* March 27, 1996
Theodore H. Emmerich
s/JAMES E. EVANS Director March 27, 1996
James E. Evans
s/CARL H. LINDNER III Director March 27, 1996
Carl H. Lindner III
s/WILLIAM R. MARTIN Director* March 27, 1996
William R. Martin
s/FRED J. RUNK Senior Vice President and March 27, 1996
Fred J. Runk Treasurer (principal
financial and accounting
officer)
* Member of the Audit Committee
