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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM . . . . . . . . TO . . . . . . . .
COMMISSION FILE NUMBER 0-8636
AMERICAN INDEMNITY FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 510119643
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE AMERICAN INDEMNITY PLAZA
GALVESTON, TEXAS 77550
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (409) 766-4600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock ($3.33 1/3 par value)
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No . . .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock of the Registrant held by
non-affiliates as of March 14, 1996 was $12,582,570 based upon the closing price
as of such date.
As of March 14, 1996, there were outstanding 1,947,110 shares of Common
Stock, $3.33 1/3 par value, of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Annual Report to Stockholders for the fiscal year ended December 31,
1995 (portions of which are incorporated into Parts II and IV hereof).
(2) The Registrant's definitive Proxy Statement with respect to the
Registrant's Annual Meeting of Stockholders proposed to be held April 29, 1996
(portions of which are incorporated into Part III hereof).
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TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. Business................................................................. 1
General Development of Business.......................................... 1
Distribution of Business................................................. 1
Financial Information.................................................... 2
Net Premiums Written................................................... 2
Underwriting Results................................................... 2
Loss and Loss Adjustment Expense Reserves.............................. 3
Narrative Description of Business........................................ 6
General................................................................ 6
Reinsurance............................................................ 6
Investments............................................................ 7
Regulation and Other Restrictions...................................... 7
ITEM 2. Properties............................................................... 9
ITEM 3. Legal Proceedings........................................................ 9
ITEM 4. Submission of Matters to a Vote of Security Holders...................... 9
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................ 9
ITEM 6. Selected Financial Data.................................................. 9
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 9
ITEM 8. Financial Statements and Supplementary Data.............................. 9
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................. 9
PART III
ITEM 10. Directors and Executive Officers of the Registrant....................... 9
ITEM 11. Executive Compensation................................................... 10
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........... 10
ITEM 13. Certain Relationships and Related Transactions........................... 10
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... 10
SIGNATURES.............................................................................. 13
INDEPENDENT AUDITORS' REPORT............................................................ 14
SCHEDULE I Summary of Investments -- Other than Investments in Related Parties,
December 31, 1995...................................................... S-1
SCHEDULE II Condensed Financial Information of Registrant............................ S-2
SCHEDULE VI Supplemental Information -- Property Casualty Insurance.................. S-5
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
American Indemnity Financial Corporation (the "Company"), an insurance
holding company, was organized in June 1973 under the laws of Delaware for the
purpose of acquiring the outstanding shares of common stock of American
Indemnity Company. The Company currently owns 99.9% of the common stock of
American Indemnity Company, its principal operating subsidiary. American
Indemnity Company, incorporated in 1913, is the oldest Texas stock company
engaged in the general casualty insurance business in the state. The insurance
written by American Indemnity Company and its two wholly owned subsidiaries,
American Fire and Indemnity Company and Texas General Indemnity Company,
includes automobile, homeowners multiple peril, workers' compensation, fire and
allied lines, commercial multiple peril and general casualty lines.
In this report, the term "American Indemnity" refers to American Indemnity
Company and its subsidiaries, unless the context indicates otherwise.
The principal business of the Company is carried on through American
Indemnity; however, the Company does provide advice and services to American
Indemnity and coordinates its activities in the areas of accounting,
investments, public relations, business development, data processing and
automation, asset and liability management, budgetary planning, compliance with
governmental regulations and procedures, financing arrangements, and other such
matters. American Indemnity and each of its subsidiaries operate under the
day-to-day management of their own officers and directors.
DISTRIBUTION OF BUSINESS
The Company writes the majority of its business in Texas. In general,
American Indemnity has avoided writing business in those jurisdictions where
regulators are most reluctant to grant rate adjustments. The following table
shows the geographic distribution of gross premiums written.
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YEARS ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Texas............................................... 73.4% 73.1% 73.0%
Louisiana........................................... 6.9 6.9 7.1
Florida............................................. 6.4 7.3 7.6
Mississippi......................................... 3.8 3.7 3.8
Alabama............................................. 2.7 2.3 2.3
Tennessee........................................... 2.4 2.5 2.2
Kentucky............................................ 2.0 1.8 1.8
All other (six states).............................. 2.4 2.4 2.2
----- ----- -----
Total..................................... 100.0% 100.0% 100.0%
</TABLE>
The following table provides the distribution of the Company's business on
the basis of net premiums written between personal lines (primarily insurance
for private passenger automobiles and residential property) and commercial
lines.
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<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Personal Lines......................................... 38% 42% 44%
Commercial Lines....................................... 62 58 56
---- ---- ----
Total........................................ 100% 100% 100%
</TABLE>
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FINANCIAL INFORMATION
NET PREMIUMS WRITTEN
The following table summarizes, by major classes of policies written, the
amounts and percentages of net premiums written by American Indemnity during the
periods indicated.
NET PREMIUMS WRITTEN
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1995 1994 1993
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Personal automobile............... $19,764 29.1% $20,426 30.9% $20,786 31.4%
Commercial multiple peril......... 16,097 23.7 14,511 21.9 13,727 20.8
Commercial automobile............. 15,263 22.4 13,408 20.2 13,658 20.6
Other liability................... 6,626 9.7 5,930 9.0 5,327 8.1
Homeowners multiple peril......... 4,154 6.1 4,886 7.4 5,418 8.2
Fire and allied lines............. 3,285 4.8 3,765 5.7 3,867 5.8
Inland marine..................... 1,439 2.1 1,617 2.4 1,521 2.3
Workers' compensation............. 1,008 1.5 1,241 1.9 1,507 2.3
All other......................... 399 0.6 390 0.6 357 0.5
------- ----- ------- ----- ------- -----
Net premiums written.... $68,035 100.0% $66,174 100.0% $66,168 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
In April 1995, A. M. Best Company assigned the Company a rating of B
(Adequate). The Company cannot predict whether this rating will eventually be
changed. Although some mortgage lenders will not accept property insurance
written by B rated insurers, the Company has not seen any reduction in the
number of its property policies which can be attributed to this rating. In the
event that any mortgage lenders take exception to any American Indemnity
property policies, the Company has arranged for a cut-through endorsement
(guaranty bond) from Munich American Reinsurance Company which will meet the
standards of mortgage lenders.
UNDERWRITING RESULTS
A common industry measurement of property-casualty insurance underwriting
results is the "statutory combined ratio." This ratio is the sum of (1) the
ratio of losses and loss adjustment expenses to premiums earned ("loss and loss
adjustment expense ratio"); (2) the ratio of underwriting expenses to premiums
written ("underwriting expense ratio"); and (3) the ratio of statutory
retrospective premium adjustments on workers' compensation policies to premiums
written ("retrospective premium adjustment ratio"). When the statutory combined
ratio is under 100%, underwriting results are profitable. Federal income taxes,
investment income, deferred policy acquisition costs and other non-underwriting
income and expenses are not reflected in the statutory combined ratios.
2
<PAGE> 5
The following table sets forth the Company's statutory combined ratios for
the periods indicated.
STATUTORY COMBINED RATIOS
(DOLLARS IN THOUSANDS)
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YEARS ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Premiums earned......................................... $67,858 $65,346 $64,082
Statutory losses incurred............................... 40,784 35,996 36,176
Loss adjustment expenses incurred....................... 8,752 7,656 6,711
Loss ratio............................................ 60.1% 55.1% 56.5%
Loss and loss adjustment expense ratio................ 73.0 66.8 66.9
Underwriting expense ratio............................ 37.4 36.1 33.0
Retrospective premium adjustment ratio................ 3.0 .4 2.2
------- ------- -------
Statutory combined ratio........................... 113.4% 103.3% 102.1%
======= ======= =======
</TABLE>
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Reserves for Insured Events. American Indemnity maintains a provision for
losses and loss adjustment expenses to cover the ultimate net cost of losses on
reported and unreported claims. The estimation of unpaid losses and loss
adjustment expenses is perhaps the most crucial and important aspect affecting
underwriting results of the Company and the industry as a whole. The Company
follows the practice of reserving for losses for reported and unreported claims
and for related loss adjustment expenses, in each case based on the terms and
limits of liability as specified in the Company's policies. There has not been a
significant change in reserving assumptions or methodologies during the year,
nor a material change in the geographic locations of business produced. The
Company believes that its loss reserving methodologies appropriately address the
effects of the change in the mix of business between personal lines and
commercial lines as reflected by the table at the bottom of page one of this
report.
With respect to reported claims, the Company establishes reserves on a
case-by-case basis, based on the best available evidence as to the cost of the
claim. When the reserve for a particular case is set initially, it is based on
current estimated costs, such as automobile or home repair costs for property
damage claims and, in the case of liability claims, the Company's claims
adjuster's and the handling attorney's best estimate of the settlement costs, as
well as such attorney's judgment as to the climate of the courts with respect to
the size of judgments. While there is no explicit provision made for inflation,
these reserves are reviewed periodically on a case-by-case basis to determine
if, for example, updated cost information on property claims or revised
estimates based on new information received in the course of settling or
litigating a claim require the reserve to be adjusted. In this manner, the
reserve is updated implicitly to reflect additional costs resulting from
inflation or from changing social conditions, such as changes in the size of
judgments for liability claims.
In addition to reserving for reported claims, the Company establishes
reserves for incurred but unreported claims. These reserves are based on
historical experience with respect to the probable number and nature of claims
arising from losses not yet reported. In addition, if an event occurs with
respect to which the Company believes that all losses have not been reported,
the Company adjusts the reserve for losses incurred but not reported. This
adjustment of the reserve for incurred but unreported claims is based on the
average severity of claims reported with respect to such an event, historical
experience with respect to the average claim severity of like occurrences, the
judgment of the Company's claims adjusters and an estimate of the probable
number of claims that will arise from such an event.
Loss adjustment expense reserves are established based on the Company's
historical experience with respect to loss adjustment expenses paid relative to
losses paid, as well as an experience-based provision for those loss adjustment
expenses not directly assignable to specific claims which are known as
unallocated loss adjustment expenses. Unallocated loss adjustment expenses are
the overhead costs associated with claim handling and administration, such as
salaries of clerical personnel.
3
<PAGE> 6
For each year end since 1987, the Company obtained an independent actuarial
review of its reserves for insured events. In addition to periodic review of
loss reserves for insured events during the year, the Company also tests the
adequacy of loss reserves on an annual basis. Loss reserves for reported claims
at the end of each year are analyzed in relation to the average per claim cost
experienced in the recent past. This average per claim cost, or "average claim
severity" is then used as a projected average. This projected average is then
used to test the adequacy of current reserves for reported losses by multiplying
it by the number of outstanding claims to calculate a projected year-end loss
reserve for insured events. This loss reserve is then compared with the
Company's then existing loss reserve for insured events to determine its
adequacy. Additionally, the current total amount of unreported losses is tested
based on historical trends and relationships regarding unreported losses to
determine the adequacy of current reserve levels for incurred but unreported
claims. This reserve is then compared with the Company's then existing reserve
for unreported losses to test its adequacy. The loss adjustment expense reserves
are tested by taking the ratio of current year data on paid loss adjustment
expenses to paid losses and including an experience-based provision for
unallocated loss adjustment expenses.
One factor influencing the predictability of loss reserves, as well as the
underwriting results of the Company, is the amount of net property losses
incurred resulting from weather-related catastrophes. Weather-related
catastrophe losses are an ever present aspect of the property-casualty insurance
business. The cost to the Company of such losses in 1995 was approximately
$6,281,000, compared with $2,930,000 for 1994 and $3,802,000 for 1993.
With respect to losses for insured events, the Company continues to limit
the effects of large losses on underwriting results by maintaining what it
believes to be adequate treaty, facultative and catastrophe reinsurance. See
Note 6 of "Notes to Consolidated Financial Statements" in the Company's 1995
Annual Report to Stockholders (the "Annual Report").
The following table presents the changes in loss reserves for the three
most recent years:
RECONCILIATION OF CONSOLIDATED LOSS RESERVES
(DOLLARS IN THOUSANDS)
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YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
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<S> <C> <C> <C>
Beginning reserve..................................... $40,293 $40,841 $43,407
------- ------- -------
Provision for:
Insured events of the current year.................. 47,159 42,015 41,572
Insured events of prior years....................... 2,407 1,294 776
------- ------- -------
Incurred loss and loss adjustment expenses.......... 49,566 43,309 42,348
------- ------- -------
Payments for losses and loss adjustment expenses:
Attributable to insured events of the current
year............................................. 27,910 23,567 23,730
Attributable to insured events of prior years....... 22,758 20,290 21,184
------- ------- -------
Total payments...................................... 50,668 43,857 44,914
------- ------- -------
Ending reserve........................................ $39,191 $40,293 $40,841
======= ======= =======
</TABLE>
4
<PAGE> 7
The following table presents the Company's loss reserve development for the
ten years ended December 31, 1995:
CONSOLIDATED LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------- ------ ------ ------ ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITY FOR UNPAID CLAIMS AND CLAIM
ADJUSTMENT EXPENSE(1).............. 57,937 58,800 49,214 51,624 54,449 47,643 43,407 40,841 40,293 39,191
PAID (CUMULATIVE) AS OF:
One year later..................... 36,870 34,099 25,848 26,186 25,009 25,514 21,184 20,375 22,759 --
Two years later.................... 54,213 47,735 38,054 36,055 39,030 35,756 29,795 31,375 -- --
Three years later.................. 62,025 55,859 43,278 44,317 45,892 40,170 36,068 -- -- --
Four years later................... 67,539 58,981 48,484 48,515 48,736 42,981 -- -- -- --
Five years later................... 69,216 62,849 51,069 50,044 50,500 -- -- -- -- --
Six years later.................... 72,007 64,819 52,212 51,324 -- -- -- -- -- --
Seven years later.................. 73,525 65,827 53,138 -- -- -- -- -- -- --
Eight years later.................. 74,358 66,585 -- -- -- -- -- -- -- --
Nine years later................... 74,920 -- -- -- -- -- -- -- -- --
LIABILITY RE-ESTIMATED AS
OF (1):
One year later..................... 66,093 59,581 50,185 52,934 53,674 48,803 44,183 42,135 42,700 --
Two years later.................... 69,049 62,997 54,145 54,949 57,612 51,887 46,609 45,516 -- --
Three years later.................. 71,304 65,324 55,397 56,414 59,599 52,202 48,749 -- -- --
Four years later................... 72,999 66,268 56,082 57,264 59,693 52,947 -- -- -- --
Five years later................... 73,731 66,687 56,511 57,112 60,474 -- -- -- -- --
Six years later.................... 74,074 66,974 56,234 57,552 -- -- -- -- -- --
Seven years later.................. 74,301 66,697 56,571 -- -- -- -- -- -- --
Eight years later.................. 74,041 66,990 -- -- -- -- -- -- -- --
Nine years later................... 74,310 -- -- -- -- -- -- -- -- --
REDUNDANCY (DEFICIENCY).............. (16,373) (8,190) (7,357) (5,928) (6,025) (5,304) (5,342) (4,675) (2,407) --
Gross liability -- end of year....... 53,425 50,917 51,165
Reinsurance recoverable.............. 12,584 10,624 11,974
Net liability -- end of year......... 40,841 40,293 39,191
Gross re-estimated
liability -- latest................ 63,787 57,657
Re-estimated recoverable -- latest... 18,271 14,957
Net re-estimated
liability -- latest................ 45,516 42,700
Gross cumulative deficiency.......... (10,362) (6,740)
</TABLE>
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(1) The re-estimated liability shown above has been reduced (increased) by
retrospective premium adjustments which were subsequently collected from
(paid to) workers' compensation policyholders as follows (dollars in
thousands): 1986, $4,196; 1987, $4,149; 1988, $1,459; 1989, $(640); 1990,
$(3,856); 1991, $(2,680); 1992, $(4,130); 1993, $(2,711); and 1994,
$(2,213). Since these amounts are reported separately from incurred losses
in the Company's financial statements prepared in accordance with generally
accepted accounting principles and its statutory financial statements, they
are reconciling items between this table and Schedule P of the statutory
financial statements. Additionally, in accordance with generally accepted
accounting principles, accruals have been made for the Company's estimated
assessments from the Texas Workers' Compensation Insurance Facility, and
the liability for unpaid claims and claim adjustment expenses has been
increased by the following amounts (dollars in thousands): 1987, $2,766;
1988, $2,817; 1989, $4,060; 1990, $4,958; 1991, $2,415; 1992, $603; 1993,
$0; 1994, $0; and 1995, $0, and the re-estimated liability shown above has
been increased (decreased) by the following amounts (dollars in thousands):
1987, $460; 1988, $752; 1989, $751; 1990, $445; 1991, $(335); 1992, $(614);
1993, $(179); and 1994, $79. Such amounts are also reconciling items
between this table and Schedule P of the statutory financial statements.
Also, the liability for incurred but not reported claims on certain lines
of business is allocated to prior accident years using different
percentages in the Company's financial statements prepared in accordance
with generally accepted accounting principles and its statutory financial
statements, and the re-estimated liability for incurred but not reported
claims has been reduced by the following amounts (dollars in thousands):
1993, $(575); and 1994, $(1,694). These amounts are also reconciling items
between this table and Schedule P of the statutory financial statements.
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<PAGE> 8
In evaluating the above table, it should be noted that each amount includes
the effects of all changes in amounts for prior periods. For example, the amount
of the deficiency related to losses settled in 1989, but incurred in 1986, will
be included in the cumulative deficiency amount for years 1986, 1987 and 1988.
Conditions and trends that have affected development of the reserves in the past
may not necessarily occur in the future. Accordingly, it is not appropriate to
extrapolate future redundancies or deficiencies based on this table.
Loss reserves amounted to approximately $39,191,000 at December 31, 1995.
In view of the variability inherent in the calculation of loss reserves, should
the ultimate net cost of American Indemnity's losses prove to be substantially
greater than its loss reserves, its operations, earnings and surplus could be
adversely affected. The Company believes, however, that its aggregate loss and
loss adjustment expense reserves are reasonable and adequate to cover the
ultimate net cost of losses and loss adjustment expenses on reported and
unreported claims.
NARRATIVE DESCRIPTION OF BUSINESS
General
The Company, through American Indemnity, is a multiple-line property and
casualty insurer. The lines of insurance written by American Indemnity include
automobile, homeowners multiple peril, workers' compensation, fire and allied
lines, commercial multiple peril and general casualty lines. American Indemnity
does not write certain high-risk specialty lines, such as medical and other
professional malpractice and directors' and officers' liability, although it is
exposed to a certain extent to such risks through pooling arrangements required
of insurance companies by various state regulatory authorities.
The insurance written by American Indemnity is produced through
approximately 540 agencies. All such agencies are permitted to, and usually do,
represent other insurance companies. Workers' compensation insurance is
principally written directly by American Indemnity's internal marketing
department. In addition, American Indemnity maintains four service offices in
two states to service its agencies and policyholders. In five other states, the
Company has a marketing representative.
American Indemnity competes with individual companies and with groups of
affiliated companies, many of which have nationwide organizations, more
diversified lines of insurance coverage, greater financial resources, larger
sales forces and more widespread agency relationships. Competitors include both
stock and mutual companies and other underwriting organizations.
As of December 31, 1995, the Company and American Indemnity had 177 home
office employees and 66 employees in the field.
Reinsurance
American Indemnity follows the customary practice of reinsuring with other
insurance companies a portion of certain risks under the policies it has
written. This practice is referred to as "ceding." Such reinsurance is
maintained to protect American Indemnity against the severity of individual
claims as well as against unusually serious occurrences in which a number of
claims produce an aggregate extraordinary loss. Although reinsurance does not
discharge American Indemnity from its primary liability for the full amount of
the policies, it does make the assuming reinsurer liable to American Indemnity
to the extent of the reinsured portion of risks. The statutes and regulations of
various states permit the primary insurer, in its financial statements, to treat
risks, to the extent properly reinsured, as though they were risks for which the
primary insurer is not liable.
American Indemnity has reinsurance contracts, known as reinsurance
"treaties," under which certain types of policies are automatically reinsured
without the need for individual approval by the reinsurer of each risk covered.
Other reinsurance contracts provide for "facultative" reinsurance which is
handled on an individual policy or risk basis and requires the specific
agreement of the reinsurer as to each risk insured.
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<PAGE> 9
Property insurance risks are reinsured under treaty arrangements whereby
$700,000 of losses in excess of $100,000 are automatically reinsured. The
Company has additional automatic property facultative reinsurance agreements for
losses in excess of $800,000 up to a maximum of $2,100,000. Therefore, the
liability of American Indemnity on property risks is effectively limited to a
maximum of $100,000. In addition, American Indemnity currently carries excess
catastrophe reinsurance which covers 95% of all losses with respect to
windstorm, hurricane and hail suffered within any two separate 72 hour periods
within a 12 month interval up to $36,000,000 in excess of $4,000,000. American
Indemnity carries excess property and automobile catastrophe reinsurance which
covers 90% of catastrophe losses up to $3,000,000 incurred in excess of
$3,000,000, subject to a $250,000 per occurrence retention. Effective July 21,
1995, American Indemnity carries excess catastrophe reinsurance which covers 95%
of all losses up to $2,000,000 in excess of $2,000,000. The Company has never
had an individual catastrophe loss in excess of $6,300,000; however, there can
be no assurance that a greater loss could not occur in the future.
All claims on automobile liability and casualty insurance over $125,000 up
to $2,000,000 are automatically reinsured under a treaty. At January 1, 1993,
the automobile physical damage line of business was subject to a 50% quota share
reinsurance agreement. This agreement was terminated effective August 31, 1993
and replaced with a 25% quota share reinsurance agreement effective September 1,
1993 for the automobile physical damage line of business. This agreement was
terminated effective August 31, 1994 and was not replaced.
Investments
American Indemnity invests its capital surplus and reserve funds in
securities and other investments authorized by applicable state laws and
regulations and receives income from such investments in the form of interest,
dividends and capital gains. The principal objective of the Company's investment
portfolio is to provide capital for American Indemnity's insurance underwriting
operations. The securities comprising American Indemnity's investment portfolio
consist primarily of taxable government bonds, tax-exempt state and municipal
bonds, corporate bonds, and preferred and common stocks.
The invested assets of the Company at December 31, 1995 are set forth on
Schedule I hereto.
The following table sets forth the investment results of the Company,
exclusive of investments in subsidiaries, for each of the three years ended
December 31, 1995 (dollars in thousands).
<TABLE>
<CAPTION>
ANNUAL PERCENTAGE
AVERAGE CASH EARNED ON NET CAPITAL
AND INVESTMENTS NET ------------------------- GAINS (LOSSES)
--------------------------------- INVESTMENT INVESTMENTS INVESTMENTS ------------------------
YEAR CASH INVESTMENTS(1) TOTAL INCOME(2) AND CASH ONLY REALIZED UNREALIZED(3)
- -------------- ------ -------------- ------- ---------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993.......... $3,650 $ 85,210 $88,860 $5,253 5.91% 6.16% $1,275 $ 907
1994.......... 3,783 84,325 88,108 4,703 5.34 5.58 (31) (12,245)
1995.......... 4,860 83,125 87,985 4,010 4.56 4.82 (276) 12,737
</TABLE>
- ---------------
(1) The average of amounts at beginning and end of year with securities valued
at market value.
(2) Net investment income is after deduction of investment expenses and before
net realized gains and losses.
(3) For 1993, unrealized gains include the effect of restatement of bonds from
lower of the aggregate amortized cost or market value to market value of
approximately $633,000. See discussion of derivative investments on pages
10 through 12 of the Annual Report.
Regulation and Other Restrictions
American Indemnity, in common with other insurance companies, is subject to
regulation and supervision by the insurance regulatory authority of each state
or other jurisdiction in which it is licensed to do business. These regulatory
authorities have broad administrative powers relating to the granting and
revocation of licenses to transact business, the licensing of agents, the
approval of policy forms and rates, the form and content of mandatory financial
statements, reserve requirements and the types of investments which may be
7
<PAGE> 10
made. Detailed annual reports must be filed with the appropriate regulatory
authorities and the books and records of American Indemnity are subject to their
examination.
In 1971, the Texas Legislature enacted the Insurance Holding Company System
Regulatory Act (the "Texas Act") which regulates insurance companies authorized
to do business in the State of Texas which are members of an insurance holding
company system. Under the Texas Act, no insurance company may pay dividends
within any twelve-month period which exceed the greater of 10% of such insurer's
statutory surplus as regards policyholders, as reported at the end of the
preceding calendar year, or the statutory net investment income of such insurer
for such year, without the consent of the Commissioner of Insurance of the State
of Texas. Furthermore, only such earnings of American Indemnity determined on
the statutory basis, exclusive of restricted surplus and special surplus funds,
are available for distribution as cash dividends and are subject to declaration
by American Indemnity's Board of Directors and to such restrictions imposed by
law or regulation on the payment of dividends. For amounts available for payment
of dividends by American Indemnity, see Note 7 of "Notes to Consolidated
Financial Statements" in the Annual Report.
The National Association of Insurance Commissioners (the "NAIC") has
established various model laws, regulations and guidelines as part of its
regulatory oversight of insurance companies. A state must adopt these laws in
order to maintain its accreditation from the NAIC. The NAIC Model Insurance
Company System Regulatory Act (the "NAIC Model Act") contains restrictions
regarding payment of dividends which differ from restrictions under Texas law.
Although the state of Texas has not yet adopted these restrictions, the Texas
Department of Insurance has given notice it will vigorously scrutinize any
dividends deemed extraordinary under this act and may take a variety of actions.
The NAIC Model Act requires that no insurance company may pay any extraordinary
dividend or make any other extraordinary distribution to its shareholders until
thirty days after the commissioner of insurance has received notice of the
declarations thereof and has not within that period disapproved the payment, or
until the commissioner of insurance has approved the payment within the
thirty-day period. An extraordinary dividend or distribution includes any
dividend or distribution of cash or other property, whose fair market value
together with that of other dividends or distributions made within the preceding
twelve months exceeds the lesser of 10% of its statutory surplus as regards to
policyholders as of the end of the preceding calendar year or the net income,
not including realized capital gains, for such year. An insurance company may
carry forward net income from the previous two calendar years that has not
already been paid out as dividends.
Additionally, under the Texas Act, a Texas insurance company may not enter
into transactions with any member of its holding company system involving sales,
purchases, exchanges, loans or extensions of credit, or investment, involving
either more than 5% of its admitted assets or 25% of its surplus, whichever is
the lesser, as of the end of the prior calendar year, without the approval of
the Commissioner of Insurance of the State of Texas. Certain other states in
which American Indemnity is authorized to do business have enacted statutes
similar to the Texas Act, but such statutes typically provide that they are
inapplicable, in whole or in part, to insurance companies which are subject to
similar regulations in their state of domicile.
American Indemnity, in common with other insurance companies, maintains its
accounts in accordance with statutory insurance practices, which differ in some
respects from generally accepted accounting principles followed by other
business enterprises in determining financial position and results of
operations. Since these differences have been adjusted to present the Company's
consolidated financial statements filed as a part of this report in conformity
with generally accepted accounting principles (see Notes 1 and 7 of "Notes to
Consolidated Financial Statements" in the Annual Report), such consolidated
financial statements do not necessarily disclose American Indemnity's financial
position for purposes of regulation and supervision by the supervising agencies
of each state or jurisdiction in which American Indemnity is licensed to do
business.
In accordance with the insurance laws of Texas and the rules and practices
of the NAIC, American Indemnity is examined periodically by examiners of the
state of Texas and (on an "association" or "zone" basis) by representatives of
the other states in which it is licensed to do business. The most recently
completed examination was made by the state of Texas as of June 30, 1994.
8
<PAGE> 11
ITEM 2. PROPERTIES.
The home office facilities consist of two adjacent and connected buildings
owned by American Indemnity with an aggregate of 152,000 square feet located in
the business section of Galveston, Texas. The Company's home office facilities
are 99.9% occupied by the Company and 0.1% leased to other parties.
All other facilities of the Company consist of a total of four service
offices in two states that are leased by American Indemnity for terms of one to
five years.
The Company believes that its leased and owned properties are adequate for
its current needs.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information set forth under the captions "Per Share Market and Dividend
Information" and "Common Stock" on pages 2 and 8, respectively, of the Annual
Report, is incorporated herein by reference. Reference is also made to
"Regulation and Other Restrictions" under Item 1 of this Form.
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth under the caption "Five Year Comparative Summary
of Selected Financial Data" on page 9 of the Annual Report is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 10 through
14, inclusive, of the Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information set forth under the captions "Consolidated Balance Sheets",
"Consolidated Statements of Income", "Consolidated Statements of Cash Flows",
"Consolidated Statements of Stockholders' Equity", "Notes to Consolidated
Financial Statements" and "Independent Auditors' Report" on pages 15 through 28,
inclusive, of the Annual Report, and under the caption "Selected Quarterly
Financial Data" on page 9 of the Annual Report, is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Election of Directors" and
"Executive Officers" on pages 4 through 7, inclusive, and the information under
the caption "Compliance with Section 16(a) of the Securities
9
<PAGE> 12
Exchange Act of 1934" on page 13 of the Company's Proxy Statement with respect
to the Company's 1996 Annual Meeting of Stockholders (the "Proxy Statement"), is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation" on
pages 7 through 13, inclusive, of the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the captions "Principal Stockholders",
"Election of Directors" and "Executive Officers" on pages 1 through 6,
inclusive, of the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Other Transactions" on page 13
of the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS A PART OF THIS REPORT.
1. FINANCIAL STATEMENTS
The financial statements listed below appear on pages 15 through 27 of the
Annual Report. Such financial statements are incorporated herein by reference.
Consolidated Balance Sheets, December 31, 1995 and 1994
Consolidated Statements of Income for the Three Years Ended December 31,
1995
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1995
Consolidated Statements of Stockholders' Equity for the Three Years Ended
December 31, 1995
Notes to Consolidated Financial Statements for the Three Years Ended
December 31, 1995
2. FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Schedule I -- Summary of Investments -- Other Than Investments in Related
Parties, December 31, 1995......................................... S-1
Schedule II -- Condensed Financial Information of Registrant:
Balance Sheets, December 31, 1995 and 1994......................... S-2
Statements of Income for the Three Years Ended
December 31, 1995.................................................. S-3
Statements of Cash Flows for the Three Years Ended
December 31, 1995.................................................. S-4
Schedule VI -- Supplemental Information -- Property Casualty Insurance............ S-5
</TABLE>
All other schedules are omitted because they are not required or because
the required information is included in the financial statements or related
footnotes.
10
<PAGE> 13
3. EXHIBITS
The Company undertakes to furnish to any stockholder so requesting a copy
of any of the following exhibits upon payment to the Company of the reasonable
costs incurred by the Company in furnishing any such exhibit.
<TABLE>
<S> <C>
3.1. -- Certificate of Incorporation of the Company, as amended (Exhibit 3.1
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1989, is incorporated by reference herein).
3.2. -- By-Laws of the Company, as amended (Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992 is
incorporated by reference herein).
4.1. -- See Exhibit Nos. 3.1 and 3.2 for provisions of the Certificate of
Incorporation, as amended, and the By-Laws, as amended, of the
Company defining the rights of the holders of the Common Stock.
+10.1. -- The Company's 1982 Incentive Stock Option Plan (Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1990, is incorporated by reference herein).
+10.2. -- Form of 1982 Incentive Stock Option Plan Agreement (Exhibit 10.2 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1990, is incorporated by reference herein).
+10.3. -- The Company's Key Executive Severance Plan (Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1990, is incorporated by reference herein).
+10.4. -- Form of Key Executive Severance Agreement (Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1990, is incorporated by reference herein).
+10.5. -- The Company's 1992 Employee Stock Option Plan (Exhibit 4.4 to the
Company's Registration Statement on Form S-8 (No. 33-47359), is
incorporated by reference herein).
+10.6. -- Form of the Company's Non-Incentive Stock Option Agreement (Exhibit
4.5 to the Company's Registration Statement on Form S-8 (No.
33-47359), is incorporated by reference herein).
+10.7. -- Form of the Company's Incentive Stock Option Agreement (Exhibit 4.6
to the Company's Registration Statement on Form S-8 (No. 33-47359),
is incorporated by reference herein).
+10.8. -- The Company's 1992 Non-Employee Director Stock Option Plan (Exhibit
4.4 to the Company's Registration Statement on Form S-8 (No.
33-47546), is incorporated by reference herein).
+10.9. -- Form of the Company's Non-Employee Director Stock Option Agreement
(Exhibit 4.5 to the Company's Registration Statement on Form S-8 (No.
33-47546), is incorporated by reference herein).
*11.1. -- Computation of Fully Diluted Net Income (Loss) Per Common and Common
Equivalent Share.
*13.1. -- Pages 2 and 8 through 28, inclusive, of the Company's Annual Report
to Stockholders for the fiscal year ended December 31, 1995.
</TABLE>
11
<PAGE> 14
<TABLE>
<S> <C>
21.1. -- List of the Company's Subsidiaries (Exhibit 22.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1990, is
hereby incorporated by reference herein).
*23.1. -- Consent of Independent Auditors.
*24.1. -- Powers of Attorney.
**28.1. -- Consolidated Statutory Schedule "P".
</TABLE>
- ---------------
* Filed herewith.
** As permitted by Rule 311(c) of Regulation S-T, the Company has filed the
Consolidated Statutory Schedule "P" (Exhibit 28.1) with the Commission in
paper format under cover of Form SE.
+ Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14 of Form 10-K.
(b) REPORTS ON FORM 8-K.
No current reports on Form 8-K were filed by the Company during the three
months ended December 31, 1995.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN INDEMNITY FINANCIAL CORPORATION
By /s/ PHILLIP E. APGAR
------------------------------------------
Phillip E. Apgar
Vice President, Treasurer and Chief Financial
Officer
Dated March 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 27th day of March, 1996, by the following
persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------------- --------------------------------------------
<S> <C>
J. FELLMAN SEINSHEIMER, III* President, Chief Executive Officer and
- ---------------------------------------- Director (Principal Executive Officer)
(J. Fellman Seinsheimer, III)
/s/ PHILLIP E. APGAR Vice President, Treasurer and Chief
- ---------------------------------------- Financial Officer (Principal Financial
(Phillip E. Apgar) Officer and Principal Accounting Officer)
WILLIAM C. LEVIN, M.D.* Director
- ----------------------------------------
(William C. Levin, M.D.)
HARRIS L. KEMPNER, JR.* Director
- ----------------------------------------
(Harris L. Kempner, Jr.)
MARVIN L. WEST* Director
- ----------------------------------------
(Marvin L. West)
JACK T. CURRIE* Director
- ----------------------------------------
(Jack T. Currie)
HENRY W. HOPE* Director
- ----------------------------------------
(Henry W. Hope)
SYNOTT L. McNEEL* Director
- ----------------------------------------
(Synott L. McNeel)
JAMES W. McFARLAND, Ph.D.* Director
- ----------------------------------------
(James W. McFarland, Ph.D.)
*By /s/ PHILLIP E. APGAR
- ----------------------------------------
(Phillip E. Apgar, pursuant to Power
of Attorney)
</TABLE>
13
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
American Indemnity Financial Corporation:
We have audited the consolidated financial statements of American Indemnity
Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and for
each of the three years in the period ended December 31, 1995 and have issued
our report thereon dated March 11, 1996; such consolidated financial statements
and report are included in your 1995 Annual Report to Stockholders and are
incorporated herein by reference. Our audits also included the financial
statement schedules of American Indemnity Financial Corporation and
subsidiaries, listed in Item 14. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such supplemental 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 set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
March 11, 1996
14
<PAGE> 17
SCHEDULE I
AMERICAN INDEMNITY FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS -- OTHER THAN
INVESTMENTS IN RELATED PARTIES
<TABLE>
<CAPTION>
=================================================================================================
DECEMBER 31, 1995
-----------------------------------------
AMOUNT
AT WHICH
SHOWN IN
THE
MARKET BALANCE
TYPE OF INVESTMENT COST(A) VALUE SHEET(B)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds
United States government and government
agencies and authorities....................... $26,428,566 $26,946,536 $26,946,536
Mortgage-backed securities issued by U.S.
government agencies and authorities............ 29,541,630 28,370,091 28,370,091
Collateralized mortgage obligations.............. 8,836,382 8,854,998 8,854,998
States, municipalities and political
subdivisions................................... 3,943,066 4,053,603 4,053,603
All other........................................ 4,249,638 4,352,950 4,352,950
----------- ----------- -----------
Total fixed maturities...................... 72,999,282 72,578,178 72,578,178
----------- ----------- -----------
Equity securities:
Common stocks
Public utilities................................. $ 4,822,534 $ 5,847,481 $ 5,847,481
Banks, trusts and insurance companies............ 1,179,568 2,226,615 2,226,615
Industrial, miscellaneous and all other.......... 3,118,368 3,821,420 3,821,420
Nonredeemable preferred stocks...................... 2,258,959 2,289,472 2,289,472
----------- ----------- -----------
Total equity securities..................... 11,379,429 14,184,988 14,184,988
----------- ----------- -----------
Mortgage loans on real estate......................... 24,604 24,604 24,604
Short-term investments................................ 60,000 60,000 60,000
----------- ----------- -----------
Total investments........................... $84,463,315 $86,847,770 $86,847,770
=========== =========== ===========
</TABLE>
- ---------------
(a) Original cost of equity securities and, as to fixed maturities, original
cost, reduced by repayments and adjusted for amortization of premium or
accrual of discount.
(b) All investments are stated at market value.
S-1
<PAGE> 18
SCHEDULE II
AMERICAN INDEMNITY FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<TABLE>
<CAPTION>
===============================================================================================
DECEMBER 31,
----------------------------
1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Bonds.......................................................... $ 477,037 $ 653,645
Cash and cash equivalents...................................... 41,746 98,368
Accrued investment income...................................... 6,895 8,935
Receivable from affiliate...................................... 26,586 15,862
----------- ------------
Total current assets................................... 552,264 776,810
INVESTMENTS IN SUBSIDIARIES -- At equity, including unrealized
appreciation or decline in market value of investments held by
subsidiaries................................................... 39,977,615 32,661,556
----------- ------------
TOTAL ASSETS........................................... $40,529,879 $ 33,438,366
=========== ============
LIABILITIES
Accounts Payable................................................. $ 764
-----------
EQUITY
STOCKHOLDERS' EQUITY:
Common stock, $3.33 1/3 par value, authorized 2,500,000 shares;
outstanding shares, 1,947,110 in 1995 and 1,946,710 in
1994........................................................ $ 6,490,351 $ 6,489,018
Preferred stock, authorized 2,000,000 shares; none
outstanding.................................................
Paid-in surplus................................................ 13,047,085 13,045,866
Unrealized appreciation (decline) in market value of
investments held by subsidiaries............................ 2,384,457 (10,352,340)
Retained earnings (substantially all of which represent equity
in undistributed earnings of subsidiaries).................. 18,607,222 24,255,822
----------- ------------
TOTAL.................................................. $40,529,115 $ 33,438,366
----------- ------------
TOTAL LIABILITIES AND EQUITY..................................... $40,529,879 $ 33,438,366
=========== ============
</TABLE>
S-2
<PAGE> 19
SCHEDULE II
AMERICAN INDEMNITY FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
=================================================================================================
YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
That portion of the equity in earnings of wholly
owned subsidiaries which is equal to the amount
of dividends received during the year............ $ 347,801 $ 563,677 $ 287,835
Investment income................................... 35,018 32,492 15,052
----------- ---------- ----------
Total....................................... 382,819 596,169 302,887
EXPENSES.............................................. 66,560 57,727 36,470
----------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAX AND EQUITY IN
EARNINGS OF WHOLLY OWNED SUBSIDIARIES............... 316,259 538,442 266,417
PROVISION (CREDIT) FOR FEDERAL INCOME
TAX -- CURRENT...................................... (10,724) (8,580) (7,282)
----------- ---------- ----------
INCOME BEFORE EQUITY IN EARNINGS OF WHOLLY OWNED
SUBSIDIARIES........................................ 326,983 547,022 273,699
INCOME (LOSSES) OF WHOLLY OWNED SUBSIDIARIES, LESS
AMOUNT REPORTED ABOVE............................... (5,420,738) 7,702,083 5,448,918
----------- ---------- ----------
NET INCOME (LOSS)..................................... $(5,093,755) $8,249,105 $5,722,617
=========== ========== ==========
EARNINGS (LOSS) PER SHARE............................. $(2.62) $4.24 $2.95
====== ===== =====
</TABLE>
S-3
<PAGE> 20
SCHEDULE II
AMERICAN INDEMNITY FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<Caption
=================================================================================================
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................. $(5,093,755) $ 8,249,105 $ 5,722,617
Adjustments to reconcile net income to net cash
flows from operating activities:
Excess of equity in income of subsidiaries over
dividends received therefrom................. 5,420,738 (7,702,083) (5,448,918)
Realized investment gains...................... 2,807
Increase in accrued investment income.......... 2,040 (3,134) (2,877)
Increase in receivable from affiliate.......... (10,724) (8,580) (7,282)
Increase in accounts payable................... 764
----------- ----------- -----------
Net cash flow from operating activities... 321,870 535,308 263,540
----------- ----------- -----------
INVESTING ACTIVITIES:
Sale of bonds..................................... 248,430
Maturity of long-term certificates of deposit..... 740,000
Purchase of bonds................................. (74,629) (149,704) (503,941)
Purchase of long-term certificates of deposit..... (390,000)
----------- ----------- -----------
Net cash flow from investing activities... 173,801 (149,704) (153,941)
----------- ----------- -----------
FINANCING ACTIVITIES:
Cash dividends paid to stockholders............... (554,845) (408,806) (193,971)
Proceeds received from exercise of stock
options........................................ 2,552 638 145,652
----------- ----------- -----------
Net cash flow from financing activities... (552,293) (408,168) (48,319)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents.................................... (56,622) (22,564) 61,280
Cash and Cash Equivalents -- January 1............ 98,368 120,932 59,652
----------- ----------- -----------
Cash and Cash Equivalents -- December 31.......... $ 41,746 $ 98,368 $ 120,932
=========== =========== ===========
</TABLE>
S-4
<PAGE> 21
SCHEDULE VI
SUPPLEMENTAL INFORMATION -- PROPERTY CASUALTY INSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
=============================================================================================================
LOSSES AND LOSS
ADJUSTMENT
EXPENSES
INCURRED AMORTIZATION
RELATED TO OF DEFERRED PAID LOSSES
NET NET ---------------- POLICY AND LOSS NET
YEAR ENDED PREMIUMS INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
DECEMBER 31, EARNED INCOME YEAR YEARS COSTS EXPENSES WRITTEN
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995....................... $67,858 $4,010 $47,159 $2,407 $ 17,643 $50,668 $68,035
1994....................... 65,346 4,703 42,015 1,294 16,217 43,857 66,174
1993....................... 64,082 5,253 41,572 776 14,629 44,914 66,168
</TABLE>
S-5
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<S> <C>
3.1. -- Certificate of Incorporation of the Company, as amended (Exhibit 3.1
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1989, is incorporated by reference herein).
3.2. -- By-Laws of the Company, as amended (Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992 is
incorporated by reference herein).
4.1. -- See Exhibit Nos. 3.1 and 3.2 for provisions of the Certificate of
Incorporation, as amended, and the By-Laws, as amended, of the
Company defining the rights of the holders of the Common Stock.
+10.1. -- The Company's 1982 Incentive Stock Option Plan (Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1990, is incorporated by reference herein).
+10.2. -- Form of 1982 Incentive Stock Option Plan Agreement (Exhibit 10.2 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1990, is incorporated by reference herein).
+10.3. -- The Company's Key Executive Severance Plan (Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1990, is incorporated by reference herein).
+10.4. -- Form of Key Executive Severance Agreement (Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1990, is incorporated by reference herein).
+10.5. -- The Company's 1992 Employee Stock Option Plan (Exhibit 4.4 to the
Company's Registration Statement on Form S-8 (No. 33-47359), is
incorporated by reference herein).
+10.6. -- Form of the Company's Non-Incentive Stock Option Agreement (Exhibit
4.5 to the Company's Registration Statement on Form S-8 (No.
33-47359), is incorporated by reference herein).
+10.7. -- Form of the Company's Incentive Stock Option Agreement (Exhibit 4.6
to the Company's Registration Statement on Form S-8 (No. 33-47359),
is incorporated by reference herein).
+10.8. -- The Company's 1992 Non-Employee Director Stock Option Plan (Exhibit
4.4 to the Company's Registration Statement on Form S-8 (No.
33-47546), is incorporated by reference herein).
+10.9. -- Form of the Company's Non-Employee Director Stock Option Agreement
(Exhibit 4.5 to the Company's Registration Statement on Form S-8 (No.
33-47546), is incorporated by reference herein).
*11.1. -- Computation of Fully Diluted Net Income (Loss) Per Common and Common
Equivalent Share.
*13.1. -- Pages 2 and 8 through 28, inclusive, of the Company's Annual Report
to Stockholders for the fiscal year ended December 31, 1995.
21.1. -- List of the Company's Subsidiaries (Exhibit 22.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1990, is
hereby incorporated by reference herein).
*23.1. -- Consent of Independent Auditors.
*24.1. -- Powers of Attorney.
*27. -- Financial Data Schedule
**28.1. -- Consolidated Statutory Schedule "P".
</TABLE>
- ---------------
* Filed herewith.
** As permitted by Rule 311(c) of Regulation S-T, the Company has filed the
Consolidated Statutory Schedule "P" (Exhibit 28.1) with the Commission in
paper format under cover of Form SE.
+ Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14 of Form 10-K.
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF FULLY DILUTED NET INCOME (LOSS)
PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Weighted average shares of common stock outstanding..... 1,946,843 1,946,685 1,938,173
Stock options (treasury stock method)................... 7,578 8,771 11,978
---------- ---------- ---------
Weighted average shares outstanding for primary earnings
per share computation................................ 1,954,421 1,955,456 1,950,151
---------- ---------- ---------
Net Income (Loss) (1)........................... $(2.61) $4.22 $2.93
FULLY DILUTED EARNINGS PER SHARE
Weighted average shares of common stock outstanding..... 1,946,843 1,946,685 1,938,173
Stock options (treasury stock method)................... 7,578 8,771 13,272
---------- ---------- ---------
Weighted average shares outstanding for fully diluted
earnings per share computation....................... 1,954,421 1,955,456 1,951,445
---------- ---------- ---------
Net Income (Loss)(1)............................ $(2.61) $4.22 $2.93
</TABLE>
- ---------------
(1) This amount is included and the resulting calculation is submitted in
accordance with the Securities Exchange Act of 1934 Release No. 9083,
although not required by footnote 2 to paragraph 14 of APB Opinion No. 15
because it results in dilution of less than 3% in 1995, 1994 and 1993.
<PAGE> 1
CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Statement Data:
Net premiums earned $ 67,857,539 $ 65,346,464 $ 64,081,902
Net investment income 4,009,564 4,703,398 5,252,684
Realized investment gains (losses) (276,311) (31,355) 1,274,693
Net income (loss) (5,093,755) 8,249,105 5,722,617
Per share (2.62) 4.24 2.95
Dividends declared per share .285 .21 .10
Balance Sheet Data:
Total assets $ 138,113,936 $ 131,201,491 $135,803,519
Stockholders' equity 40,529,114 33,438,366 37,842,559
Per share 20.82 17.18 19.44
Average investment yield 4.82% 5.58% 6.16%
Statutory Ratios:
Statutory combined ratio 113.4% 103.3% 102.1%
Net premiums written/statutory surplus ratio 2.3 to 1 2.1 to 1 2.2 to 1
</TABLE>
PER SHARE MARKET AND DIVIDEND INFORMATION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
PRICE OF COMMON STOCK DIVIDENDS
HIGH LOW PAID
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 Quarter Ended:
March 31 12 1/4 10 1/8 .060
June 30 12 3/4 10 1/8 .075
September 30 13 1/4 9 .075
December 31 12 1/2 9 1/4 .075
1994 Quarter Ended:
March 31 14 3/4 12 1/8 .03
June 30 14 1/4 10 3/4 .06
September 30 12 10 .06
December 31 11 3/8 10 1/8 .06
</TABLE>
As of February 8, 1996 there were approximately 376 stockholders, not including
shares held beneficially in nominee accounts.
NET PREMIUMS WRITTEN (IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Personal automobile $19,764 29.1% $20,426 30.9% $20,786 31.4%
Commercial multiple peril 16,097 23.7 14,511 21.9 13,727 20.8
Commercial automobile 15,263 22.4 13,408 20.2 13,658 20.6
Other liability 6,626 9.7 5,930 9.0 5,327 8.1
Homeowners multiple peril 4,154 6.1 4,886 7.4 5,418 8.2
Fire and allied lines 3,285 4.8 3,765 5.7 3,867 5.8
Inland marine 1,439 2.1 1,617 2.4 1,521 2.3
Workers' compensation 1,008 1.5 1,241 1.9 1,507 2.3
All other 399 0.6 390 0.6 357 0.5
- ----------------------------------------------------------------------------------
Net premiums written $68,035 100.0% $66,174 100.0% $66,168 100.0%
==================================================================================
</TABLE>
<PAGE> 2
AMERICAN INDEMNITY FINANCIAL CORPORATION
<TABLE>
<S> <C> <C> <C>
Directors William C. Levin, M. D. J. Fellman Seinsheimer, III Executive Officers
Consultant in Hematology 3,4,5
Jack T. Currie 3,5 Galveston, Texas President and Chief J. Fellman Seinsheimer, III
Investments Executive Officer President and Chief
Houston, Texas James W. McFarland, Ph.D.1 Executive Officer
Dean, A.B. Freeman Marvin L. West 1,2
Henry W. Hope 2,5 School of Business Bank Consultant Phillip E. Apgar, CPA4
Partner Tulane University Houston, Texas Vice President, Treasurer
Fulbright & Jaworski L.L.P. New Orleans, Louisiana and Chief Financial Officer
Attorneys at Law Chairman Emeritus
Houston, Texas Synott L. McNeel 1,3 Helen K. Lohec
Investments J. F. Seinsheimer, Jr. Secretary
Harris L. Kempner, Jr. 2 Galveston, Texas
President 1 Member, Audit Committee
Kempner Capital Management, 2 Member, Compensation
Inc. Committee
Galveston, Texas 3 Member, Executive
Committee
4 Member, Investment
Committee
5 Member, Nominating and
Management
Development Committee
</TABLE>
THE AMERICAN INDEMNITY COMPANIES
<TABLE>
<S> <C> <C> <C>
Directors James W. McFarland, Ph.D. Executive Officers Vice Presidents (Continued)
Dean, A.B. Freeman
Jack T. Currie School of Business J. Fellman Seinsheimer, III Robert S. Lee
Investments Tulane University President and Chief Robert A. Payne
Houston, Texas New Orleans, Louisiana Executive Officer Jack C. Ritter
Don M. Stewart
Henry W. Hope Synott L. McNeel Phillip E. Apgar, CPA Vaughn V. Vaughan
Partner Investments Vice President, Treasurer
Fulbright & Jaworski L.L.P. Galveston, Texas and Chief Financial Officer ASSISTANT VICE PRESIDENTS
Attorneys at Law
Houston, Texas J. Fellman Seinsheimer, III Helen K. Lohec William J. Byczek
President and Chief Secretary Armin M. Cantini
Robert K. Hutchings Executive Officer James V. Glynn
Investments American Indemnity Financial Vice Presidents Elizabeth R. Monts
Galveston, Texas Corporation Mildred L. Phillips
Galveston, Texas Phillip E. Apgar Robert L. Seinsheimer
Harris L. Kempner, Jr. James G. Carpenter Charles L. Vaughn
President Marvin L. West William H. Felts, Jr.
Kempner Capital Bank Consultant Eugene Hornstein
Management, Inc. Houston, Texas John H. Hutchings
Galveston, Texas Richard C. Ivey, III
Chairman Emeritus
William C. Levin, M.D.
Consultant in Hematology J. F. Seinsheimer, Jr.
Galveston, Texas
</TABLE>
AMERICAN INDEMNITY FINANCIAL CORPORATION
<TABLE>
<S> <C> <C>
GENERAL COUNSEL COMMON STOCK FORM 10-K AVAILABLE
Mills, Shirley, Eckel & Bassett American Indemnity Financial A copy of the Company's 1995 Form
Galveston, Texas Corporation common stock is traded 10-K, as filed with the Securities
over the counter through the National and Exchange Commission, may be
LEGAL COUNSEL Market System with the NASDAQ symbol obtained without charge to any
Fulbright & Jaworski L.L.P. AIFC. stockholder after April 1, 1996, on
Houston, Texas written request to:
Should stockholders holding common Mr. William H. Felts, Jr.
INDEPENDENT ACCOUNTANTS stock beneficially in "street name" Stockholders' Relations Department
Deloitte & Touche LLP wish to receive corporate reports American Indemnity Financial
Houston, Texas directly from the Company, please Corporation
write: P. O. Box 8985
STOCK TRANSFER AGENT & REGISTRAR Mr. William H. Felts, Jr. Wilmington, Delaware 19899-8985
Communications concerning stock Stockholders' Relations Department
transfer requirements, lost American Indemnity Financial PRINCIPAL EXECUTIVE OFFICES
certificates or changes of address Corporation American Indemnity Financial
should be directed to: P. O. Box 8985 Corporation
United States National Bank Wilmington, Delaware 19899-8985 P. O. Box 8985
P. O. Box 179 Wilmington, Delaware 19899-8985
Galveston, Texas 77553
</TABLE>
<PAGE> 3
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
NET PREMIUMS PREMIUMS NET EARNINGS
WRITTEN EARNED INCOME PER SHARE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
First Quarter $ 19,014,881 $ 16,668,061 $ 484,620 $ .25
Second Quarter 17,227,160 17,246,656 (3,553,090) (1.83)
Third Quarter 17,327,257 17,243,770 (677,402) (.34)
Fourth Quarter 14,466,216 16,699,052 (1,347,883) (.70)
1994
First Quarter $ 16,932,715 $ 16,181,161 $ 1,517,409 $ .78
Second Quarter 16,259,061 15,920,720 626,768 .32
Third Quarter 16,716,676 16,817,922 920,713 .47
Fourth Quarter 16,265,640 16,426,661 5,184,215 2.67
</TABLE>
FIVE YEAR COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Premiums earned $ 67,857,539 $ 65,346,464 $ 64,081,902 $ 60,470,621 $ 57,389,184
Net investment income 4,009,564 4,703,398 5,252,684 5,535,826 5,650,067
Realized investment
gains (losses) (276,311) (31,355) 1,274,693 1,360,140 (5,039)
Net income (loss) (5,093,755) 8,249,105 5,722,617 3,198,879 2,080,357
Net income (loss)
per share (2.62) 4.24 2.95 1.66 1.08
Dividends declared
per share .285 .21 .10 .08 .08
Balance Sheet Data:
Total assets $ 138,113,936 $ 131,201,491 $ 135,803,519 $ 130,782,576 $ 128,729,130
Notes payable to bank 687,146 1,341,378
Stockholders' equity 40,529,114 33,438,366 37,842,559 31,260,941 27,772,154
Equity per share 20.82 17.18 19.44 16.25 14.43
Average investment yield 4.82% 5.58% 6.16% 7.01% 7.45%
Statutory Ratios:
Loss and loss adjustment
expenses to premiums
earned 73.0% 66.8% 66.9% 74.9% 68.9%
Underwriting expenses to
premiums written 37.4 36.1 33.0 32.9 33.0
Retrospective premium
adjustments to premiums
written 3.0 .4 2.2 (.8) 4.0
- -------------------------------------------------------------------------------------------------------------------------
Statutory combined ratio 113.4% 103.3% 102.1% 107.0% 105.9%
=========================================================================================================================
Net premiums written/statutory
surplus ratio 2.3 to 1 2.1 to 1 2.2 to 1 2.5 to 1 2.1 to 1
</TABLE>
9
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes found on pages 15 to 27,
since they contain important information which is helpful in evaluating the
Company's financial position and results of operations.
LIQUIDITY
The Company has consistently been able to generate adequate amounts of cash to
meet its needs and management is unaware of any trends, demands or commitments
which will or are reasonably likely to have a significant effect on the
Company's liquidity.
OPERATING ACTIVITIES. Operating activities in 1995 produced negative net cash
flow primarily as a result of an increase in the amount of funds required for
the payment of claims, an increase in policy acquisition costs and a decrease
in net investment income during 1995 compared with 1994. The negative effect on
cash flow of these items was partially offset by a 2.8% increase in net
premiums written during 1995 compared with 1994.
The amount of funds required for the payment of claims increased
approximately 16.3% during 1995 compared with 1994. This resulted primarily
from an increase in the severity of weather-related natural catastrophes and
the settlement of several large liability claims in the Company's commercial
automobile and other liability lines of business during 1995 compared with
1994. During 1995, the Company's total net loss resulting from weather-related
catastrophes was approximately $6,281,000 compared with $2,930,000 during 1994.
The adverse financial effect on the company's financial position from
weather-related catastrophes compelled management to seek further reinsurance
protection. In mid-1995, the Company negotiated additional catastrophe
reinsurance coverage which provided coverage for ninety-five percent of losses
up to $2,000,000 in excess of $2,000,000, to further protect the Company from
these types of occurrences. See "Notes to Consolidated Financial Statements"
for further discussion regarding reinsurance.
Policy acquisition costs increased 11.4% during 1995 compared with
1994. This increase resulted primarily from increases in amortization of
deferred policy acquisition costs of prior years and increased overhead
expenses during 1995 compared with 1994. Overhead expenses increased primarily
as a result of an increase in legal expense.
Net investment income decreased 14.8% during 1995 compared with 1994,
primarily as a result of reduced yields on the Company's derivative
investments.
Primarily as a result of favorable underwriting results in the
Company's commercial lines of business and a decreased frequency and severity
of weather-related natural catastrophes during 1994, the Company's operating
results provided positive net cash flow in 1994. During 1994, the Company's
total net loss resulting from weather-related catastrophes was approximately
$2,930,000 compared with $3,802,000 for 1993. Primarily as a result of this,
the amount of funds required for claim payments decreased approximately 3.3% in
1994 compared with 1993.
Operating activities provided positive cash flow during 1993 primarily
as a result of favorable operating results and an increase in net premiums
written.
INVESTING ACTIVITIES. The net cash flow from investing activities was positive
for 1995, as illustrated in the Company's Consolidated Statements of Cash
Flows, because total investment sales and maturities exceeded total investment
purchases during 1995. Due to unfavorable underwriting results during 1995, the
Company's cash flow from operating activities was insufficient to cover the
payment of claims and underwriting expenses. As a result, additional funds were
raised through the sale of investments. However, whenever possible during 1995,
management invested a portion of available cash balances and the proceeds
received from disposition of investments into investment grade bonds and common
stocks.
During 1995, the overall returns in bond and stock markets were quite
favorable. As a result, there was significant price appreciation in the
Company's portfolio of equity securities. This increase, combined with the
positive effect of decreased interest rates on the market value of the
Company's fixed maturity bond portfolio and yield increases in certain
derivative
10
<PAGE> 5
investments held by the Company, resulted in significant unrealized investment
gains during 1995. As shown in the Company's consolidated balance sheets, the
unrealized appreciation in market value of investments was approximately
$2,384,000 at December 31, 1995, compared to an unrealized decline of
approximately $10,352,000 at December 31, 1994, resulting in unrealized gains
for 1995 of approximately $12,736,000. The unrealized gains in the Company's
bond portfolio constituted approximately $9,275,000 of this total with
unrealized gains on equity securities constituting the balance of $3,461,000.
Approximately $5,176,000 of the total $9,275,000 in unrealized
investment gains on bonds in 1995 were related to six issues of derivative
securities purchased by the Company in 1993. The Company's debt and equity
securities are reported on the Company's balance sheet at their respective
market values which fluctuate based upon a variety of market factors. Such
fluctuations will result in changes to the Company's unrealized investment
gains or losses and will have a corresponding impact on the Company's
stockholders' equity. Substantially all of the derivative securities mentioned
above are known as inverse floaters as their yields, which are adjusted
periodically, vary inversely to certain LIBOR rates. These derivative
securities will probably exacerbate swings in unrealized investment gains and
losses and stockholders' equity in the event of significant movement in
interest rates, particularly LIBOR rates. Additionally, the yield formulas for
these securities will result in commensurate swings in investment income. At
current yield rates and considering future yield resets for these securities
and the guarantee (see discussion below) that has been obtained with respect to
certain of these securities, net investment income during 1996 will be
increased by approximately $618,000, as compared to 1995. This is subject to
change, either positively or negatively, depending on future investment market
conditions. Any unrealized investment gains or losses and changes in investment
income will be reflected in the Company's financial reports. For the year ended
December 31, 1995, the average yield of these derivative investments, including
the guaranteed yield on one such issue discussed below, was approximately 1.7%,
their average term to maturity was 2.9 years, and the market value carried on
the Company's balance sheet was approximately $19,834,000.
Because these derivative securities were issued by government
agencies, the Company believes that their principal is assured at maturity.
Barring unforeseen circumstances, the Company has the ability to hold these
debt securities until their stated maturity. However, if conditions are
favorable for their disposition, the Company may dispose of all or a portion of
these securities prior to maturity. During 1995, the Company was able to reduce
its exposure in such securities by the sale of $2,000,000 par value of one
issue of the derivative securities. As a matter of investment policy, the
Company no longer invests in inverse floating rate securities.
In connection with an arbitration proceeding in 1995, the Company
received an agreement, effective December 8, 1995, guaranteeing the yield rate
on the largest derivative issue held by it (Guaranteed Yield Security). The
Guaranteed Yield Security has a par value of $11,000,000 and matures in March
1998. The yield rate that is guaranteed will equal the weekly average yield
rate for three month treasury bills during each interest period of the
security. The maximum amount guaranteed is $1,500,000 and the guarantee will
terminate no later than the security's maturity date. This guarantee is secured
by two letters of credit. One letter of credit is in the amount of $500,000 and
expires two years from its issue date. The second letter of credit is also in
the amount of $500,000 and expires in one year, provided that, in the event of
certain defaults in financial covenants, an additional letter of credit is
provided in the amount of $250,000 for a second twelve month period. At
December 31, 1995, the stated interest rate for the Guaranteed Yield Security
was .063% and the guaranteed yield rate was 5.2364%. Based on such guaranteed
yield rate, net investment income earned by this security during 1996 will be
increased by approximately $506,000 compared to 1995. This amount may increase
or decrease, however, depending on changes in the average yield rate of the
three month treasury bill that determines the guaranteed yield on this
security.
As a result of this guarantee, the yield of the Guaranteed Yield
Security is similar to that of a floating rate instrument whose coupon yield
resets weekly to the average three month treasury bill yield rate during each
interest period. The market value of this security at December 31, 1995 was
determined based upon the market values of other securities whose yields are
calculated in this manner and which mature in three years. As a result, the
market value for this security as carried on the Company's balance sheet at
December 31, 1995 was approximately $10,918,000.
11
<PAGE> 6
During 1994, management invested a portion of available cash balances
and the proceeds received from disposition of investments into investment grade
bonds and common and preferred stocks. Since total investment purchases
exceeded total investment sales and maturities during 1994, the net cash flow
from investing activities was negative for 1994.
During 1994, the negative effects of increased interest rates on the
Company's fixed maturity bond portfolio and yield decreases in the derivative
investments held by the Company, combined with a change in the financial
reporting requirements adopted in 1993, resulted in significant unrealized
investment losses. Total unrealized losses for 1994 were approximately
$12,245,000, which resulted from an unrealized decline in the market value of
investments of $10,352,000 at December 31, 1994, compared to an unrealized
appreciation of approximately $1,893,000 at December 31, 1993. Of such
unrealized loss, $10,329,000 was related to the fixed maturity bond portfolio
and $1,916,000 was related to equity securities. Approximately $6,407,000 of
the total $10,329,000 in unrealized investment losses on bonds were related to
derivative securities held by the Company at the time. At December 31, 1994,
the market value of these derivatives carried on the Company's balance sheet
was approximately $16,665,000.
Effective December 31, 1993, the Company adopted a new accounting
standard, pursuant to which the Company is required to report its bond
portfolio on the consolidated balance sheets at market value. Prior to the
adoption of this standard, the Company's bond portfolio was reflected on its
consolidated balance sheets at amortized values. This change in reporting
increased stockholders' equity as of December 31, 1993 by approximately
$633,000. However, as discussed above, this accounting change resulted in
significant declines in stockholders' equity in 1994 and significant gains in
stockholders' equity in 1995.
During 1993, management invested a portion of available cash balances
and the proceeds received from disposition of investments into investment grade
bonds and common and preferred stocks. Since total investment purchases
exceeded total investment sales and maturities during 1993, the net cash flow
from investing activities was negative for 1993.
FINANCING ACTIVITIES. During 1995, the Company's Board of Directors declared
quarterly dividends totaling $.285 per share compared with $.21 per share in
1994. This resulted in a 35.7% increase in the amount of funds required for the
payment of dividends in 1995 compared with 1994.
Effective January 1, 1996, the Company and United States National
Bank, Galveston, Texas, agreed to renew, for an additional term of 17 months,
an existing line of credit in the principal amount of $5,000,000, which was
entered into on January 1, 1995. This line of credit is secured by the pledge
of $5,500,000 par value of United States Treasury Notes. Pursuant to the line
of credit agreement, the Company can draw on this line of credit at any time.
The Company entered into this agreement in order to reduce the need to dispose
of investments during unfavorable market conditions in order to meet
potentially significant cash demands that could result, for example, from a
major catastrophic event such as a hurricane. The Company did not borrow
against this line of credit during 1995.
During 1994, the Company's Board of Directors declared quarterly
dividends totaling $.21 per share compared with $.10 per share in 1993. This
resulted in a 110.8% increase in the amount of funds required for the payment
of dividends in 1994 compared with 1993.
During 1993, the Company received approximately $146,000 in proceeds
from the exercise of stock options. Management also decided to pay off the
remaining balance of the notes payable to banks.
CAPITAL RESOURCES
The activities of insurance companies are regulated by state authorities and
adequate levels of reserves and equity capital are required to be maintained to
ensure that enough capital is retained in the business to provide sufficient
funds to meet its obligations. Management believes that the Company has met all
statutory and regulatory requirements and that sufficient funds have been
retained to meet its obligations. The Company has no current commitments or
plans for any new debt or equity financing.
12
<PAGE> 7
RESULTS OF OPERATIONS
Net premiums earned increased 3.8% during 1995 compared with 1994, resulting
primarily from an increase in the Company's automobile physical damage line of
business due to the cancellation of the 25% quota share reinsurance agreement
in 1994 and increases in the Company's commercial multiple peril and other
liability lines of business. However, the net premiums earned decreased in the
homeowners and fire and allied lines of business during 1995 compared with
1994, as a result of a reduction in the number of personal lines policies
written in 1995 compared with 1994. Management intends to continue conservative
expansion of the Company's commercial lines of business and to maintain current
levels of premium writings in the personal lines of business.
During 1995, management invested a portion of available cash balances
and the proceeds received from disposition of investments into investment grade
bonds and common stocks. However, primarily as a result of the reduced yields
on the Company's derivative securities, net investment income decreased 14.8%
during 1995 compared with 1994. This decrease in net investment income reduced
the Company's average investment yield to 4.82% for 1995 compared with 5.58%
for 1994. As a result of the guarantee of the yield rate on the $11,000,000 par
value derivative security discussed above and, based on the guaranteed yield
rate at December 31, 1995, net investment income earned by this security will
be increased by approximately $506,000 during 1996 compared to 1995. This is
subject to change, either positively or negatively, depending on changes in the
average three month treasury bill yield that determines the guaranteed yield
rate.
During 1995, the sale of certain investments resulted in realized
investment losses, including a $236,000 realized investment loss on the
disposition of $2,000,000 par value of one issue of derivative securities.
During 1994, the sale of certain investments resulted in realized investment
losses, including a $267,000 realized investment loss on the disposition of one
issue of derivative securities.
The Company's underwriting results for 1995 were disappointing
compared with 1994, as reflected in the increase in loss and loss adjustment
expenses incurred. The loss and loss adjustment expense ratio was 73.0% for
1995 compared with 66.3% for 1994. This increase resulted primarily from claims
attributable to the occurrence of numerous weather-related natural
catastrophes in Texas during 1995, which were unprecedented in their severity.
Claims from weather-related natural catastrophes resulted in approximately
$6,281,000 in net losses during 1995 compared with approximately $2,930,000
during 1994. Also, adverse underwriting results during 1995 in the Company's
commercial automobile and other liability lines of business, which resulted
from an increase in the number of large liability claims during 1995,
contributed to the increase in loss and loss adjustment expenses incurred.
Management believes, based on the favorable underwriting results of these lines
of business during the previous three years, that the underwriting results that
these lines of business experienced during 1995 are not indicative of a trend.
The policy acquisition cost ratio was 38.2% for 1995 compared with
35.6% for 1994. This increase resulted primarily from increases in amortization
of deferred policy acquisition costs of prior years and increased overhead
expenses during 1995 compared with 1994. Overhead expenses increased primarily
as a result of an increase in legal expense which was incurred in connection
with legal assistance used in obtaining the guarantee for the yield on the
derivative security discussed above under "Liquidity-Investing Activities."
Management has established strategic initiatives to significantly reduce
overhead expense and policy acquisition costs in the long term and has also
effected changes during 1995 which will reduce overhead costs somewhat during
1996.
The Company writes its workers' compensation business on a
participation and assessment basis, whereby the policyholder participates
directly in the loss experience of the policy through retrospective premium
adjustments. If loss and loss adjustment expenses incurred plus the Company's
charge against premiums earned is less than premiums earned under the policy,
the difference is refunded to the insured. Conversely, if the same total
exceeds premiums earned under the policy, the insured is assessed for the
excess. The introduction in 1992 of premium discounts associated with large
loss deductibles on workers' compensation policies has limited the majority of
retrospective premium adjustments to the loss experience on workers'
compensation policies for years prior to 1992. As a result of the favorable
loss experience during 1995 on these policies, retrospective premium
adjustments on workers' compensation policies were 3.0% of premiums earned for
1995 compared with 0.4% for 1994.
13
<PAGE> 8
Primarily as a result of the Company's unfavorable underwriting
results, the increase in policy acquisition costs and the decrease in net
investment income during 1995, the net loss of the Company was approximately
$5,094,000 compared to net income of approximately $8,249,000 for 1994. Net
income for 1994 included $4,430,000 in earnings related to the Company
recording a deferred tax asset for that amount during 1994.
Net premiums earned increased 2.0% during 1994 compared with 1993,
which resulted primarily from increases in the Company's commercial multiple
peril, commercial automobile and other liability lines of business. However,
the net premiums earned decreased in the homeowners and personal automobile
lines of business during 1994 compared with 1993, as a result of the reduction
in personal lines business written in 1994 compared with 1993.
During 1994, management invested a portion of available cash balances
and the proceeds received from disposition of investments into investment grade
bonds and common and preferred stocks. However, primarily as a result of the
yield adjustments on the Company's derivative securities, net investment income
decreased 10.5% during 1994 compared with 1993. This decrease in net investment
income reduced the Company's average investment yield to 5.58% for 1994
compared with 6.16% for 1993.
Due to unfavorable market conditions during 1994, the sale of certain
investments resulted in realized investment losses, including a $267,000
realized investment loss on the disposition of one issue of derivative
securities. However, realized investment losses were not significant to the
Company's operating results during 1994. In 1993, management decided to take
advantage of more favorable market conditions by disposing of several issues of
fixed maturity bonds. These dispositions produced realized investment gains
that were significant to the Company's operating results during 1993.
During 1994, management continued to emphasize an increase in the
production of commercial lines business and a reduction in personal lines
business because of the Company's improved underwriting experience in recent
years with commercial lines of insurance. This strategy proved an effective one
for the Company as underwriting results were profitable during 1994 in the
commercial multiple peril, workers' compensation and other liability lines of
business. The underwriting results in the Company's personal lines of
insurance continued to be unprofitable during 1994. This was most apparent in
the personal automobile, homeowners multiple peril and fire and allied lines of
business. Improved underwriting experience and a decrease in losses from
weather-related natural catastrophes resulted in a decrease in the Company's
ratio of loss and loss adjustment expenses to premiums earned to 66.8% for 1994
from 66.9% for 1993. During 1994, the Company's total net loss resulting from
weather-related natural catastrophes was approximately $2,930,000 compared with
$3,802,000 for 1993.
Rates on renewals of existing treaty reinsurance contracts increased
during 1994 as a result of the Company's loss experience in prior years. Rates
typically increase in the year subsequent to one in which loss costs to
reinsurers were in excess of premiums earned by the reinsurers under their
respective reinsurance contracts. Also, in order to retain a greater share of
premiums on the automobile physical damage line of business, management decided
to cancel the Company's quota share reinsurance agreement. The reduced
reinsurance commissions resulting from the cancellation of this agreement and
the increased rates on renewals of other reinsurance contracts were the primary
reasons for an increase in policy acquisition costs in 1994. The ratio of
policy acquisition costs to premiums earned was 35.6% for 1994 compared with
33.8% for 1993.
As a result of the favorable loss experience during 1994 on workers'
compensation policies, retrospective premium adjustments on workers'
compensation policies were 0.4% of premiums earned for 1994 compared with 2.4%
for 1993.
During 1994, the Company recorded a deferred tax asset which was
attributable to the recognition of the tax benefit of a portion of its net
operating loss carryforward. This deferred tax asset, in the amount of
$4,430,000 or $2.28 per share, had a significant positive effect on 1994
earnings. During 1993, the Company did not record a deferred tax asset and
therefore, 1993 earnings were not impacted.
Primarily as a result of recording the deferred tax asset, the net
income of the Company increased 44.1% during 1994 compared with 1993.
14
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities - bonds:
Available for sale - at market value (amortized cost $72,999,281
in 1995 and $72,265,339 in 1994) $ 72,578,178 $ 62,569,334
Equity securities:
Preferred stocks - at market value (cost $2,258,959 in 1995
and $2,494,209 in 1994) 2,289,472 2,268,012
Common stocks - at market value (cost $9,120,470 in 1995
and $14,905,400 in 1994) 11,895,516 14,475,261
Mortgage loans on real estate 24,604 29,034
Short-term investments 60,000 60,000
- -------------------------------------------------------------------------------------------------------------------------
Total investments 86,847,770 79,401,641
Cash and Cash Equivalents 4,781,566 4,937,544
Accrued Investment Income 711,185 736,466
Premiums in Course of Collection 4,293,569 5,962,784
Direct Premium Bills Receivable 8,267,740 7,908,893
Reinsurance Balances Receivable 12,167,759 10,788,671
Prepaid Reinsurance Premiums 716,632 1,327,484
Property and Equipment, Net 4,202,742 3,791,245
Deferred Policy Acquisition Costs 8,841,705 9,097,464
Deferred Income Taxes 4,498,000 4,430,000
Other Assets 2,785,268 2,819,299
- -------------------------------------------------------------------------------------------------------------------------
Total $ 138,113,936 $ 131,201,491
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS EQUITY
Losses and Loss Adjustment Expenses:
Unpaid losses $ 44,421,001 $ 45,290,631
Unpaid loss adjustment expenses 6,744,423 5,626,145
Unearned Premiums 34,489,378 34,922,255
Reinsurance Balances Held or Payable 2,844,698 3,777,547
Accounts Payable and Other Accrued Liabilities 9,085,322 8,146,547
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities 97,584,822 97,763,125
- -------------------------------------------------------------------------------------------------------------------------
Contingencies
Stockholders' Equity:
Preferred stock, authorized 2,000,000 shares; none outstanding
Common stock, $3.33 1/3 par value; authorized, 2,500,000 shares;
outstanding shares 1,947,110 in 1995 and 1,946,710 in 1994 6,490,351 6,489,018
Paid-in surplus 13,047,085 13,045,866
Unrealized appreciation (decline) in market value of investments 2,384,456 (10,352,340)
Retained earnings 18,607,222 24,255,822
- -------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 40,529,114 33,438,366
- -------------------------------------------------------------------------------------------------------------------------
Total $ 138,113,936 $ 131,201,491
=========================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
15
<PAGE> 10
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and Other Income
Premiums earned $ 67,857,539 $ 65,346,464 $ 64,081,902
Net investment income 4,009,564 4,703,398 5,252,684
Realized investment gains (losses) (276,311) (31,355) 1,274,693
Interest on premium bills receivable and other income 730,211 693,670 724,913
- --------------------------------------------------------------------------------------------------------------
Total 72,321,003 70,712,177 71,334,192
- --------------------------------------------------------------------------------------------------------------
Expenses
Losses and loss adjustment expenses:
Losses incurred 40,862,977 35,729,193 35,638,454
Loss adjustment expenses 8,703,295 7,580,177 6,711,115
Policy acquisition costs 25,909,448 23,267,039 21,654,789
Retrospective premium adjustments on workers
compensation policies 2,020,126 282,381 1,506,637
- --------------------------------------------------------------------------------------------------------------
Total 77,495,846 66,858,790 65,510,995
- --------------------------------------------------------------------------------------------------------------
Income (Loss) Before Federal Income Tax (5,174,843) 3,853,387 5,823,197
Provision (Credit) for Federal Income Tax
Current (13,088) 34,282 100,580
Deferred (68,000) (4,430,000)
- --------------------------------------------------------------------------------------------------------------
Total (81,088) (4,395,718) 100,580
- --------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (5,093,755) $ 8,249,105 $ 5,722,617
==============================================================================================================
Net Income (Loss) Per Share $ (2.62) $ 4.24 $ 2.95
- --------------------------------------------------------------------------------------------------------------
Dividends Declared Per Share $ .285 $ .21 $ .10
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
16
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ (5,093,755) $ 8,249,105 $ 5,722,617
Adjustments to reconcile net
income (loss) to net cash
flow from operating activities:
Decrease (Increase) in:
Premiums in course of collection 1,669,215 560,987 1,928,569
Direct premium bills receivable (358,847) (190,065) (648,963)
Reinsurance balances receivable (1,379,088) 1,864,839 (11,180)
Prepaid reinsurance premiums 610,852 960,390 1,040,667
Deferred policy acquisition costs 255,759 (1,367,695) (624,118)
Deferred income taxes (68,000) (4,430,000)
Other assets 34,031 (200,808) (386,119)
Increase (Decrease) in:
Unpaid losses and loss adjustment expenses 248,648 (2,508,638) (2,466,690)
Unearned premiums (432,877) (132,763) 1,045,772
Reinsurance balances held or payable (932,849) 1,443,193 (1,409,711)
Accounts payable and other accrued liabilities 938,775 1,000,373 1,957,100
Realized investment (gains) or losses 276,311 31,355 (1,274,693)
Depreciation 419,714 335,548 290,954
Other 109,127 525,667 (129,845)
- ------------------------------------------------------------------------------------------------------------
Net cash flow from operating activities (3,702,984) 6,141,488 5,034,360
- ------------------------------------------------------------------------------------------------------------
Investing Activities
Sale of bonds 9,252,615 21,217,761 82,385,020
Maturity of bonds 5,761,836 5,873,780 5,655,753
Sale of preferred stocks 49,338 655,511
Redemption of preferred stocks 170,018 80,625 251,752
Sale of common stocks 6,234,399 2,459,425 3,621,255
Maturity of long-term certificates of deposit 800,000
Purchase of bonds (16,018,351) (30,933,224) (90,597,585)
Purchase of preferred stocks (175,000) (795,525)
Purchase of common stocks (496,370) (1,080,825) (7,540,690)
Purchase of long-term certificates of deposit (450,000)
Purchase of property and equipment (858,616) (877,466) (331,080)
Other 4,430 10,467 4,727
- ------------------------------------------------------------------------------------------------------------
Net cash flow from investing activities 4,099,299 (3,424,457) (6,340,862)
- ------------------------------------------------------------------------------------------------------------
Financing Activities
Payments on bank loan (687,146)
Cash dividends paid to stockholders (554,845) (408,806) (193,971)
Proceeds received from exercise of stock options 2,552 638 145,652
- ------------------------------------------------------------------------------------------------------------
Net cash flow from financing activities (552,293) (408,168) (735,465)
- ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (155,978) 2,308,863 (2,041,967)
Cash and Cash Equivalents, January 1 4,937,544 2,628,681 4,670,648
- ------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, December 31 $ 4,781,566 $ 4,937,544 $ 2,628,681
============================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
17
<PAGE> 12
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------------------------------------
UNREALIZED
APPRECIATION
COMMON STOCK (DECLINE) IN
ISSUED PAID-IN MARKET VALUE RETAINED
SHARES PAR VALUE SURPLUS OF INVESTMENTS EARNINGS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 1,924,210 $ 6,414,018 $ 12,974,576 $ 985,470 $ 10,886,877
Net income 5,722,617
Cash dividends ($.10 per share) (193,971)
Change in market value of investments 274,179
Effect of restatement of bonds as of
December 31, 1993 from lower of
the aggregate amortized cost or
market value to market value 633,141
Common Stock issued in connection
with stock option plans 22,400 74,666 70,986
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 1,946,610 6,488,684 13,045,562 1,892,790 16,415,523
Net income 8,249,105
Cash dividends ($.21 per share) (408,806)
Change in market value of investments (12,245,130)
Common stock issued in connection
with stock option plans 100 334 304
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 1,946,710 6,489,018 13,045,866 (10,352,340) 24,255,822
Net income (5,093,755)
Cash dividends ($.285 per share) (554,845)
Change in market value of
investments 12,736,796
Common stock issued in connection
with stock option plans 400 1,333 1,219
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,947,110 $ 6,490,351 $ 13,047,085 $ 2,384,456 $ 18,607,222
=========================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
18
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
CONSOLIDATION. The consolidated financial statements include the accounts of
American Indemnity Financial Corporation (the "Company"), American Indemnity
Company ("American Indemnity") and American Indemnity's wholly-owned
subsidiaries, American Fire and Indemnity Company, Texas General Indemnity
Company and American Computing Company. All material intercompany balances and
transactions have been eliminated in consolidation.
BASIS OF PRESENTATION. The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP"). These
principles differ from practices prescribed or permitted by regulatory
authorities (the "statutory method") in the following material respects:
(a) Under GAAP, commissions, salaries, premium taxes and other costs
associated with writing new business are deferred and amortized
against the related earned premiums, whereas under the statutory
method those costs are expensed as incurred.
(b) Under GAAP, the cost of furniture, fixtures and automobiles is
capitalized and depreciation is recorded thereon; while under the
statutory method certain assets are depreciated over different lives
and certain costs are expensed as incurred.
(c) Under GAAP, a deferred federal income tax asset is recorded which is
attributable to the estimated recognition of the tax benefit of a
portion of the Company's net operating loss carryforward. No deferred
federal income tax is recorded under the statutory method.
(d) Under GAAP, certain reserves required for statutory purposes are
recorded as restrictions of retained earnings; such reserves, under
the statutory method, are classified as liabilities on the balance
sheet.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
periods. Actual results could differ from these estimates.
PERMITTED STATUTORY ACCOUNTING PRACTICES. American Indemnity, domiciled in
Texas, prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the Texas Department of
Insurance. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"),
as well as state laws, regulations, and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed.
In all material respects, the Company does not use any permitted
statutory accounting practices in preparing its statutory financial statements
which differ from prescribed statutory accounting practices. Also, no material
transactions have arisen which prescribed statutory accounting practices do not
address.
INVESTMENTS. Fixed maturities are purchased to support the investment
strategies of the Company, which are based on many factors including rate of
return, maturity, credit risk, tax considerations and regulatory requirements.
Investments in fixed maturities are stated at market value.
Investments in equity securities are stated at market value.
Unrealized gains or losses on investments which are reported at market
value are credited or charged to stockholders' equity, net of a provision for
federal income tax, if any. Gains or losses on disposition are computed by the
identified certificate method.
CASH AND CASH EQUIVALENTS. For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments, purchased with a maturity of
three months or less, and all money market investments to be cash equivalents,
and has elected to use the indirect method to present cash flows.
PROPERTY AND DEPRECIATION. Property and equipment is stated at cost.
Depreciation is computed principally using the straight-line method over the
estimated useful lives of the related assets.
UNEARNED PREMIUMS. Insurance premiums are included in income as earned on the
semi-monthly pro-rata basis over the term of the related policies. The Company
considers anticipated investment income in determining whether a premium
deficiency exists.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES. The liability for unpaid losses is
based upon the aggregate of estimates for losses reported prior to the end of
the accounting period and estimates for unreported losses based on experience.
Unpaid loss adjustment expenses are based on historical ratios of adjustment
expenses to losses paid.
19
<PAGE> 14
RETROSPECTIVE PREMIUMS. Retrospective premium adjustments on workers'
compensation policies represent refunds to (assessments due from) insureds
which reflect the difference between the premiums earned, net of American
Indemnity's charge against premiums earned, and losses and loss adjustment
expenses incurred.
INCOME TAXES. The provision or credit for federal income tax is based on
reported income, adjusted for differences arising in revenue or expense items,
per applicable tax laws and regulations, between reported income and taxable
income. The deferred portion relates to the change in the deferred tax asset or
liability, which arises from the current year's change in temporary differences
between the tax and book basis of assets or liabilities and the valuation
allowance related to the deferred tax asset.
The deferred tax asset recorded in the Company's balance sheets is
attributable to the estimated recognition of the tax benefit of a portion of
its net operating loss carryforward.
PER SHARE DATA. Per share data are based on the weighted average number of
shares outstanding for the period; 1,946,843 for 1995, 1,946,685 for 1994 and
1,938,173 for 1993.
Shares issuable upon the exercise of options are excluded from the
average number of shares outstanding for the computation of per share amounts
because their effect is insignificant.
2. INVESTMENTS AND INVESTMENT INCOME
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." This statement addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. The adoption of this standard resulted
in the reclassification of all bonds not already classified as available for
sale and the reporting of all bonds at market value. Unrealized gains and
losses have been excluded from earnings and reported as a net amount in a
separate component of stockholders' equity.
FIXED MATURITIES - BONDS. The amortized cost and estimated market values of
investments in fixed maturities - bonds are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and Government
Agencies and Authorities $ 26,428,566 $ 540,751 $ 22,781 $ 26,946,536
Mortgage-backed Securities issued by U.S.
Government Agencies and Authorities 29,541,630 62,229 1,233,768 28,370,091
Collateralized Mortgage Obligations 8,836,382 88,522 69,906 8,854,998
States, Municipalities and Political
Subdivisions 3,943,066 116,257 5,720 4,053,603
All Other 4,249,638 103,341 29 4,352,950
- --------------------------------------------------------------------------------------------------------------------
Totals $ 72,999,282 $ 911,100 $ 1,332,204 $ 72,578,178
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and Government
Agencies and Authorities $ 33,106,473 $ 12,711 $ 1,926,346 $ 31,192,838
Mortgage-backed Securities issued by U.S.
Government Agencies and Authorities 34,029,887 1,274 7,638,298 26,392,863
Collateralized Mortgage Obligations 407,178 77,162 330,016
States, Municipalities and Political
Subdivisions 4,559,554 31,033 96,845 4,493,742
All Other 162,247 500 2,872 159,875
- -------------------------------------------------------------------------------------------------------------------------
Totals $ 72,265,339 $ 45,518 $ 9,741,523 $ 62,569,334
=========================================================================================================================
</TABLE>
The market value on one inverse floating rate derivative issue, which
matures in March 1998, with a par value of $11,000,000 is determined based on
an agreement the Company received in connection with an arbitration proceeding
in 1995. The agreement provided a minimum guaranteed yield and effectively
converted the security into a floating rate instrument whose coupon yield
resets weekly to the average three month treasury bill rate during each
interest period. The market value of this security at December 31, 1995 was
determined based upon the market values of other securities whose yields are
calculated in this manner and which mature in three years. As a result, the
market value carried on the Company's balance sheet at December 31, 1995 for
this security was approximately $10,918,000. The market value of this security,
exclusive of the guaranteed yield agreement was approximately $9,790,000 at
December 31, 1995.
20
<PAGE> 15
At December 31, 1995, bonds with an amortized cost of approximately
$8,004,000 were on deposit with regulatory authorities and bonds with an
amortized cost of approximately $5,474,000 were pledged as collateral with
Frost Bank, San Antonio for a $5,000,000 line of credit.
The amortized cost and estimated market value of fixed maturities at
December 31, 1995, by estimated maturity are shown below. Actual maturities
will differ from estimated maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DECEMBER 31, 1995
ESTIMATED
AMORTIZED MARKET
MATURITY DISTRIBUTION COST VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 4,786,175 $ 4,792,015
Due after one year through five years 60,703,017 60,045,373
Due after five years through ten years 5,299,682 5,466,978
Due after ten years 2,210,408 2,273,812
- --------------------------------------------------------------------------------
Totals $ 72,999,282 $ 72,578,178
================================================================================
</TABLE>
INVESTMENT GAINS AND LOSSES. Realized investment gains and losses and
unrealized appreciation or decline in market value of investments are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized Investment Gains (Losses):
Fixed maturities-Bonds $ (213,516) $ (102,886) $ 1,013,452
Equity securities (62,795) 71,531 261,241
- ------------------------------------------------------------------------------------------
Total (276,311) (31,355) 1,274,693
- ------------------------------------------------------------------------------------------
Unrealized Appreciation (Decline)
in Market Value of Investments:
Fixed maturities-Bonds 9,288,407 (10,344,235) (238,395)
Equity Securities 3,461,895 (1,922,441) 266,033
- ------------------------------------------------------------------------------------------
Total 12,750,302 (12,266,676) 27,638
- ------------------------------------------------------------------------------------------
Total $ 12,473,991 $ (12,298,031) $ 1,302,331
==========================================================================================
</TABLE>
Proceeds from sales of investments during 1995, 1994 and 1993 were
$15,706,370, $23,757,811 and $86,913,538, respectively. The gross realized
investment gains and losses for such sales were as follows: Realized investment
gains: 1995 - $1,061,546; 1994 - $658,404; and 1993 - $1,610,193. Realized
investment losses: 1995 - $1,415,132; 1994 - $692,848; and 1993 - $351,528. The
gross unrealized gains and losses on equity securities at December 31, 1995
were approximately $3,014,000 and $209,000 respectively.
NET INVESTMENT INCOME. Investment income and expenses are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Maturities - Bonds $ 3,376,965 $ 3,844,990 $ 4,318,843
Equity Securities:
Common stocks 639,790 837,057 798,537
Preferred stocks 188,101 207,178 204,297
Mortgage Loans on Real Estate 2,634 3,124 3,473
Other Short-Term Investments 191,259 173,532 286,053
- ------------------------------------------------------------------------------------
Total Investment Income 4,398,749 5,065,881 5,611,203
Less Investment Expenses 389,185 362,483 358,519
- ------------------------------------------------------------------------------------
Net Investment Income $ 4,009,564 $ 4,703,398 $ 5,252,684
====================================================================================
</TABLE>
21
<PAGE> 16
3. PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
DECEMBER 31,
1995 1994
- ---------------------------------------------------------------------
<S> <C> <C>
Land $ 263,503 $ 263,503
Building and Improvements 5,792,172 5,634,205
Furniture, Fixtures and Equipment 2,341,459 1,934,659
Automobiles 419,978 370,678
- ---------------------------------------------------------------------
Total 8,817,112 8,203,045
Less Accumulated Depreciation 4,614,370 4,411,800
- ---------------------------------------------------------------------
Property and Equipment, Net $ 4,202,742 $ 3,791,245
=====================================================================
</TABLE>
4. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Activity in the liability for loss and loss adjustment reserves is summarized
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C>
Balance at January 1 $ 50,917,000 $ 53,425,000
Less reinsurance recoverables 10,624,000 12,584,000
- ---------------------------------------------------------------------------------
Net balance at January 1 40,293,000 40,841,000
- ---------------------------------------------------------------------------------
Incurred related to loss and loss adjustment
expenses related to:
Current year 47,159,000 42,015,000
Prior years 2,407,000 1,294,000
- ---------------------------------------------------------------------------------
Total incurred 49,566,000 43,309,000
- ---------------------------------------------------------------------------------
Paid loss and loss adjustment expenses related to:
Current year 27,910,000 23,567,000
Prior years 22,758,000 20,290,000
- ---------------------------------------------------------------------------------
Total paid 50,668,000 43,857,000
- ---------------------------------------------------------------------------------
Net balance at December 31 39,191,000 40,293,000
Plus reinsurance recoverables 11,974,000 10,624,000
- ---------------------------------------------------------------------------------
Balance at December 31 $ 51,165,000 $ 50,917,000
=================================================================================
</TABLE>
As a result of changes in estimates of insured events in prior years,
the provision of loss and loss adjustment expenses increased by $2,407,000 in
1995 and $1,294,000 in 1994 because of higher than anticipated losses and
related expenses. This is most apparent in the personal and commercial
automobile liability, commercial multiple peril and other liability lines of
business during 1995 and 1994.
The Company's exposure to environmental type claims has been
insignificant. However, liabilities have been recognized for known claims when
sufficient information has been developed to indicate the involvement of a
specific insurance policy and management can reasonably estimate its liability.
22
<PAGE> 17
5. FEDERAL INCOME TAX
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and (b) operating loss
carryforwards. The tax effects of significant items comprising the Company's
net deferred income taxes as of December 31, 1995 and December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
DECEMBER 31,
1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $ (3,006,180) $ (3,093,138)
Differences between book and tax basis of property (300,935) (293,041)
Unrealized investments gains (810,715)
Other (403,926) (648,145)
- ----------------------------------------------------------------------------------------
(4,521,756) (4,034,324)
- ----------------------------------------------------------------------------------------
Deferred tax assets:
Reserves not currently deductible 6,013,565 5,544,486
Unrealized investment losses 3,519,796
Operating loss carryforwards 11,824,122 10,266,792
- ----------------------------------------------------------------------------------------
17,837,687 19,331,074
- ----------------------------------------------------------------------------------------
Net asset 13,315,931 15,296,750
Valuation allowance (8,817,931) (10,866,750)
- ----------------------------------------------------------------------------------------
Net deferred tax assets $ 4,498,000 $ 4,430,000
========================================================================================
</TABLE>
The Company is required to establish a valuation allowance for any
portion of the deferred tax asset that management believes will not be
realized. The net change in the total valuation allowance for the year ended
December 31, 1995, was a decrease of $2,048,819. Based on a review of
anticipated future earnings and all other available evidence, both positive and
negative, management has concluded that it is "more likely than not" that the
Company's deferred tax asset recognized of $4,498,000 will be realized.
The variance from federal statutory tax rates for each of the years
indicated below consisted of the following elements:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax provision (credit)
computed at statutory rate (34%) $ (1,759,445) $ 1,310,150 $ 1,979,886
Increase in tax credit, or decrease in tax
provision, resulting from:
Tax exempt bond interest (99,375) (113,103) (202,990)
Tax exempt dividends (70% of amount
received from domestic corporations) (178,595) (248,513) (238,675)
Recognition of deferred tax asset (68,000) (4,430,000)
Other 44,320 34,382 35,385
Reduction in tax provision (credit) for
current year net operating loss limitation 1,980,007 (948,634) (1,473,026)
- ------------------------------------------------------------------------------------------------
Provision (credit) for federal income tax $ (81,088) $ (4,395,718) $ 100,580
================================================================================================
</TABLE>
The Company has a net operating loss carryforward for tax purposes of
$34,776,829, which expires if not previously utilized, in 1998 - $3,163,998;
1999 - $7,384,546; 2000 - $5,712,421; 2001 - $4,927,522; 2002 - $2,271,256;
2003 - $621,205; 2004 - $4,596,950; 2005 - $1,246,728; 2006 - $118,137; 2007 -
$43,352; 2008 - $13,450; 2009 - $13,410; and 2010 - $4,663,854.
The Company received a federal income tax refund of $36,779 in 1995,
paid federal income tax of $152,414 in 1994 and received a refund of federal
income tax of $130 in 1993.
23
<PAGE> 18
6. REINSURANCE AND CONTINGENCIES
Property insurance risks are reinsured under treaty arrangements whereby
$700,000 of losses in excess of $100,000 are automatically reinsured. The
Company has additional automatic property facultative reinsurance agreements
for losses in excess of $800,000 up to a maximum of $2,100,000. Therefore, the
liability of American Indemnity on property risks is effectively limited to a
maximum of $100,000.
American Indemnity carries excess catastrophe reinsurance which covers
95% of all losses up to $36,000,000 in excess of $4,000,000. American Indemnity
carries excess property and automobile catastrophe reinsurance which covers 90%
of catastrophe losses up to $3,000,000 incurred in excess of $3,000,000,
subject to a $250,000 per occurrence retention. Effective July 21, 1995,
American Indemnity carries excess catastrophe reinsurance which covers 95% of
all losses up to $2,000,000 in excess of $2,000,000.
All claims on automobile liability and casualty insurance over
$125,000 up to $2,000,000 are automatically reinsured under a treaty. At
January 1, 1993, the automobile physical damage line of business was subject to
a 50% quota share reinsurance agreement. This agreement was terminated
effective August 31, 1993 and replaced with a 25% quota share reinsurance
agreement effective September 1, 1993 for the automobile physical damage line
of business. This agreement was terminated effective August 31, 1994 and was
not replaced.
American Indemnity, however, is contingently liable if the reinsurance
companies are unable to meet their obligations since such obligations would
become a direct liability of American Indemnity.
Premiums earned, losses and loss adjustment expenses incurred, and
unpaid losses and loss adjustment expenses have been reduced by transactions
with reinsurance companies as follows:
<TABLE>
<CAPTION>
===============================================================================================================
YEARS ENDED DECEMBER 31,
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums Earned:
Catastrophe reinsurance $ 3,996,420 $ 3,218,084 $ 4,517,273
Other reinsurance 10,126,104 11,810,207 13,167,154
- ---------------------------------------------------------------------------------------------------------------
Total $ 14,122,524 $ 15,028,291 $ 17,684,427
===============================================================================================================
Losses and Loss Adjustment Expenses Incurred:
Catastrophe reinsurance $ 2,700,000 $ $ 810,286
Other reinsurance 8,167,619 7,729,361 10,959,818
- ---------------------------------------------------------------------------------------------------------------
Total $ 10,867,619 $ 7,729,361 $ 11,770,104
===============================================================================================================
Unpaid Losses and Loss Adjustment
Expenses at December 31 $ 11,974,000 $ 10,623,000 $ 12,583,000
===============================================================================================================
</TABLE>
American Indemnity maintains loss reserves to cover the ultimate net
cost of losses on reported and unreported claims and loss adjustment expenses.
In view of the variability inherent in the estimation of such loss reserves,
should the ultimate net cost of such items prove to be substantially greater
than the loss reserves, the Company's operations, earnings and surplus could be
adversely affected. Management believes, however, that the Company's aggregate
loss reserves are reasonable and adequate to cover such ultimate net costs.
7. STOCKHOLDERS' EQUITY
American Indemnity may pay cash dividends only from statutory basis retained
earnings, exclusive of special surplus funds and restricted reserves.
Furthermore, under Texas law, American Indemnity may not pay a dividend without
the consent of the Texas Insurance Commissioner if such dividend and all other
dividends paid during the preceding twelve months would exceed the greater of
(i) 10% of its statutory surplus as regards to policyholders as of the end of
the preceding calendar year or (ii) its statutory net investment income for
such year.
The NAIC has established various model laws, regulations and
guidelines as part of its regulatory oversight of insurance companies. A state
must adopt these laws in order to maintain its accreditation from the NAIC. The
NAIC Model Insurance Company System Regulatory Act ("NAIC Model Act") contains
restrictions regarding payment of dividends which differ from restrictions
under Texas law. Although the state of Texas has not yet adopted these
restrictions, the Texas Department of Insurance has given notice it will
vigorously scrutinize any dividends deemed extraordinary under this act and may
take a variety of actions. The NAIC Model Act requires that American Indemnity
may not pay any extraordinary dividend or make any other extraordinary
distribution to its shareholders until thirty days after the Commissioner has
received notice of the declaration thereof and has not within that period
disapproved the payment, or until the Commissioner has approved the payment
within the thirty-day period. An extraordinary dividend or distribution
includes any dividend or distribution of cash or other property, whose fair
market value together with that of other dividends or distributions made within
the preceding twelve months exceeds the lesser of (i) ten percent of its
statutory surplus as regards to policyholders as of the end of the preceding
24
<PAGE> 19
calendar year or (ii) the net income, not including realized capital gains or
losses, for such year. American Indemnity may carry forward net income from the
previous two calendar years that has not already been paid out as dividends.
This carry-forward shall be computed by taking the net income from the second
and third preceding calendar years, not including realized capital gains or
losses, less dividends paid in the second and immediate preceding calendar
years.
At December 31, 1995, American Indemnity had $106,909 of statutory
retained earnings available for payment of cash dividends. At December 31,
1995, American Indemnity's reported statutory surplus as regards to
policyholders was $28,694,851. For the year ended December 31, 1995, American
Indemnity's unconsolidated statutory net investment income (including realized
capital losses) was $3,947,851 and its unconsolidated net loss (excluding
realized capital losses) was $2,163,531. The Company's stockholders' equity at
December 31, 1995, 1994 and 1993 and net income for the years then ended, as
reported under the statutory method, are as follows:
<TABLE>
<CAPTION>
================================================================================
STATUTORY STATUTORY
YEARS ENDED DECEMBER 31, STOCKHOLDERS' EQUITY NET INCOME
- --------------------------------------------------------------------------------
<S> <C> <C>
1995 $ 30,682,608 $ 310,914
1994 $ 31,629,505 $ 3,131,381
1993 $ 30,906,163 $ 5,395,998
</TABLE>
8. EMPLOYEE AND NON-EMPLOYEE DIRECTOR STOCK OPTION PLANS
In 1982, the Company adopted an incentive stock option plan providing for the
grant of options to purchase its common stock by certain employees. The
exercise price of the options granted may not be less than the fair market
value of shares of its common stock on the date the option is granted. All
options granted may be exercised six months from the date of the grant and
expire five years from the date of the grant. Proceeds from options exercised
are credited to capital accounts. No amounts have been charged to income or
expense in connection with the issuance or exercise of options. No options may
be granted under this plan subsequent to March 1992. In 1992, the Company
adopted the 1992 Employee Stock Option Plan, which includes similar provisions.
No options may be granted under the 1992 plan subsequent to January 2002.
Activity of shares under the plans was as follows:
<TABLE>
<CAPTION>
============================================================================================
NUMBER OF AVERAGE
SHARES PRICE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding, January 1, 1993 44,700 $ 6.58
Options exercised in 1993 (20,400) (6.38)
- --------------------------------------------------------------------------------------------
Options outstanding, December 31, 1993 24,300 6.74
Options granted April 15, 1994 4,000 13.50
Options exercised in 1994 (100) (6.38)
Options forfeited in 1994 (7,000) (7.01)
- --------------------------------------------------------------------------------------------
Options outstanding, December 31, 1994 21,200 7.93
Options exercised in 1995 (400) (6.38)
- --------------------------------------------------------------------------------------------
Options outstanding and exercisable, December 31, 1995 20,800 $ 7.96
============================================================================================
</TABLE>
At December 31, 1995, 123,800 shares of common stock were reserved for
issuance pursuant to the terms of the Company's Employee Stock Option Plans.
Also in 1992, the Company adopted a Non-Employee Director Stock Option
Plan providing for the grant of options to purchase its common stock by
Directors who are not employees of the Company or its subsidiaries. The
exercise price of the options granted shall be equal to the fair market value
of shares of its common stock on the date the option is granted and all options
expire ten years from the date of grant. Proceeds from options exercised are
credited to capital accounts. No amounts have been charged to income or expense
in connection with the issuance or exercise of options.
Activity of shares under the Non-Employee Director Stock Option Plan
was as follows:
<TABLE>
<CAPTION>
============================================================================================
NUMBER OF AVERAGE
SHARES PRICE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding, January 1,1993 6,000 $ 7.75
Options exercised in 1993 (2,000) (7.75)
- --------------------------------------------------------------------------------------------
Options outstanding December 31, 1993 4,000 7.75
Options granted, April 15, 1994 7,000 13.79
- --------------------------------------------------------------------------------------------
Options outstanding, December 31, 1994 11,000 11.59
- --------------------------------------------------------------------------------------------
Options outstanding and exercisable, December 31, 1995 11,000 $ 11.59
============================================================================================
</TABLE>
25
<PAGE> 20
At December 31, 1995 23,000 shares of common stock were reserved for
issuance pursuant to the terms of the Company's 1992 Non-Employee Director
Stock Option Plan.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which is effective for the Company on January 1,
1996. SFAS No. 123 permits, but does not require, a fair value based method of
accounting for employee stock option plans which results in compensation
expense being recognized in the results of operations when stock options are
granted. The Company has not decided whether to change its method of accounting
for stock-based compensation; however, management believes that the adoption of
this statement will not have a significant impact on the financial statements
of the Company.
9. RETIREMENT PLANS
During 1994, American Indemnity established a defined Contribution 401(K)
Profit Sharing Plan which covers all full-time employees over twenty-one years
of age who have completed one year of service. Employees may contribute a
portion of their annual salary, subject to limitation, to the plan. American
Indemnity contributes an additional amount, subject to limitation, based on the
voluntary contribution of the employee. American Indemnity's contributions
charged to expense with respect to the plan during the years ended December 31,
1995 and 1994 were approximately $254,000 and $122,000, respectively.
American Indemnity also has a noncontributory, trusteed defined
benefit retirement plan covering substantially all full-time employees over
twenty-one years of age who have more than one year of service. Pension
benefits are based on years of service and average compensation for each
employee's five consecutive highest paid years during the last ten years
worked. Pension benefits are fully vested after five years of service.
The following table sets forth the defined benefit plan's funded status:
<TABLE>
<CAPTION>
=============================================================================================================
DECEMBER 31,
1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial Present Value of Benefit Obligations:
Accumulated plan benefits, including vested benefits
of $1,793,585 in 1995 and $1,376,260 in 1994 $ 1,885,507 $ 1,424,809
=============================================================================================================
Projected benefit obligations for services rendered to date $ (3,809,516) $ (2,582,082)
Plan assets at fair value, consisting primarily of equity securities 2,558,322 1,931,238
- -------------------------------------------------------------------------------------------------------------
Projected benefit obligations in excess of plan assets (1,251,194) (650,844)
Unrecognized net gain (236,668) (966,854)
Unrecognized net obligations, at adoption of plan,
being recognized over 15 years 990,877 1,134,181
Unrecognized Prior Service Cost (18,072) (20,389)
- -------------------------------------------------------------------------------------------------------------
Accrued pension cost $ (515,057) $ (503,906)
=============================================================================================================
</TABLE>
The weighted-average discount rate and rate of the increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were seven and one-half percent and four and
one-half percent, respectively, for 1995 and eight and one-half percent and
four and one-half percent, respectively, for 1994. The expected long-term rate
of return on assets was seven percent for 1995 and 1994.
Net pension cost included the following components:
<TABLE>
<CAPTION>
==================================================================================================================
YEARS ENDED DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 131,609 $ 145,209 $ 161,718
Interest cost on projected benefit obligations 215,042 174,271 203,245
(Return) loss on plan assets (388,691) 31,564 (123,590)
Net amortization and deferral 339,845 (62,391) 103,778
- ------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 297,805 $ 288,653 $ 345,151
==================================================================================================================
</TABLE>
American Indemnity's funding policy is to contribute annually an
amount at least sufficient to fund pension cost accrued. Contributions have
been intended to provide not only for benefits attributed to services to date
but also those expected to be earned in the future.
26
<PAGE> 21
10. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company accrues the cost of providing postretirement benefits to employees
during the employees' service period. The benefits provided to retired
employees are principally health care and life insurance. All of these benefits
are funded by the Company on a cash basis.The following table sets forth the
unfunded status and amounts recognized in the Company's consolidated financial
statements:
<TABLE>
<CAPTION>
=============================================================================================================
FOR THE YEARS ENDED DECEMBER 31, 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 1,232,000 $ 1,067,000
Fully eligible active participants 421,000 459,000
Other active participants 1,140,000 782,000
- -------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 2,793,000 2,308,000
Unrecognized net obligation, at adoption of plan,
being recognized over 20 years 1,893,000 2,004,000
Prior service cost 84,000 96,000
Unrecognized net loss (gain) 101,000 (281,000)
- -------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit liability $ 715,000 $ 489,000
=============================================================================================================
Net postretirement benefit costs include the following components:
- -------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995 1994
- -------------------------------------------------------------------------------------------------------------
Service cost $ 59,000 $ 73,000
Interest cost 187,000 179,000
Net amortization and deferral 107,000 124,000
- -------------------------------------------------------------------------------------------------------------
Net postretirement costs $ 353,000 $ 376,000
=============================================================================================================
</TABLE>
For measurement purposes, the assumed health care cost trend rate is 10
percent in 1996 and gradually declines to 4.5 percent in 2002 and thereafter.
Increasing the health care cost trend rate by one percentage point in each year
would increase the accumulated postretirement benefit obligation as of December
31, 1995 by approximately $251,000 and the net periodic postretirement benefit
cost would increase by approximately $30,000. The calculation assumes a long-
term rate of increase in compensation of 4.5 percent at December 31, 1995 and
1994. The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5 percent and 8.5 percent at December
31, 1995 and 1994, respectively.
11. POLICY ACQUISITION COSTS
Policy acquisition costs incurred and expensed and policy acquisition costs
amortized to expense were as follows:
<TABLE>
<CAPTION>
=============================================================================================================
YEARS ENDED DECEMBER 31,
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Costs Incurred and Expensed $ 8,266,372 $ 7,050,516 $ 7,025,952
Costs Amortized to Expense 17,643,076 16,216,523 14,628,837
- -------------------------------------------------------------------------------------------------------------
Total $ 25,909,448 $ 23,267,039 $ 21,654,789
=============================================================================================================
</TABLE>
12. LEASE COMMITMENTS
The Company has several operating leases for office space and equipment. Total
lease expense was approximately $688,000 for 1995, $600,000 for 1994 and
$610,000 for 1993. Future minimum lease commitments for the Company are
approximately $265,000 for 1996, $187,000 for 1997, $174,000 for 1998, $165,000
for 1999 and $112,000 for 2000.
13. LINE OF CREDIT
The Company and United States National Bank, Galveston, Texas, agreed to renew,
for an additional term of 17 months, an existing line of credit in the
principal amount of $5,000,000, which was entered into on January 1, 1995. This
line of credit is secured by the pledge of $5,500,000 par value of United
States Treasury Notes. Pursuant to the line of credit agreement, the Company
can draw on this line of credit at any time. The Company did not borrow against
this line of credit during 1995.
27
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
To The Stockholders of American Indemnity Financial Corporation:
We have audited the accompanying consolidated balance sheets of American
Indemnity Financial Corporation and subsidiaries as of December 31, 1995 and
1994 and the related consolidated statements of income, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements 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 misstatements. 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 American Indemnity Financial
Corporation and subsidiaries at December 31, 1995 and 1994 and the 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.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Houston, Texas
March 11, 1996
28
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in Registration
Statement No. 2-78856, Registration Statement No. 33-47359 and Registration
Statement No. 33-47546 of American Indemnity Financial Corporation on Form S-8
of our reports dated March 11, 1996 appearing in and incorporated by reference
in this Annual Report on Form 10-K of American Indemnity Financial Corporation
for the year ended December 31, 1995.
DELOITTE & TOUCHE LLP
Houston, Texas
March 27, 1996
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
American Indemnity Financial Corporation, a Delaware corporation (the
"Company"), hereby constitutes and appoints J. Fellman Seinsheimer, III and
Phillip E. Apgar and each of them (with full power to each of them to act
alone), his true and lawful attorney-in-fact and agent, for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file any of the documents relating to the Company's Annual Report
of Form 10-K for the year ended December 31, 1995, to be filed with the
Securities and Exchange Commission, together with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as the undersigned might or could do if
personally present, hereby ratifying and confirming all that said
attorney-in-facts and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
26th day of March, 1996.
/s/ J. Fellman Seinsheimer, III
---------------------------------------
J. Fellman Seinsheimer, III
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
American Indemnity Financial Corporation, a Delaware corporation (the
"Company"), hereby constitutes and appoints J. Fellman Seinsheimer, III and
Phillip E. Apgar and each of them (with full power to each of them to act
alone), his true and lawful attorney-in-fact and agent, for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file any of the documents relating to the Company's Annual Report
of Form 10-K for the year ended December 31, 1995, to be filed with the
Securities and Exchange Commission, together with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as the undersigned might or could do if
personally present, hereby ratifying and confirming all that said
attorney-in-facts and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of March, 1996.
/s/ Jack T. Currie
---------------------------------
Jack T. Currie
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
American Indemnity Financial Corporation, a Delaware corporation (the
"Company"), hereby constitutes and appoints J. Fellman Seinsheimer, III and
Phillip E. Apgar and each of them (with full power to each of them to act
alone), his true and lawful attorney-in-fact and agent, for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file any of the documents relating to the Company's Annual Report
of Form 10-K for the year ended December 31, 1995, to be filed with the
Securities and Exchange Commission, together with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as the undersigned might or could do if
personally present, hereby ratifying and confirming all that said
attorney-in-facts and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of March, 1996.
/s/ Henry W. Hope
------------------------------
Henry W. Hope
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
American Indemnity Financial Corporation, a Delaware corporation (the
"Company"), hereby constitutes and appoints J. Fellman Seinsheimer, III and
Phillip E. Apgar and each of them (with full power to each of them to act
alone), his true and lawful attorney-in-fact and agent, for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file any of the documents relating to the Company's Annual Report
of Form 10-K for the year ended December 31, 1995, to be filed with the
Securities and Exchange Commission, together with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as the undersigned might or could do if
personally present, hereby ratifying and confirming all that said
attorney-in-facts and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of March, 1996.
/s/ Harris L. Kempner, Jr.
-----------------------------------
Harris L. Kempner, Jr.
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
American Indemnity Financial Corporation, a Delaware corporation (the
"Company"), hereby constitutes and appoints J. Fellman Seinsheimer, III and
Phillip E. Apgar and each of them (with full power to each of them to act
alone), his true and lawful attorney-in-fact and agent, for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file any of the documents relating to the Company's Annual Report
of Form 10-K for the year ended December 31, 1995, to be filed with the
Securities and Exchange Commission, together with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as the undersigned might or could do if
personally present, hereby ratifying and confirming all that said
attorney-in-facts and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of March, 1996.
/s/ William C. Levin, M.D.
-----------------------------------------
William C. Levin, M.D.
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
American Indemnity Financial Corporation, a Delaware corporation (the
"Company"), hereby constitutes and appoints J. Fellman Seinsheimer, III and
Phillip E. Apgar and each of them (with full power to each of them to act
alone), his true and lawful attorney-in-fact and agent, for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file any of the documents relating to the Company's Annual Report
of Form 10-K for the year ended December 31, 1995, to be filed with the
Securities and Exchange Commission, together with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as the undersigned might or could do if
personally present, hereby ratifying and confirming all that said
attorney-in-facts and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of March, 1996.
/s/ James W. McFarland
-----------------------------------
James W. McFarland
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
American Indemnity Financial Corporation, a Delaware corporation (the
"Company"), hereby constitutes and appoints J. Fellman Seinsheimer, III and
Phillip E. Apgar and each of them (with full power to each of them to act
alone), his true and lawful attorney-in-fact and agent, for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file any of the documents relating to the Company's Annual Report
of Form 10-K for the year ended December 31, 1995, to be filed with the
Securities and Exchange Commission, together with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as the undersigned might or could do if
personally present, hereby ratifying and confirming all that said
attorney-in-facts and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of March, 1996.
/s/ Synott L. McNeel
------------------------------------
Synott L. McNeel
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
American Indemnity Financial Corporation, a Delaware corporation (the
"Company"), hereby constitutes and appoints J. Fellman Seinsheimer, III and
Phillip E. Apgar and each of them (with full power to each of them to act
alone), his true and lawful attorney-in-fact and agent, for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file any of the documents relating to the Company's Annual Report
of Form 10-K for the year ended December 31, 1995, to be filed with the
Securities and Exchange Commission, together with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as the undersigned might or could do if
personally present, hereby ratifying and confirming all that said
attorney-in-facts and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th
day of March, 1996.
/s/ Marvin L. West
----------------------------------
Marvin L. West
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000005227
<NAME> AMERICAN INDEMINTY FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 72,578,178
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 14,184,988
<MORTGAGE> 24,604
<REAL-ESTATE> 0
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0
0
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67,857,539
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</TABLE>
