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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ......... TO .........
COMMISSION FILE NUMBER 0-8636
AMERICAN INDEMNITY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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<C> <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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (409) 766-4600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
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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 [ ] 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, 1997 was $16,980,522 based upon the closing price
as of such date.
As of March 14, 1997, there were outstanding 1,962,410 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,
1996 (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 28, 1997
(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.................................................. 8
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, 1996................................ 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,
--------------------------
1996 1995 1994
------ ------ ------
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Texas....................................................... 71.9% 73.4% 73.1%
Louisiana................................................... 7.3 6.9 6.9
Florida..................................................... 6.6 6.4 7.3
Mississippi................................................. 3.8 3.8 3.7
Alabama..................................................... 3.5 2.7 2.3
Tennessee................................................... 2.5 2.4 2.5
Kentucky.................................................... 2.1 2.0 1.8
All other (six states)...................................... 2.3 2.4 2.4
----- ----- -----
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,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Personal Lines.............................................. 37% 38% 42%
Commercial Lines............................................ 63 62 58
--- --- ---
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,
-----------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Personal automobile........................ $17,844 25.9% $19,764 29.4% $20,426 30.9%
Commercial automobile...................... 16,272 23.6 14,543 21.6 13,408 20.2
Commercial multiple peril.................. 15,973 23.2 16,097 23.9 14,511 21.9
Other liability............................ 7,646 11.1 6,626 9.8 5,930 9.0
Homeowners multiple peril.................. 5,506 8.0 4,154 6.2 4,886 7.4
Fire and allied lines...................... 3,506 5.1 3,285 4.9 3,765 5.7
Inland marine.............................. 1,366 2.0 1,439 2.1 1,617 2.4
Workers' compensation...................... 409 0.6 1,008 1.5 1,241 1.9
All other.................................. 341 0.5 399 0.6 390 0.6
------- ----- ------- ----- ------- -----
Net premiums written............. $68,863 100.0% $67,315 100.0% $66,174 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
In April 1996, 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,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Premiums earned............................................. $64,579 $67,858 $65,346
Statutory losses incurred................................... 38,505 40,784 35,996
Loss adjustment expenses incurred........................... 7,360 8,752 7,656
Loss ratio................................................ 59.6% 60.1% 55.1%
Loss and loss adjustment expense ratio.................... 70.9 73.0 66.8
Underwriting expense ratio................................ 36.4 37.4 36.1
Retrospective premium adjustment ratio.................... 0.8 3.0 .4
------- ------- -------
Statutory combined ratio............................... 108.1% 113.4% 103.3%
======= ======= =======
</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 1996 was approximately
$3,525,000, compared with $6,281,000 for 1995 and $2,930,000 for 1994.
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 1996
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,
-----------------------------
1996 1995 1994
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Beginning reserve........................................... $39,191 $40,293 $40,841
------- ------- -------
Provision for:
Insured events of the current year........................ 44,431 47,159 42,015
Insured events of prior years............................. 1,777 2,407 1,294
------- ------- -------
Incurred loss and loss adjustment expenses................ 46,208 49,566 43,309
------- ------- -------
Payments for losses and loss adjustment expenses:
Attributable to insured events of the current year........ 24,941 27,910 23,567
Attributable to insured events of prior years............. 23,625 22,758 20,290
------- ------- -------
Total payments.................................... 48,566 50,668 43,857
------- ------- -------
Ending reserve.............................................. $36,833 $39,191 $40,293
======= ======= =======
</TABLE>
4
<PAGE> 7
The following table presents the Company's loss reserve development for the
ten years ended December 31, 1996:
CONSOLIDATED LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
(DOLLARS IN THOUSANDS)
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<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITY FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT
EXPENSE(1).................. 58,800 49,214 51,624 54,449 47,643 43,407 40,841 40,293 39,191 36,833
PAID (CUMULATIVE) AS OF:
One year later.............. 34,099 25,848 26,186 25,009 25,514 21,184 20,375 22,759 23,625 --
Two years later............. 47,735 38,054 36,055 39,030 35,756 29,795 31,375 32,389 -- --
Three years later........... 55,859 43,278 44,317 45,892 40,170 36,068 36,407 -- -- --
Four years later............ 58,981 48,484 48,515 48,736 42,984 39,180 -- -- -- --
Five years later............ 62,849 51,069 50,044 50,500 44,914 -- -- -- -- --
Six years later............. 64,819 52,212 51,324 51,824 -- -- -- -- -- --
Seven years later........... 65,827 53,138 52,491 -- -- -- -- -- -- --
Eight years later........... 66,585 54,324 -- -- -- -- -- -- -- --
Nine years later............ 67,570 -- -- -- -- -- -- -- -- --
LIABILITY RE-ESTIMATED AS
OF(1):
One year later.............. 59,581 50,185 52,934 53,674 48,803 44,183 42,135 42,700 40,968 --
Two years later............. 62,997 54,145 54,949 57,612 51,887 46,609 45,516 46,267 -- --
Three years later........... 65,324 55,397 56,414 59,599 52,202 48,749 47,640 -- -- --
Four years later............ 66,268 56,082 57,264 59,693 52,947 50,016 -- -- -- --
Five years later............ 66,687 56,511 57,112 60,474 53,737 -- -- -- -- --
Six years later............. 66,974 56,234 57,552 60,995 -- -- -- -- -- --
Seven years later........... 66,697 56,571 57,957 -- -- -- -- -- -- --
Eight years later........... 66,990 56,974 -- -- -- -- -- -- -- --
Nine years later............ 67,318 -- -- -- -- -- -- -- -- --
REDUNDANCY (DEFICIENCY)....... (8,518) (7,760) (6,333) (6,546) (6,094) (6,609) (6,799) (5,974) (1,777) --
Gross liability -- end of
year........................ 50,917 51,165 55,602
Reinsurance recoverable....... 10,624 11,974 18,769
Net liability -- end of
year........................ 40,293 39,191 36,833
Gross re-estimated
liability -- latest......... 62,717 56,716
Re-estimated recoverable --
latest...................... 16,450 15,748
Net re-estimated liability --
latest...................... 46,267 40,968
Gross cumulative deficiency... (11,800) (5,551)
</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): 1987, $4,189; 1988, $1,537; 1989, $(579); 1990, $(3,823); 1991,
$(2,648); 1992, $(4,098); 1993, $(3,602); 1994, $(3,035); and 1995, $(782).
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;
1995, $0; and 1996, $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, $401; 1991, $(366); 1992, $(642); 1993,
$(214); 1994, $42 and 1995, $(37). 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): 1994, $(142); and
1995, $(1,353). These amounts are also reconciling items between this table
and Schedule P of the statutory financial statements.
5
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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 1990, but incurred in 1987, will
be included in the cumulative deficiency amount for years 1987, 1988 and 1989.
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 $36,833,000 at December 31, 1996.
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 554 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, 1996, the Company and American Indemnity had 159 home
office employees and 72 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
$900,000 of losses in excess of $100,000 are automatically reinsured. American
Indemnity has additional automatic property facultative reinsurance agreements
for losses in excess of $1,000,000 up to a maximum of $2,300,000. 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 95% of catastrophe losses up to $4,000,000 incurred in excess of
$2,000,000, subject to a $200,000 per occurrence retention. 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. Effective January 1,
1997, American Indemnity's retention for these claims will increase to $150,000
from $125,000.
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 and government agencies and authorities
bonds, tax-exempt state and municipal bonds, corporate bonds, and preferred and
common stocks.
The invested assets of the Company at December 31, 1996 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, 1996 (dollars in thousands).
<TABLE>
<CAPTION>
ANNUAL PERCENTAGE
EARNED ON
------------------------- NET CAPITAL GAINS
AVERAGE CASH AND INVESTMENTS NET (LOSSES)
--------------------------------- INVESTMENT INVESTMENTS INVESTMENTS ---------------------
YEAR CASH INVESTMENTS(1) TOTAL INCOME(2) AND CASH ONLY REALIZED UNREALIZED
---- ------ -------------- ------- ---------- ----------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
1996................. 4,566 86,388 90,954 4,592 5.05 5.32 658 (304)
</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.
REGULATION AND OTHER RESTRICTIONS
American Indemnity, similar to 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 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
7
<PAGE> 10
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, similar to 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. In
addition, an examination as of December 31, 1996 is currently being conducted by
the state of Texas.
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.
8
<PAGE> 11
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 the inside front cover and inside back cover,
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 8 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 9 through
13, 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 14 through 28,
inclusive, of the Annual Report, and under the caption "Selected Quarterly
Financial Data" on page 8 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 caption "Election of Directors" on
pages 4 through 6, inclusive, the information set forth under the caption
"Executive Officers" on page 9 and the information under the caption "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" on pages 15 and 16 of
the Company's Proxy Statement with respect to the Company's 1997 Annual Meeting
of Stockholders (the "Proxy Statement"), is incorporated herein by reference.
9
<PAGE> 12
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation" on
pages 9 through 15, 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" and
"Election of Directors" on pages 2 through 6, inclusive, and the information set
forth under the caption "Executive Officers" on page 9 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 15
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 14 through 27 of the
Annual Report. Such financial statements are incorporated herein by reference.
Consolidated Balance Sheets, December 31, 1996 and 1995
Consolidated Statements of Income for the Three Years Ended December
31, 1996
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1996
Consolidated Statements of Stockholders' Equity for the Three Years
Ended December 31, 1996
Notes to Consolidated Financial Statements for the Three Years Ended
December 31, 1996
2. FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Schedule I -- Summary of Investments -- Other Than Investments in Related
Parties, December 31, 1996.................................. S-1
Schedule II-- Condensed Financial Information of Registrant:
Balance Sheets, December 31, 1996 and 1995.................. S-2
Statements of Income for the Three Years Ended December 31,
1996........................................................ S-3
Statements of Cash Flows for the Three Years Ended December
31, 1996.................................................... 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>
<CAPTION>
<C> <S>
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. -- Inside front cover, pages 9 through 28, inclusive, and
information set forth under the caption "Common Stock" on
the inside back cover of the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1996.
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).
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
<C> <S>
*23.1. -- Consent of Independent Auditors.
*24.1. -- Powers of Attorney.
*27.1 -- 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.
(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, 1996.
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 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 26th day of March, 1997, by the following
persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ 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 Officer and
(Phillip E. Apgar) Principal Accounting Officer)
/s/ WILLIAM C. LEVIN, M.D.* Director
- -----------------------------------------------------
(William C. Levin, M.D.)
/s/ HARRIS L. KEMPNER, JR.* Director
- -----------------------------------------------------
(Harris L. Kempner, Jr.)
/s/ MARVIN L. WEST* Director
- -----------------------------------------------------
(Marvin L. West)
/s/ JACK T. CURRIE* Director
- -----------------------------------------------------
(Jack T. Currie)
/s/ HENRY W. HOPE* Director
- -----------------------------------------------------
(Henry W. Hope)
/s/ SYNOTT L. McNEEL* Director
- -----------------------------------------------------
(Synott L. McNeel)
/s/ JAMES W. McFARLAND, Ph.D.* Director
- -----------------------------------------------------
(James W. McFarland, Ph.D.)
/s/ FRED C. BURNS* Director
- -----------------------------------------------------
(Fred C. Burns)
*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, 1996 and 1995, and for
each of the three years in the period ended December 31, 1996 and have issued
our report thereon dated March 7, 1997; such consolidated financial statements
and report are included in your 1996 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 7, 1997
<PAGE> 17
SCHEDULE I
AMERICAN INDEMNITY FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS -- OTHER THAN
INVESTMENTS IN RELATED PARTIES
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
AMOUNT
AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST(A) VALUE BALANCE SHEET
------------------ ----------- ----------- -------------
<S> <C> <C> <C>
Fixed maturities:
Bonds
United States government and government
agencies and authorities..................... $21,954,272 $21,960,750 $21,960,750
Mortgage-backed securities issued by U.S.
government agencies and authorities.......... 27,627,789 26,041,700 26,041,700
Collateralized mortgage obligations............ 15,975,313 15,938,340 15,938,340
States, municipalities and political
subdivisions................................. 2,529,867 2,591,659 2,591,659
All other...................................... 5,510,812 5,577,812 5,577,812
----------- ----------- -----------
Total fixed maturities.................... 73,598,053 72,110,261 72,110,261
----------- ----------- -----------
Equity securities:
Common stocks
Public utilities............................... $ 4,241,695 $ 5,168,478 $ 5,168,478
Banks, trusts and insurance companies.......... 1,156,454 2,628,431 2,628,431
Industrial, miscellaneous and all other........ 3,441,175 4,623,347 4,623,347
Nonredeemable preferred stocks.................... 1,390,189 1,377,438 1,377,438
----------- ----------- -----------
Total equity securities................... 10,229,513 13,797,694 13,797,694
----------- ----------- -----------
Mortgage loans on real estate....................... 19,710 19,710 19,710
----------- ----------- -----------
Total investments......................... $83,847,276 $85,927,665 $85,927,665
=========== =========== ===========
</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.
S-1
<PAGE> 18
SCHEDULE II
AMERICAN INDEMNITY FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Bonds..................................................... $ 113,676 $ 477,037
Cash and cash equivalents................................. 47,555 41,746
Accrued investment income................................. 596 6,895
Receivable from affiliate................................. 27,288 26,586
----------- -----------
Total current assets.............................. 189,115 552,264
INVESTMENTS IN SUBSIDIARIES -- At equity, including
unrealized appreciation in market value of investments
held by subsidiaries................................... 41,430,749 39,977,615
----------- -----------
TOTAL ASSETS...................................... $41,619,864 $40,529,879
=========== ===========
LIABILITIES
Accounts Payable............................................ $ 891 $ 764
----------- -----------
EQUITY
STOCKHOLDERS' EQUITY:
Common stock, $3.33 1/3 par value, authorized 2,500,000
shares; outstanding shares, 1,951,910 in 1996 and
1,947,110 in 1995...................................... $ 6,506,351 $ 6,490,351
Preferred stock, authorized 2,000,000 shares; none
outstanding............................................
Paid-in surplus........................................... 13,061,709 13,047,085
Unrealized appreciation in market value of investments
held by subsidiaries................................... 2,080,388 2,384,457
Retained earnings (substantially all of which represent
equity in undistributed earnings of subsidiaries)...... 19,970,525 18,607,222
----------- -----------
TOTAL............................................. $41,618,973 $40,529,115
----------- -----------
TOTAL LIABILITIES AND EQUITY...................... $41,619,864 $40,529,879
=========== ===========
</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,
---------------------------------------
1996 1995 1994
---------- ----------- ----------
<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............ $ 215,876 $ 347,801 $ 563,677
Investment income................................... 21,110 35,018 32,492
---------- ----------- ----------
Total....................................... 236,986 382,819 596,169
EXPENSES.............................................. 46,938 66,560 57,727
---------- ----------- ----------
INCOME BEFORE FEDERAL INCOME TAX AND EQUITY IN
EARNINGS OF WHOLLY OWNED SUBSIDIARIES............... 190,048 316,259 538,442
CREDIT FOR FEDERAL INCOME TAX -- CURRENT.............. (702) (10,724) (8,580)
---------- ----------- ----------
INCOME BEFORE EQUITY IN EARNINGS OF WHOLLY OWNED
SUBSIDIARIES........................................ 190,750 326,983 547,022
INCOME (LOSS) OF WHOLLY OWNED SUBSIDIARIES, IN EXCESS
OF DIVIDENDS RECEIVED............................... 1,757,203 (5,420,738) 7,702,083
---------- ----------- ----------
NET INCOME (LOSS)..................................... $1,947,953 $(5,093,755) $8,249,105
========== =========== ==========
EARNINGS (LOSS) PER SHARE............................. $ 1.00 $ (2.62) $ 4.24
========== =========== ==========
</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,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................. $ 1,947,953 $(5,093,755) $ 8,249,105
Adjustments to reconcile net income to net cash
flows from operating activities:
Excess of equity in income of subsidiaries over
dividends received therefrom................. (1,757,203) 5,420,738 (7,702,083)
Realized investment gains (losses)............. (7,911) 2,807
Decrease (Increase) in accrued investment
income....................................... 6,299 2,040 (3,134)
Increase in receivable from affiliate.......... (702) (10,724) (8,580)
Increase in accounts payable................... 127 764
----------- ----------- -----------
Net cash flow from operating activities... 188,563 321,870 535,308
----------- ----------- -----------
INVESTING ACTIVITIES:
Sale of bonds..................................... 929,898 248,430
Purchase of bonds................................. (558,626) (74,629) (149,704)
----------- ----------- -----------
Net cash flow from investing activities... 371,272 173,801 (149,704)
----------- ----------- -----------
FINANCING ACTIVITIES:
Cash dividends paid to stockholders............... (584,650) (554,845) (408,806)
Proceeds received from exercise of stock
options........................................ 30,624 2,552 638
----------- ----------- -----------
Net cash flow from financing activities... (554,026) (552,293) (408,168)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents.................................... 5,809 (56,622) (22,564)
Cash and Cash Equivalents -- January 1............ 41,746 98,368 120,932
----------- ----------- -----------
Cash and Cash Equivalents -- December 31.......... $ 47,555 $ 41,746 $ 98,368
=========== =========== ===========
</TABLE>
S-4
<PAGE> 21
SCHEDULE VI
SUPPLEMENTAL INFORMATION -- PROPERTY CASUALTY INSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LOSSES AND LOSS
ADJUSTMENT EXPENSES AMORTIZATION
INCURRED 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> <C>
1996................ $66,961 $4,592 $44,431 $1,777 $17,993 $48,118 $68,863
1995................ 67,137 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
</TABLE>
S-5
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
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. -- Inside front cover, pages 9 through 28, inclusive, and
information set forth under the caption "Common Stock" on
the inside back cover of the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1996.
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.
*27.1 -- Financial Data Schedule
**28.1. -- Consolidated Statutory Schedule "P".
</TABLE>
<PAGE> 23
- ---------------
* 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, 1996.
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF FULLY DILUTED NET INCOME (LOSS)
PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Weighted average shares of common stock
outstanding....................................... 1,948,710 1,946,843 1,946,685
Stock options (treasury stock method)................ 5,357 7,578 8,771
---------- ---------- ----------
Weighted average shares outstanding for primary
earnings per share computation.................... 1,954,067 1,954,421 1,955,456
---------- ---------- ----------
Net Income (Loss)(1)......................... $ 1.00 $ (2.61) $ 4.22
========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE
Weighted average shares of common stock
outstanding....................................... 1,948,710 1,946,843 1,946,685
Stock options (treasury stock method)................ 5,357 7,578 8,771
---------- ---------- ----------
Weighted average shares outstanding for fully diluted
earnings per share computation.................... 1,954,067 1,954,421 1,955,456
---------- ---------- ----------
Net Income (Loss)(1)......................... $ 1.00 $ (2.61) $ 4.22
========== ========== ==========
</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 1996, 1995 and 1994.
<PAGE> 1
CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
For the Years Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Statement Data:
Net premiums earned $ 66,961,281 $ 67,136,782 $ 65,346,464
Net investment income 4,591,651 4,009,564 4,703,398
Realized investment gains (losses) 657,875 (276,311) (31,355)
Net income (loss) 1,947,953 (5,093,755) 8,249,105
Per share 1.00 (2.62) 4.24
Dividends declared per share .30 .285 .21
Balance Sheet Data:
Total assets $ 144,899,748 $ 138,113,936 $ 131,201,491
Stockholders' equity 41,618,973 40,529,114 33,438,366
Per share 21.32 20.82 17.18
Average investment yield 5.32% 4.82% 5.58%
Statutory Ratios:
Statutory combined ratio 108.1% 113.4% 103.3%
Net premiums written/statutory surplus ratio 2.1 TO 1 2.3 to 1 2.1 to 1
</TABLE>
PER SHARE MARKET AND DIVIDEND INFORMATION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Price of Common Stock Dividends
High Low Paid
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 Quarter Ended:
March 31 11 1/4 9 3/8 .075
June 30 13 3/8 9 5/8 .075
September 30 13 9 3/4 .075
December 31 11 3/8 9 1/2 .075
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
</TABLE>
As of February 7, 1997 there were approximately 437 stockholders, not
including shares held beneficially in nominee accounts.
NET PREMIUMS WRITTEN (IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
For the Years Ended December 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Personal automobile $17,844 25.9% $19,764 29.4% $20,426 30.9%
Commercial automobile 16,272 23.6 14,543 21.6 13,408 20.2
Commercial multiple peril 15,973 23.2 16,097 23.9 14,511 21.9
Other liability 7,646 11.1 6,626 9.8 5,930 9.0
Homeowners multiple peril 5,506 8.0 4,154 6.2 4,886 7.4
Fire and allied lines 3,506 5.1 3,285 4.9 3,765 5.7
Inland marine 1,366 2.0 1,439 2.1 1,617 2.4
Workers' compensation 409 0.6 1,008 1.5 1,241 1.9
All other 341 0.5 399 0.6 390 0.6
- ---------------------------------------------------------------------------------------------
Net premiums written $68,863 100.0% $67,315 100.0% $66,174 100.0%
=============================================================================================
</TABLE>
American Indemnity Financial Corporation is a Galveston, Texas, based holding
company comprised of a group of regional property and casualty insurance
companies. The corporate common stock is traded over-the-counter, through the
National Market System, under the NASDAQ symbol AIFC.
American Indemnity Company, American Fire and Indemnity Company and Texas
General Indemnity Company offer personal and commercial lines of insurance
through their independent agents.
<PAGE> 2
EXHIBIT 13.1
FIVE YEAR COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Premiums earned $ 66,961,281 $ 67,136,782 $ 65,346,464 $ 64,081,902 $ 60,470,621
Net investment income 4,591,651 4,009,564 4,703,398 5,252,684 5,535,826
Realized investment gains (losses) 657,875 (276,311) (31,355) 1,274,693 1,360,140
Net income (loss) 1,947,953 (5,093,755) 8,249,105 5,722,617 3,198,879
Net Income (loss) per share 1.00 (2.62) 4.24 2.95 1.66
Dividends declared per share .30 .285 .21 .10 .08
Balance Sheet Data:
Total assets $ 144,899,748 $ 138,113,936 $ 131,201,491 $ 135,803,519 $ 130,782,576
Note payable to bank 515,981 687,146
Stockholders' equity 41,618,973 40,529,114 33,438,366 37,842,559 31,260,941
Equity per share 21.32 20.82 17.18 19.44 16.25
Average investment yield 5.32% 4.82% 5.58% 6.16% 7.01%
Statutory Ratios:
Loss and loss adjustment expenses
to premiums earned 70.9% 73.0% 66.8% 66.9% 74.9%
Underwriting expenses to
premiums written 36.4 37.4 36.1 33.0 32.9
Retrospective premium adjustments
to premiums written .8 3.0 .4 2.2 (.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Statutory combined ratio 108.1% 113.4% 103.3% 102.1% 107.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Net premiums written/statutory
surplus ratio 2.1 to 1 2.3 to 1 2.1 to 1 2.2 to 1 2.5 to 1
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
*Net Premiums *Premiums Net Earnings
Written Earned Income Per Share
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
First Quarter $18,119,163 $16,875,476 $ 1,065,799 $ .55
Second Quarter 18,389,001 16,765,029 (1,166,984) (.60)
Third Quarter 16,064,232 16,527,013 696,931 .36
Fourth Quarter 16,290,161 16,793,763 1,352,207 .69
1995
First Quarter $18,860,826 $16,514,006 $ 484,620 $ .25
Second Quarter 17,256,581 17,276,077 (3,553,090) (1.83)
Third Quarter 17,463,121 17,379,634 (677,402) (.34)
Fourth Quarter 13,734,229 15,967,065 (1,347,883) (.70)
</TABLE>
* Certain reclassifications have been made in the amounts presented for
1995 to conform with the 1996 presentation.
8
<PAGE> 3
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 14 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. The underwriting results improved significantly during
1996 compared with 1995. Nevertheless, these underwriting results produced
negative net cash flow during 1996. However, the negative effect on cash flow
from the underwriting results was partially offset by a decrease in policy
acquisition costs and an increase in net investment income during 1996 compared
with 1995.
The Company's total net loss resulting from weather-related catastrophes
during 1996 decreased significantly compared with 1995. Nevertheless, the
negative cash flow from underwriting results during 1996 was caused primarily
by the occurrence of several weather-related natural catastrophes. During 1996,
the Company's total net loss resulting from weather-related catastrophes was
approximately $3,525,000 compared with $6,281,000 during 1995.
Policy acquisition costs decreased 2.6% during 1996 compared with 1995.
This decrease resulted primarily from decreased overhead expenses during 1996
compared with 1995. Overhead expenses decreased primarily as a result of a
decrease in legal expense.
Net investment income increased 14.5% during 1996 compared with 1995,
primarily as a result of increased yields on the Company's derivative
investments.
Primarily as a result of 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, an
increase in policy acquisition costs and a decrease in net investment income
during 1995, the Company's operating results produced negative cash flow in
1995. 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.
Primarily as a result of this, the amount of funds required for claim payments
increased approximately 16.3% in 1995 compared with 1994. Policy acquisition
costs increased 8.3% 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.
Operating activities provided positive cash flow during 1994 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.
Investing Activities. The net cash flow from investing activities
was positive for 1996 because total investment sales and maturities exceeded
total investment purchases during 1996. During 1996, the Company's cash flow
from operating activities was negative. As a result, additional funds were
raised through the sale of investments. However, whenever possible during 1996,
management invested a portion of available cash balances and the proceeds
received from disposition of investments into investment grade bonds and common
stocks.
9
<PAGE> 4
As shown in the Company's consolidated balance sheets, the unrealized
appreciation in market value of investments was approximately $2,080,000 at
December 31, 1996, compared to an unrealized appreciation of approximately
$2,384,000 at December 31, 1995, resulting in unrealized losses for 1996 of
approximately $304,000. Of these amounts, unrealized losses in the Company's
bond portfolio were approximately $1,067,000 of this total with unrealized
gains on equity securities constituting the balance of $763,000. The unrealized
investment losses were primarily the result of the negative effects of
increased interest rates on the market value of the Company's debt securities
during 1996.
Approximately $297,000 of the total $1,067,000 in unrealized investment
losses on bonds in 1996 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 was obtained
with respect to certain of these securities, net investment income during 1997
should not change significantly compared with 1996. 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, 1996, the average yield of these derivative investments, including
the guaranteed yield on one such issue discussed below, was approximately 4.3%,
their average term to maturity was 2 years, and the market value carried on the
Company's balance sheet was approximately $18,778,000.
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 1996, the Company was able to reduce its
exposure in such securities by the sale of $750,000 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 the settlement of 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 equals 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. As of December 31,
1996, the remaining amount guaranteed, reduced by settlements received during
1996, is approximately $1,115,000. This guarantee was originally 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 in the
amount of $500,000 expired in December 1996. At December 31, 1996, the stated
interest rate for the Guaranteed Yield Security was .039% and the guaranteed
yield rate was 5.15%. Based on such guaranteed yield rate, and assuming no
change in the yield rate that determines the guaranteed yield rate, net
investment income earned by this security during 1997 should not change
significantly compared with 1996.
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, 1996 was determined
based upon the market values of other securities with similar yield resets and
similar maturities. As a result, the market value for this security as carried
on the Company's balance sheet at December 31, 1996 was approximately
$10,979,000.
10
<PAGE> 5
The net cash flow from investing activities was positive for 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 and this, combined with the positive
effects of decreased interest rates on the market value of the Company's fixed
maturity bond portfolio and yield increases in certain derivative 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.
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 losses, $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.
Financing Activities. During 1996, the Company's Board of Directors declared
quarterly dividends totaling $.30 per share compared with $.285 per share in
1995. This resulted in a 5.3% increase in the amount of funds required for the
payment of dividends in 1996 compared with 1995.
In January 1996, the Company received $580,500 proceeds from a loan from
United States National Bank. The Company is required to make seventy-two
monthly payments at an interest rate of 8.75% until the maturity date of
February 1, 2002. The Company may pay without penalty all or a portion of the
principal. These funds were obtained to finance the purchase of computer
software designed to provide policy processing, claims administration, billing
and collection, reinsurance and management reporting needed as part of the
Company's ongoing effort to enhance its technology and re-engineer its business
processes.
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 1996 or 1995.
11
<PAGE> 6
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.
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.
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.
RESULTS OF OPERATIONS
Primarily as a result of strong competition in a soft market and the
Company's conservative pricing and strict underwriting standards, net premiums
earned decreased slightly during 1996 compared with 1995. 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.
As discussed above, net investment income increased 14.5% during 1996
compared with 1995, resulting in an increase in the Company's average
investment yield to 5.32% for 1996 compared with 4.82% for 1995. At current
yield rates and considering future yield resets for derivative securities and
the guaranteed yield rate discussed above, net investment income during 1997
should not change significantly compared to 1996. This is subject to change,
either positively or negatively, depending on future investment market
conditions.
In an effort to maximize the overall return on the Company's investment
portfolio, Management elected to take advantage of favorable market conditions
and sold several issues of common and preferred stocks and fixed maturity bonds
which were held in the investment portfolio. As a result, realized investment
gains were approximately $658,000 during 1996 compared with realized investment
losses of approximately $276,000 during 1995.
The underwriting results improved significantly during 1996 compared with
1995, as reflected in the decrease in loss and loss adjustment expenses
incurred. The loss and loss adjustment expense ratio was 69.0% for 1996
compared with 73.8% for 1995. This decrease was primarily the result of a
smaller number and decreased severity of weather-related natural catastrophes
during 1996 compared with 1995. Claims from weather-related natural
catastrophes resulted in approximately $3,525,000 in net losses during 1996
compared with approximately $6,281,000 during 1995.
The policy acquisition cost ratio was 36.6% for 1996 compared with 37.5%
for 1995. The decrease in this ratio resulted primarily from decreased overhead
expenses during 1996 compared with 1995. Overhead expenses decreased primarily
as a result of a decrease in legal expenses. Legal expenses incurred during
1995 included non-recurring expenses in connection with legal assistance used
in obtaining the guarantee of the yield on the Guaranteed Yield Security.
Management has established strategic initiatives to significantly reduce
overhead expense and policy acquisition costs in the long term.
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
12
<PAGE> 7
workers' compensation policies for years prior to 1992. As a result of the
favorable loss experience during 1996 on these policies, retrospective premium
adjustments on workers' compensation policies were 0.7% of premiums earned for
1996 compared with 3.0% for 1995.
The net income of the Company was approximately $1,948,000 during 1996
compared with net loss of $5,094,000 during 1995. This improvement resulted
primarily from the decrease in claims from weather-related natural
catastrophes, the increase in net investment income, and the realized
investment gains during 1996 compared with 1995.
Net premiums earned increased 2.7% 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.
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.
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 73.8% 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.
The policy acquisition cost ratio was 37.5% 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
Guaranteed Yield Security.
As a result of the favorable loss experience during 1995 on workers'
compensation policies, retrospective premium adjustments on workers'
compensation policies were 3.0% of premiums earned for 1995 compared with 0.4%
for 1994.
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 during 1994.
The Company did not adopt the accounting provisions of Statement of
Financial Accounting Standards No. 123, but rather has elected to continue to
apply Accounting Principles Board Opinion No. 25 for measurement and
recognition of employee stock-based compensation. The Company estimates that
the provisions of the statement, if adopted, would not have materially affected
reported amounts for net income (loss) and earnings (loss) per share in 1996
and 1995.
13
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
December 31,
1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities - bonds:
Available for sale - at market value (amortized cost $73,598,053
in 1996 and $72,999,281 in 1995) $ 72,110,261 $ 72,578,178
Equity securities:
Preferred stocks - at market value (cost $1,390,189 in 1996
and $2,258,959 in 1995) 1,377,438 2,289,472
Common stocks - at market value (cost $8,839,325 in 1996
and $9,120,470 in 1995) 12,420,256 11,895,516
Mortgage loans on real estate 19,710 24,604
Short-term investments 60,000
- -------------------------------------------------------------------------------------------------------------
Total investments 85,927,665 86,847,770
Cash and Cash Equivalents 4,349,953 4,781,566
Accrued Investment Income 826,791 711,185
Premiums in Course of Collection 4,093,476 4,293,569
Direct Premium Bills Receivable 9,659,722 8,267,740
Reinsurance Balances Receivable 18,689,412 12,167,759
Prepaid Reinsurance Premiums 651,050 716,632
Property and Equipment, Net 4,072,394 4,202,742
Deferred Policy Acquisition Costs 9,375,133 8,841,705
Deferred Income Taxes 4,743,000 4,498,000
Other Assets 2,511,152 2,785,268
- -------------------------------------------------------------------------------------------------------------
Total $144,899,748 $138,113,936
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and Loss Adjustment Expenses:
Unpaid losses $ 47,476,034 $ 44,421,001
Unpaid loss adjustment expenses 8,125,895 6,744,423
Unearned Premiums 36,325,073 34,489,378
Reinsurance Balances Held or Payable 1,657,874 2,844,698
Note Payable to Bank 515,981
Accounts Payable and Other Accrued Liabilities 9,179,918 9,085,322
- -------------------------------------------------------------------------------------------------------------
Total Liabilities 103,280,775 97,584,822
- -------------------------------------------------------------------------------------------------------------
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 1,951,910 in 1996 and 1,947,110 in 1995 6,506,351 6,490,351
Paid-in surplus 13,061,709 13,047,085
Unrealized appreciation in market value of investments 2,080,388 2,384,456
Retained earnings 19,970,525 18,607,222
- -------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 41,618,973 40,529,114
- -------------------------------------------------------------------------------------------------------------
Total $144,899,748 $138,113,936
=============================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these financial statements.
14
<PAGE> 9
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and Other Income
Premiums earned $ 66,961,281 $ 67,136,782 $ 65,346,464
Net investment income 4,591,651 4,009,564 4,703,398
Realized investment gains (losses) 657,875 (276,311) (31,355)
Interest on premium bills receivable and other income 743,892 730,211 693,670
- -------------------------------------------------------------------------------------------------------
Total 72,954,699 71,600,246 70,712,177
- -------------------------------------------------------------------------------------------------------
Expenses
Losses and loss adjustment expenses:
Losses incurred 38,916,069 40,862,977 35,729,193
Loss adjustment expenses 7,292,287 8,703,295 7,580,177
Policy acquisition costs 24,531,623 25,188,691 23,267,039
Retrospective premium adjustments on workers'
compensation policies 511,767 2,020,126 282,381
- -------------------------------------------------------------------------------------------------------
Total 71,251,746 76,775,089 66,858,790
- -------------------------------------------------------------------------------------------------------
Income (Loss) Before Federal Income Tax 1,702,953 (5,174,843) 3,853,387
Provision (Credit) for Federal Income Tax
Current (13,088) 34,282
Deferred (245,000) (68,000) (4,430,000)
- -------------------------------------------------------------------------------------------------------
Total (245,000) (81,088) (4,395,718)
- -------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 1,947,953 $ (5,093,755) $ 8,249,105
=======================================================================================================
Net Income (Loss) Per Share $ 1.00 $ (2.62) $ 4.24
- -------------------------------------------------------------------------------------------------------
Dividends Declared Per Share $ .30 $ .285 $ .21
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
15
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 1,947,953 $ (5,093,755) $ 8,249,105
Adjustments to reconcile net income (loss) to net cash
flow from operating activities:
Decrease (Increase) in:
Premiums in course of collection 200,093 1,669,215 560,987
Direct premium bills receivable (1,391,982) (358,847) (190,065)
Reinsurance balances receivable (6,521,653) (1,379,088) 1,864,839
Prepaid reinsurance premiums 65,582 610,852 960,390
Deferred policy acquisition costs (533,428) 255,759 (1,367,695)
Deferred income taxes (245,000) (68,000) (4,430,000)
Other assets 274,116 34,031 (200,808)
Increase (Decrease) in:
Unpaid losses and loss adjustment expenses 4,436,505 248,648 (2,508,638)
Unearned premiums 1,835,695 (432,877) (132,763)
Reinsurance balances held or payable (1,186,824) (932,849) 1,443,193
Accounts payable and other accrued liabilities 94,596 938,775 1,000,373
Realized investment (gains) losses (657,875) 276,311 31,355
Depreciation 455,274 419,714 335,548
Other 73,634 109,127 525,667
- --------------------------------------------------------------------------------------------------------
Net cash flow from operating activities (1,153,314) (3,702,984) 6,141,488
- --------------------------------------------------------------------------------------------------------
Investing Activities
Sale of bonds 9,848,321 9,252,615 21,217,761
Maturity of bonds 9,304,151 5,761,836 5,873,780
Sale of preferred stocks 184,396 49,338
Redemption of preferred stocks 705,368 170,018 80,625
Sale of common stocks 2,936,366 6,234,399 2,459,425
Maturity of long-term certificates of deposit 60,000
Purchase of bonds (19,746,127) (16,018,351) (30,933,224)
Purchase of preferred stocks (175,000)
Purchase of common stocks (2,090,731) (496,370) (1,080,825)
Purchase of property and equipment (446,893) (858,616) (877,466)
Other 4,895 4,430 10,467
- --------------------------------------------------------------------------------------------------------
Net cash flow from investing activities 759,746 4,099,299 (3,424,457)
- --------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds received from bank loan 580,500
Payments on bank loan (64,519)
Cash dividends paid to stockholders (584,650) (554,845) (408,806)
Proceeds received from exercise of stock options 30,624 2,552 638
- --------------------------------------------------------------------------------------------------------
Net cash flow from financing activities (38,045) (552,293) (408,168)
- --------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (431,613) (155,978) 2,308,863
Cash and Cash Equivalents, January 1 4,781,566 4,937,544 2,628,681
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, December 31 $ 4,349,953 $ 4,781,566 $ 4,937,544
========================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
16
<PAGE> 11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
For the Three Years Ended December 31, 1996
- -----------------------------------------------------------------------------------------------------------------
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, 1994 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 loss (5,093,755)
Cash dividends ($.285 per share) (554,845)
Change in market value of investments 12,736,796
Common stock issued in connection
with stock option plans 400 1,333 1,219
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,947,110 6,490,351 13,047,085 2,384,456 18,607,222
Net income 1,947,953
Cash dividends ($ .30 per share) (584,650)
Change in market value of investments (304,068)
Common stock issued in connection
with stock option plans 4,800 16,000 14,624
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,951,910 $6,506,351 $13,061,709 $ 2,080,388 $19,970,525
=================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
17
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 1996
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.
Reclassifications. Certain reclassifications have been made in the amounts
presented for 1995 to conform with the 1996 presentation.
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 those 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 which are available for sale are stated at
market value. Investments in fixed maturities which are designated as held to
maturity are stated at amortized cost. At December 31, 1996 and 1995, all fixed
maturities were classified as available for sale.
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.
18
<PAGE> 13
Disclosures about Fair Value of Financial Instruments. In preparing disclosures
about the fair value of financial instruments, the Company has assumed that the
carrying amount approximates fair value for cash and cash equivalents because
of the short maturities of those instruments. The fair value of investments is
estimated based on quoted market values when available, independent pricing
services, or on the current interest rates available to the Company for
investments with similar terms and remaining maturities. At December 31, 1996
and 1995, the fair market value of all of the Company's financial instruments
approximated their reported values.
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.
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.
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; 1,948,710 for 1996, 1,946,843 for 1995 and
1,946,685 for 1994.
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
Fixed Maturities - Bonds. The amortized cost and estimated market values of
investments in fixed maturities-bonds are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and Government Agencies and Authorities $21,954,272 $151,756 $ 145,278 $21,960,750
Mortgage-backed Securities issued by U. S.
Government Agencies and Authorities 27,627,789 13,084 1,599,173 26,041,700
Collateralized Mortgage Obligations 15,975,313 62,260 99,233 15,938,340
States, Municipalities and Political Subdivisions 2,529,867 67,026 5,234 2,591,659
All Other 5,510,812 67,000 5,577,812
- -----------------------------------------------------------------------------------------------------------------------
Totals $73,598,053 $361,126 $1,848,918 $72,110,261
=======================================================================================================================
</TABLE>
19
<PAGE> 14
<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>
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, 1996 was
determined based upon the market values of other securities with similar yield
resets and similar maturities. As a result, the market value carried on the
Company's balance sheet at December 31, 1996 for this security was
approximately$10,979,000. The market value of this security, exclusive of the
guaranteed yield agreement was approximately $10,319,000 at December 31, 1996.
At December 31, 1996, bonds with an amortized cost of approximately
$8,651,000 were on deposit with regulatory authorities and bonds with an
amortized cost of approximately $5,480,000 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, 1996, 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, 1996
Estimated
Amortized Market
Maturity Distribution Cost Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 7,841,743 $ 7,815,853
Due after one year through five years 56,122,837 54,520,114
Due after five years through ten years 8,252,449 8,394,734
Due after ten years 1,381,024 1,379,560
- -------------------------------------------------------------------------------------------------
Totals $73,598,053 $72,110,261
=================================================================================================
</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,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized Investment Gains (Losses):
Fixed maturities-Bonds $ 72,391 $ (213,516) $ (102,886)
Equity securities 585,484 (62,795) 71,531
- ---------------------------------------------------------------------------------------------------------------
Total 657,875 (276,311) (31,355)
- ---------------------------------------------------------------------------------------------------------------
Unrealized Appreciation (Decline) in Market Value of Investments:
Fixed maturities-Bonds (1,068,353) 9,288,407 (10,344,235)
Equity Securities 772,620 3,461,895 (1,922,441)
- ---------------------------------------------------------------------------------------------------------------
Total (295,733) 12,750,302 (12,266,676)
- ---------------------------------------------------------------------------------------------------------------
Total $ 362,142 $ 12,473,991 $(12,298,031)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 15
Proceeds from sales of investments during 1996, 1995 and 1994 were
$13,012,386, $15,706,370 and $23,757,811, respectively. The gross realized
investment gains and losses for such sales were as follows: Realized investment
gains: 1996 - $803,138; 1995 - $1,061,546; and 1994 - $658,404. Realized
investment losses: 1996 - $160,025; 1995 - $1,415,132; and 1994 - $692,848. The
gross unrealized gains and losses on equity securities at December 31, 1996
were approximately $3,705,000 and $137,000 respectively.
NET INVESTMENT INCOME. Investment income and expenses are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Years Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Maturities - Bonds $ 4,150,909 $ 3,376,965 $ 3,844,990
Equity Securities:
Common stocks 464,839 639,790 837,057
Preferred stocks 146,513 188,101 207,178
Mortgage Loans on Real Estate 2,199 2,634 3,124
Other Short-Term Investments 227,643 191,259 173,532
- -------------------------------------------------------------------------------
Total Investment Income 4,992,103 4,398,749 5,065,881
Less Investment Expenses (400,452) (389,185) (362,483)
- -------------------------------------------------------------------------------
Net Investment Income $ 4,591,651 $ 4,009,564 $ 4,703,398
===============================================================================
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
December 31,
1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
Land $ 263,503 $ 263,503
Building and Improvements 5,835,467 5,792,172
Furniture, Fixtures and Equipment 2,588,784 2,341,459
Automobiles 398,884 419,978
- ---------------------------------------------------------------------------------
Total 9,086,638 8,817,112
Less Accumulated Depreciation 5,014,244 4,614,370
- ---------------------------------------------------------------------------------
Property and Equipment, Net $4,072,394 $4,202,742
=================================================================================
</TABLE>
4. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Reserving for all property and casualty claims continues to be a complex and
uncertain process, requiring the use of informed estimates and judgments. As
additional experience and other data become available and are reviewed or as
new or improved methodologies are developed or as current law changes,
estimates and judgments may be revised. Any such revisions could result in
future changes in estimates of losses or reinsurance recoverables, and would be
reflected in results of operations for the period in which the estimates are
changed. While the effect of any such changes in estimates of losses or
reinsurance recoverables could be material to future results of operations,
management does not expect such changes to have a material effect on the
Company's liquidity or financial condition. In management's judgment,
information currently available has been appropriately considered in estimating
loss reserves and reinsurance recoverables.
21
<PAGE> 16
The table below is a reconciliation of beginning and ending reserve
balances for loss and loss adjustment expenses for the years ended December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross reserves, beginning of year $51,165,000 $50,917,000 $53,425,000
Reinsurance recoverable, beginning of year 11,974,000 10,624,000 12,584,000
- ---------------------------------------------------------------------------------------------------------------
Net reserves, beginning of year 39,191,000 40,293,000 40,841,000
- ---------------------------------------------------------------------------------------------------------------
Net incurred loss and loss adjustment expenses related to:
Current year 44,431,000 47,159,000 42,015,000
Prior years 1,777,000 2,407,000 1,294,000
- ---------------------------------------------------------------------------------------------------------------
Total net incurred 46,208,000 49,566,000 43,309,000
Net paid loss and loss adjustment expenses related to:
Current year 24,941,000 27,910,000 23,567,000
Prior years 23,625,000 22,758,000 20,290,000
- ---------------------------------------------------------------------------------------------------------------
Total net paid 48,566,000 50,668,000 43,857,000
- ---------------------------------------------------------------------------------------------------------------
Net reserves, end of year 36,833,000 39,191,000 40,293,000
Reinsurance recoverable, end of year 18,769,000 11,974,000 10,624,000
- ---------------------------------------------------------------------------------------------------------------
Gross reserves at December 31 $55,602,000 $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 $1,777,000 in 1996
and $2,407,000 in 1995 because of higher than anticipated losses and related
expenses. This is most apparent in the personal and commercial automobile
liability and the commercial multiple peril lines of business during 1996 and
1995.
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.
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, 1996 and
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
December 31,
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $ (3,187,545) $ (3,006,180)
Differences between book and tax basis of property (320,161) (300,935)
Unrealized investments gains (707,332) (810,715)
Other (341,959) (403,926)
- ------------------------------------------------------------------------------------------
(4,556,997) (4,521,756)
- ------------------------------------------------------------------------------------------
Deferred tax assets:
Reserves not currently deductible 5,167,237 6,013,565
Operating loss carryforwards 12,189,198 11,824,122
- ------------------------------------------------------------------------------------------
17,356,435 17,837,687
- ------------------------------------------------------------------------------------------
Net asset 12,799,438 13,315,931
Valuation allowance (8,056,438) (8,817,931)
- ------------------------------------------------------------------------------------------
Net deferred tax assets $ 4,743,000 $ 4,498,000
==========================================================================================
</TABLE>
22
<PAGE> 17
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,
1996, was a decrease of $761,493. 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 $4,743,000 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,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax provision (credit) computed at statutory rate (34%) $ 579,004 $(1,759,445) $ 1,310,150
Increase in tax credit, or decrease in tax
provision, resulting from:
Tax exempt bond interest (75,135) (99,375) (113,103)
Tax exempt dividends (70% of amount received from domestic corporations) (145,502) (178,595) (248,513)
Recognition of deferred tax asset (245,000) (68,000) (4,430,000)
Other 33,102 44,320 34,382
Reduction in tax provision
(credit) for current year net operating loss limitation (391,469) 1,980,007 (948,634)
- -----------------------------------------------------------------------------------------------------------------------------
Credit for federal income tax $(245,000) $ (81,088) $(4,395,718)
=============================================================================================================================
</TABLE>
The Company has a net operating loss carryforward for tax purposes of
$35,850,582, 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; 2010 - $4,604,277; and 2011 -
$1,133,330.
The Company paid federal income tax of $15,000 in 1996, received a federal
income tax refund of $36,779 in 1995 and paid federal income tax of $152,414 in
1994.
6. REINSURANCE AND CONTINGENCIES
Property insurance risks are reinsured under treaty arrangements whereby
$900,000 of losses in excess of $100,000 are automatically reinsured. American
Indemnity has additional automatic property facultative reinsurance agreements
for losses in excess of $1,000,000 up to a maximum of $2,300,000. 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. Additionally, American
Indemnity carries aggregate excess property and automobile catastrophe
reinsurance which covers 95% of all losses up to $4,000,000 in excess of
$2,000,000, subject to a $200,000 per occurrence retention.
During the three years ended December 31, 1996, all claims on automobile
liability and casualty insurance over $125,000 up to $2,000,000 were
automatically reinsured under a treaty. Effective January 1, 1997, the American
Indemnity's retention for these claims will increase to $150,000 from $125,000.
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.
23
<PAGE> 18
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,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums Earned:
Catastrophe reinsurance $ 4,216,768 $ 3,996,420 $ 3,218,084
Other reinsurance 10,488,973 10,846,861 11,810,207
- ----------------------------------------------------------------------------------------------------------
Total 14,705,741 14,843,281 15,028,291
==========================================================================================================
Losses and Loss Adjustment Expenses Incurred:
Catastrophe reinsurance 2,700,000
Other reinsurance 13,025,638 8,167,619 7,729,361
- ----------------------------------------------------------------------------------------------------------
Total 13,025,638 10,867,619 7,729,361
==========================================================================================================
Unpaid Losses and Loss Adjustment Expenses at December 31 $18,768,740 $11,974,375 $10,623,491
==========================================================================================================
</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 only pay cash dividends 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
calendar year or (ii) the net income, not including realized capital gains or
losses, for such year. American Indemnity may carryforward net income from the
previous two calendar years that has not already been paid out as dividends.
This carryforward 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, 1996, American Indemnity had $2,952,462 of statutory
retained earnings available for payment of cash dividends. At December 31,
1996, American Indemnity's reported statutory surplus as regards to
policyholders was $30,674,820. For the year ended December 31, 1996, American
Indemnity's unconsolidated statutory net investment income (including realized
capital gains) was $7,761,836 and its unconsolidated net income (excluding
realized capital gains) was
24
<PAGE> 19
$2,375,211. The Company's stockholders' equity at December 31, 1996, 1995 and
1994 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
- -----------------------------------------------------------------
<C> <C> <C>
1996 $32,556,876 $2,159,102
1995 $30,682,608 $ 310,914
1994 $31,629,505 $3,131,381
</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> <C>
Options outstanding, January 1, 1994 24,300 $ 6.74
Options granted April 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, December 31, 1995 20,800 7.99
Options exercised in 1996 (4,800) (6.38)
- ----------------------------------------------------------------------------------------------------
Options outstanding and exercisable, December 31, 1996 16,000 $ 8.47
====================================================================================================
</TABLE>
At December 31, 1996, 119,000 shares of common stock were reserved for
issuance pursuant to the terms of the Company's Employee Stock Option Plan.
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> <C>
Options outstanding, January 1, 1994 4,000 $ 7.75
Options granted, April 1994 7,000 13.79
- -------------------------------------------------------------------------------------
Options outstanding, December 31, 1994 11,000 11.59
- -------------------------------------------------------------------------------------
Options outstanding, December 31, 1995 11,000 11.59
Options granted, April 1996 8,000 12.59
- -------------------------------------------------------------------------------------
Options outstanding and exercisable, December 31, 1996 19,000 $ 12.01
=====================================================================================
</TABLE>
At December 31, 1996, 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.
25
<PAGE> 20
The Company recognizes compensation expense with respect to any
nonqualified option pursuant to Accounting Principles Board (APB) Opinion No.
25. Accordingly, no compensation expense has been recognized in connection with
the issuance of stock options. The Company did not adopt Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" which
requires an alternative method for measuring compensation cost. The Company
estimates that the provisions of the statement, if adopted, would not have
materially affected reported amounts for net income (loss) and earnings (loss)
per share in 1996 and 1995.
9. RETIREMENT PLANS
American Indemnity sponsors a defined contribution plan (the "Plan"), whereby
eligible employees may elect to 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, 1996 and 1995 were
approximately $153,000 and $254,000, respectively.
On January 1, 1996, American Indemnity converted its defined benefits plan
to a Cash Balance Pension Plan. Employees who were participants of the plan on
December 31, 1995 received credit for benefits earned under the defined
benefits plan as an opening balance in the Cash Balance Pension Plan. Beginning
on January 1, 1996, at the end of each plan year, American Indemnity credits
each eligible participant's account with five percent of each participant's
compensation earned that year plus interest at a rate of six percent. 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,
1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial Present Value of Benefit Obligations:
Accumulated plan benefits, including vested benefits
of $2,156,658 in 1996 and $1,793,585 in 1995 $ 2,220,951 $ 1,885,507
- -----------------------------------------------------------------------------------------------------------------------
Projected benefit obligations for services rendered to date $(2,785,203) $(3,809,516)
Plan assets at fair value, consisting primarily of equity securities 2,941,658 2,558,322
- -----------------------------------------------------------------------------------------------------------------------
Plan assets in excess of (less than) projected benefit obligations 156,455 (1,251,194)
Unrecognized net gain (394,525) (236,668)
Unrecognized net obligations, at adoption of plan, being recognized over 15 years 847,573 990,877
Unrecognized Prior Service Cost (1,084,828) (18,072)
- -----------------------------------------------------------------------------------------------------------------------
Accrued pension cost $ (475,325) $ (515,057)
=======================================================================================================================
</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 eight percent and four percent, respectively,
for 1996 and seven and one-half percent and four and one-half percent,
respectively, for 1995. The expected long-term rate of return on assets was
eight percent for 1996 and seven percent for 1995.
Net pension cost included the following components:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Years Ended December 31,
1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 152,401 $ 131,609 $ 145,209
Interest cost on projected benefit obligations 199,882 215,042 174,271
(Return) loss on plan assets (462,436) (388,691) 31,564
Net amortization and deferral 343,021 339,845 (62,391)
- ----------------------------------------------------------------------------------------------
Net periodic pension cost $ 232,868 $ 297,805 $ 288,653
==============================================================================================
</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.
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.
26
<PAGE> 21
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,
1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 1,082,000 $1,140,000
Fully eligible active participants 274,000 421,000
Other active participants 716,000 1,232,000
- ----------------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 2,072,000 2,793,000
Unrecognized net obligation, at adoption of plan, being recognized over 20 years 1,215,000 1,893,000
Prior service cost 84,000
Unrecognized net loss (gain) (79,000) 101,000
- ----------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit liability $ 936,000 $ 715,000
======================================================================================================================
</TABLE>
Net postretirement benefit costs include the following components:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
For the years ended December 31,
1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
Service cost $ 57,000 $ 59,000
Interest cost 155,000 187,000
Net amortization and deferral 75,000 107,000
- --------------------------------------------------------------------
Net postretirement costs $287,000 $353,000
====================================================================
</TABLE>
For measurement purposes, the assumed health care cost trend rate is 9
percent in 1997 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, 1996 by approximately $257,000 and the net periodic postretirement benefit
cost would increase by approximately $33,000. The calculation assumes a
long-term rate of increase in compensation of four percent for December 31,
1996 and four and one-half percent for 1995. The weighted-average discount rate
used in determining the accumulated postretirement benefit obligation was eight
percent and seven and one-half percent for 1996 and 1995, 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,
1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Costs Incurred and Expensed $ 6,538,408 $ 7,545,615 $ 7,050,516
Costs Amortized to Expense 17,993,215 17,643,076 16,216,523
- --------------------------------------------------------------------------------------
Total $24,531,623 $25,188,691 $23,267,039
======================================================================================
</TABLE>
12. LEASE COMMITMENTS
The Company has several operating leases for office space and equipment. Total
lease expense was approximately $682,000 for 1996, $688,000 for 1995 and
$600,000 for 1994. Future minimum lease commitments for the Company are
approximately $454,000 for 1997, $386,000 for 1998, $338,000 for 1999, $165,000
for 2000 and $0 for 2001.
13. NOTE PAYABLE TO BANK AND LINE OF CREDIT
In January 1996, the Company received $580,500 proceeds from a loan used to
purchase computer software. The Company is required to make seventy-two monthly
installments of $10,447 including interest. The interest rate is fixed at 8.75%
and the loan maturity date is February 1, 2002. The principal payments of the
note payable to bank are as follows: 1996 - $64,519; 1997 - $83,508; 1998 -
$91,116; 1999 - $99,416; 2000 - $108,472; and 2001 - $118,353.
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 1996 or 1995.
27
<PAGE> 22
[DELOITTE & TOUCHE LLP LETTERHEAD]
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, 1996 and
1995 and the related consolidated statements of income, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1996. 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, 1996 and 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
March 7, 1997
<PAGE> 23
COMMON STOCK
American Indemnity Financial Corporation common stock is traded over the
counter through the National Market System with the NASDAQ symbol AIFC.
Should stockholders holding common stock beneficially in "street name"
wish to receive corporate reports directly from the Company, please write:
Mr. William H. Felts, Jr.
Stockholders' Relations Department
American Indemnity Financial Corporation
P.O. Box 8985
Wilmington, Delaware 19899-8985
<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 7, 1997 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, 1996.
DELOITTE & TOUCHE LLP
Houston, Texas
March 7, 1997
<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, 1996, 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 21st
day of March, 1997.
/s/ Jack T. Currie
---------------------------------
Jack T. Currie
<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, 1996, 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 20th
day of March, 1997.
/s/ Henry W. Hope
------------------------------
Henry W. Hope
<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, 1996, 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 21st
day of March, 1997.
/s/ Harris L. Kempner, Jr.
-----------------------------------
Harris L. Kempner, Jr.
<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, 1996, 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 21st
day of March, 1997.
/s/ William C. Levin, M.D.
-----------------------------------------
William C. Levin, M.D.
<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, 1996, 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 22nd
day of March, 1997.
/s/ James W. McFarland
-----------------------------------
James W. McFarland
<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, 1996, 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 21st
day of March, 1997.
/s/ Synott L. McNeel
------------------------------------
Synott L. McNeel
<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, 1996, 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 21st
day of March, 1997.
/s/ Marvin L. West
----------------------------------
Marvin L. West
<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, 1996, 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 21st
day of March, 1997.
/s/ Fred C. Burns
----------------------------------
Fred C. Burns
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 72,110,261
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 13,797,694
<MORTGAGE> 19,710
<REAL-ESTATE> 0
<TOTAL-INVEST> 85,927,665
<CASH> 4,349,953
<RECOVER-REINSURE> 18,689,412
<DEFERRED-ACQUISITION> 9,375,133
<TOTAL-ASSETS> 144,899,748
<POLICY-LOSSES> 55,601,929
<UNEARNED-PREMIUMS> 36,325,073
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 6,506,351
<OTHER-SE> 35,112,622
<TOTAL-LIABILITY-AND-EQUITY> 144,899,748
66,961,281
<INVESTMENT-INCOME> 4,591,651
<INVESTMENT-GAINS> 657,875
<OTHER-INCOME> 743,892
<BENEFITS> 46,208,356
<UNDERWRITING-AMORTIZATION> 17,993,215
<UNDERWRITING-OTHER> 6,538,408
<INCOME-PRETAX> 1,702,953
<INCOME-TAX> (245,000)
<INCOME-CONTINUING> 1,947,953
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,947,953
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
<RESERVE-OPEN> 39,191,000
<PROVISION-CURRENT> 44,431,000
<PROVISION-PRIOR> 1,777,000
<PAYMENTS-CURRENT> 24,941,000
<PAYMENTS-PRIOR> 23,625,000
<RESERVE-CLOSE> 36,833,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
