SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
________________________
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
______________________
Commission File Number 0-8636
AMERICAN INDEMNITY FINANCIAL CORPORATION
________________________________________
(Exact name of registrant as specified in its charter)
Delaware 510119643
________ ___________
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
One American Indemnity Plaza, Galveston, Texas 77550
______________________________________________ _____
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (409) 766-4600
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
___ ____
As of May 6, 1996, 1,962,410 shares of registrant's common stock,
$3.33 1/3 par value, were outstanding.
<PAGE> PAGE 1 OF 11 PAGES
AMERICAN INDEMNITY FINANCIAL CORPORATION
AND SUBSIDIARIES
Item 1. Financial Statements
Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1996
Unaudited
1997 1996
____ ____
PREMIUMS AND OTHER INCOME:
Premiums earned $15,944,356 $16,875,476
Net investment income (net of investment
expenses of $103,182 in 1997 and $99,517
in 1996) 1,065,821 1,119,619
Realized investment gains 23,604 136,914
Interest on premium bills receivable and
other income 213,800 172,294
____________ ____________
TOTAL 17,247,581 18,304,303
____________ ____________
EXPENSES:
Losses and loss adjustment expenses 11,564,523 10,910,359
Policy acquisition costs 6,134,290 6,348,374
Retrospective premium adjustments on
workers' compensation policies (126,399) (20,229)
____________ ____________
TOTAL 17,572,414 17,238,504
____________ ____________
INCOME (LOSS) BEFORE FEDERAL INCOME TAX (324,833) 1,065,799
PROVISION (CREDIT) FOR FEDERAL INCOME TAX:
Current
Deferred (66,000)
____________ ____________
TOTAL (66,000)
____________ ____________
NET INCOME (LOSS) $ (258,833) $ 1,065,799
============ ============
AVERAGE SHARES OUTSTANDING 1,959,785 1,947,110
EARNINGS PER SHARE:
NET INCOME (LOSS) $ (.13) $ .55
============ ============
DIVIDENDS DECLARED PER SHARE $ .075 $ .075
============ ============
See Notes to Consolidated Financial Information
<PAGE> PAGE 1 OF 11 PAGES
AMERICAN INDEMNITY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996
(Unaudited)
ASSETS 1997 1996
____ ____
Investments:
Fixed maturities - bonds:
Available for sale $ 68,758,012 $ 72,110,261
Preferred stocks 1,064,125 1,377,438
Common stocks 12,782,234 12,420,256
Mortgage loans on real estate 18,409 19,710
_____________ _____________
Total Investments 82,622,780 85,927,665
Cash and Cash Equivalents 5,478,647 4,349,953
Accrued Investment Income 767,808 826,791
Premiums in Course of Collection 6,279,821 4,093,476
Direct Premium Bills Receivable 10,136,171 9,659,722
Reinsurance Balances Receivable 20,913,252 18,689,412
Prepaid Reinsurance Premiums 593,841 651,050
Property and Equipment - Less accumulated
depreciation of $5,122,742 in 1997 and
$5,014,244 in 1996 4,080,188 4,072,394
Deferred Policy Acquisition Costs 9,493,530 9,375,133
Deferred income taxes 4,809,000 4,743,000
Other Assets 2,795,550 2,511,152
_____________ _____________
TOTAL $147,970,588 $144,899,748
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
Losses and Loss Adjustment Expenses $ 58,202,315 $ 55,601,929
Unearned Premiums 36,732,136 36,325,073
Reinsurance Balances Held or Payable 2,428,373 1,657,874
Notes Payable to Bank 495,781 515,981
Accounts Payable and Other Accrued Liabilities 9,659,104 9,179,918
_____________ _____________
Total Liabilities 107,517,709 103,280,775
_____________ _____________
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 1,962,410
in 1997 and 1,951,910 in 1996 6,541,351 6,506,351
Paid-in surplus 13,097,668 13,061,709
Unrealized appreciation in market value
of investments 1,249,349 2,080,388
Retained earnings 19,564,511 19,970,525
_____________ _____________
Total Stockholders' Equity 40,452,879 41,618,973
_____________ _____________
TOTAL $147,970,588 $144,899,748
============= =============
See Notes to Consolidated Financial Information
<PAGE> PAGE 3 OF 11 PAGES
AMERICAN INDEMNITY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996
Unaudited
OPERATING ACTIVITIES: 1997 1996
____ ____
Net income (loss) $ (258,833) $ 1,065,799
Adjustments to reconcile net income to
net cash flow from operating activities:
Decrease (Increase) in:
Premiums in course of collection (2,186,345) (2,234,203)
Direct premium bills receivable (476,449) (863,682)
Reinsurance balances receivable (2,223,840) (320,935)
Prepaid reinsurance premiums 57,209 20,831
Deferred policy acquisition costs (118,397) (347,766)
Deferred income taxes (66,000)
Other assets (284,398) (38,471)
Increase (Decrease) in:
Unpaid losses and loss adjustment 2,600,386 (536,557)
expenses
Unearned premiums 407,063 1,222,857
Reinsurance balances held or payable 770,499 393,951
Accounts payable and other accrued
liabilities 479,186 86,183
Realized investment (gains) losses (23,604) (136,914)
Depreciation 112,869 111,625
Other 74,961 (81,593)
_____________ _____________
Net cash flow from operating activities (1,135,693) (1,658,875)
_____________ _____________
INVESTING ACTIVITIES:
Sale of bonds 2,712,403 3,921,664
Maturity of bonds 455,697 3,707,849
Sale of preferred stocks 53,125
Redemption of preferred stocks 303,617 102,930
Sale of common stocks 73,869 751,442
Purchase of bonds (173,015) (8,442,168)
Purchase of common stocks (892,400) (330,095)
Purchase of property and equipment (120,663) (171,894)
Other 1,301 1,178
_____________ _____________
Net cash flow from investing activities 2,360,809 (405,969)
_____________ _____________
FINANCING ACTIVITIES:
Proceeds received from bank loan 580,500
Payments on bank loan (20,200) (6,496)
Cash dividends paid to stockholders (147,181) (146,034)
Proceeds received from exercise of stock
options 70,959
_____________ _____________
Net cash flow from financing activities (96,422) 427,970
_____________ _____________
Net Increase (Decrease) in Cash and Cash
Equivalents 1,128,694 (1,636,874)
Cash and Cash Equivalents, January 1 4,349,953 4,781,566
_____________ _____________
Cash and Cash Equivalents, March 31 $ 5,478,647 $ 3,144,692
============= =============
See Notes to Consolidated Financial Information
<PAGE> PAGE 4 OF 11 PAGES
AMERICAN INDEMNITY FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
(1)The financial information included herein is unaudited but, in the
opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation have been
included. These interim consolidated financial statements should
be read in conjunction with the Company's report on Form 10-K for
the year ended December 31, 1996. The results of operations for
this interim period are not necessarily indicative of results for
the full year.
(2)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 March 31, 1997 and December 31, 1996 are as
follows:
March 31, 1997 December 31, 1996
______________ _________________
Deferred tax liabilities:
Deferred policy acquisition
costs $ (3,227,800) $ (3,187,545)
Differences between book and tax
basis of property (263,018) (320,161)
Unrealized investment gains (424,779) (707,332)
Other (466,139) (341,959)
_____________ ______________
(4,381,736) (4,556,997)
_____________ ______________
Deferred tax assets:
Reserves not currently deductible 5,361,731 5,167,237
Operating loss carryforwards 12,540,556 12,189,198
_____________ ______________
17,902,287 17,356,435
_____________ ______________
Net Asset 13,520,551 12,799,438
Valuation allowance (8,711,551) (8,056,438)
_____________ ______________
Net deferred tax assets $ 4,809,000 $ 4,743,000
============= ==============
The credit for income tax for the three months ended March 31,
1997 was $66,000. The Company did not pay any federal income
taxes during the first three months of 1997 or the first three
months of 1996.
The Company has a net operating loss carryforward for tax purposes
of $36,883,988, 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; 2011 - $1,133,330; and 2012 - $1,033,406.
<PAGE> PAGE 5 OF 11 PAGES
(3)The Company paid total interest expense of $11,141 and $8,136 for
the three months ended March 31, 1997 and March 31, 1996,
respectively.
(4)In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," ("SFAS No. 128"). SFAS
No. 128, which is effective for periods ending after December 15,
1997, establishes standards for computing and presenting earnings
per share ("EPS"). SFAS No. 128 replaces the presentation of
primary EPS previously prescribed by Accounting Principles Board
Opinion No. 15 ("APB No. 15") with a presentation of basic EPS,
which is computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding for the period. SFAS No. 128 also requires dual
presentation of basic and diluted EPS. Diluted EPS is computed
similar to fully diluted EPS pursuant to APB No. 15. Pro forma
basic and diluted EPS for all historical periods presented,
assuming that SFAS No. 128 was effective at the beginning of each
such historical period, would not be materially different from
what has been presented using APB No. 15.
<PAGE> PAGE 6 OF 11 PAGES
AMERICAN INDEMNITY FINANCIAL CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION 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 net cash flow from operating activities for the three months
ended March 31, 1997 was negative primarily as a result of unfavorable
underwriting results in the commercial automobile line of business
compared with the three months ended March 31, 1996. The unfavorable
underwriting results for the commercial automobile line of business
during the first three months of 1997 were due primarily to the
occurrence of several large liability claims in the period.
Management believes that these claims are not indicative of a trend.
The net cash flow from operating activities for the three months
ended March 31, 1996 was negative primarily as a result of an 8.1%
decrease in net premiums written compared with the three months ended
March 31, 1995. The decrease in net written premiums is primarily
attributable to a reduction in the number of policies written in the
personal automobile and workers' compensation lines of business and
increased rates charged to the Company on renewal of certain of its
reinsurance contracts for the same comparison periods.
Investing Activities
The net cash flow from investing activities was positive for the
first three months of 1997 because total investment sales and
maturities exceeded total investment purchases. During the first
three months of 1997, 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,
management invested a portion of available cash balances and the
proceeds received from disposition of investments into investment
grade bonds and common stocks.
During the first three months of 1997, unrealized investment
losses decreased stockholders' equity by approximately $831,000, of
which approximately $329,000 of this amount was from debt securities,
with the remaining losses from equity securities. These unrealized
investment losses were primarily the result of the negative effects of
increased interest rates on the Company's debt securities and an
overall decline in investment market conditions during the first three
months of 1997.
The $329,000 unrealized investment losses on debt securities
included approximately $312,000 unrealized investment gains related to
six derivative issues purchased by the Company in 1993. On March 31,
1997, the value carried in the Company's balance sheet for these six
issues was approximately $19,062,000. 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. The
derivative securities previously mentioned are known as inverse
<PAGE> PAGE 7 OF 11 PAGES
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 the final three quarters of 1997 should not
change significantly compared to the corresponding period in 1996.
This is subject to change, either positively or negatively, depending
on future investment market conditions.
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. As a matter of investment policy, the Company no longer
invests in inverse floating rate securities.
In connection with an arbitration proceeding in 1995, the Company
received an agreement, effective December 8, 1995, guaranteeing the
yield rate on the largest derivative issue held by it (Guaranteed
Yield Security). The Guaranteed Yield Security has a par value of
$11,000,000 and matures in March 1998. The yield rate that is
guaranteed will equal the weekly average yield rate for three month
treasury bills during each interest period of the security. The
maximum amount guaranteed is $1,500,000 and the guarantee will
terminate no later than the security's maturity date. As of March 31,
1997, the remaining amount guaranteed, reduced by settlements
received, is approximately $835,000. 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 March 31, 1997, the stated interest rate for the Guaranteed
Yield Security was .063% and the guaranteed yield rate was 5.30%.
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 the final three quarters of 1997
should not change significantly compared with the corresponding period
in 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 March 31, 1997 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 as of March 31, 1997 was approximately $10,984,000.
During the first three months of 1996, management invested a
portion of available cash balances and the proceeds received from the
disposition of investments into investment grade bonds and common
stocks. The net cash flow from investing activities was negative in
the first three months of 1996 as total investment purchases exceeded
total investment sales and maturities.
<PAGE> PAGE 8 OF 11 PAGES
Financing Activities
There were no new financing commitments entered into in the first
three months of 1997 and no significant increase in the cost of
current financing arrangements. The net cash flow from financing
activities was negative for the first three months of 1997 as a result
of cash dividends paid to stockholders. During the first three months
of 1997, the Company received approximately $71,000 in proceeds from
the exercise of incentive stock options, whereas, during the first
three months of 1996 there were no incentive stock options exercised.
In January, 1996, the Company received $580,500 proceeds from a
loan from United States National Bank. 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 reengineer its business process.
As a result of this loan, the net cash flow from financing activities
was positive for the first three months of 1996.
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 debt or equity financing.
RESULTS OF OPERATIONS
Premiums earned decreased 5.5% and net premiums written decreased
9.4% for the three months ended March 31, 1997 compared with the three
months ended March 31, 1996 primarily as a result of experience based
premium increases due reinsurors charged to the Company under the
retrospective premium adjustment provisions of its casualty
reinsurance contract.
As previously discussed, the Company raised additional funds
through the sale of investments to offset the negative cash flow from
unfavorable operating results during the first three months of 1997.
This, combined with the unrealized losses in market value of
investments experienced during the first three months of 1997,
resulted in a decrease in average invested assets of approximately
$2,248,000 at March 31, 1997 compared with March 31, 1996.
Additionally, net investment income decreased 4.8% for the three
months ended March 31, 1997 compared with the three months ended March
31, 1996, primarily as a result of the sale of invested assets. This
decrease in net investment income reduced the Company's average
investment yield to 5.06% for the three months ended March 31, 1997
compared with 5.18% for the three months ended March 31, 1996.
<PAGE> PAGE 9 OF 11 PAGES
The loss and loss adjustment expense ratio was 72.5% for the
three months ended March 31, 1997 compared with 64.7% for the three
months ended March 31, 1996. The underwriting results of the
commercial automobile line of business were unfavorable for the three
months ended March 31, 1997 compared with the three months ended March
31, 1996. The unfavorable underwriting results for the commercial
automobile line of business during the first three months of 1997 were
due primarily to the occurrence of several large liability claims in
the period.
The policy acquisition cost ratio was 38.5% for the three months
ended March 31, 1997 compared with 37.6% for the three months ended
March 31, 1996. The increase in this ratio was primarily a result of
the decrease in premiums earned and increased expenses related to the
ongoing conversion of our computer system.
Primarily as a result of the decrease in premiums earned and the
unfavorable underwriting results during the first three months of
1997, the net loss of the Company was approximately $259,000 during
the first three months of 1997 compared with net income of
approximately $1,066,000 during the first three months of 1996.
<PAGE> PAGE 10 OF 11 PAGES
AMERICAN INDEMNITY FINANCIAL CORPORATION
AND SUBSIDIARIES
Item 6. (a) Exhibit 11 - Computation of Fully Diluted Net
Income per Common and Common Equivalent Share.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the
quarter for which this report is filed.
SIGNATURES
__________
Pursuant to the requirements 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
________________________________________
(Registrant)
Date MAY 13, 1997 PHILLIP E. APGAR
________________ ___________________________________________
PHILLIP E. APGAR
VICE PRESIDENT-TREASURER - CHIEF
FINANCIAL OFFICER
(PRINCIPAL FINANCIAL & ACCOUNTING OFFICER)
PAGE 10 OF 11 PAGES
AMERICAN INDEMNITY FINANCIAL CORPORATION EXHIBIT 11
AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED NET INCOME
PER COMMON AND COMMON EQUIVALENT SHARE
THREE MONTHS THREE MONTHS
ENDED ENDED
03-31-97 03-31-96
=========== ===========
PRIMARY EARNINGS PER SHARE
Weighted average shares of
common stock outstanding 1,959,785 1,947,110
Stock options (treasury
stock method) (1) 1,562 6,247
___________ ___________
Weighted average shares
out- standing for primary
earnings per share 1,961,347 1,953,357
computation =========== ===========
Net income (loss) $(.13) $.55
=========== ===========
FULLY DILUTED EARNINGS PER
SHARE
Weighted average shares of
common stockoutstanding 1,959,785 1,947,110
Stock options (treasury
stock method) (1) 1,809 6,247
___________ ___________
Weighted average shares
outstanding for fully
diluted computation 1,961,594 1,953,357
=========== ===========
Net income (loss) $(.13) $.55
=========== ===========
(1)This calculation is submitted in accordance with Regulation S-K
item 601(b)(11) although not required by footnote 2 to paragraph
14 of APB Opinion No. 15 because it results in dilution of less
than 3%.
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000005227
<NAME> AMERICAN INDEMNITY FINANCIAL CORP
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 68,758,012
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 13,846,359
<MORTGAGE> 18,409
<REAL-ESTATE> 0
<TOTAL-INVEST> 82,622,780
<CASH> 5,478,647
<RECOVER-REINSURE> 20,913,252
<DEFERRED-ACQUISITION> 9,493,530
<TOTAL-ASSETS> 147,970,588
<POLICY-LOSSES> 58,202,315
<UNEARNED-PREMIUMS> 36,732,136
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 495,781
0
0
<COMMON> 6,541,351
<OTHER-SE> 33,911,528
<TOTAL-LIABILITY-AND-EQUITY> 147,970,588
15,944,356
<INVESTMENT-INCOME> 1,065,821
<INVESTMENT-GAINS> 23,604
<OTHER-INCOME> 213,800
<BENEFITS> 11,564,523
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 6,134,290
<INCOME-PRETAX> (324,833)
<INCOME-TAX> (66,000)
<INCOME-CONTINUING> (258,833)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (258,833)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
