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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, 1998
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)
DELAWARE 510119643
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE AMERICAN INDEMNITY PLAZA
GALVESTON, TEXAS 77550
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (409) 766-4600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($3.33 1/3 par value)
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the Registrant held
by non-affiliates as of March 25, 1999 was $16,602,215 based upon the closing
price as of such date.
As of March 25, 1999, 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, 1998 (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 June 2, 1999
(portions of which are incorporated into Part III hereof).
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PART I
<S> <C> <C>
ITEM 1. Business ................................................................................... 3
General Development of Business ............................................................ 3
Distribution of Business ................................................................... 3
Financial Information ...................................................................... 4
Net Premiums Written ................................................................... 4
Underwriting Results ................................................................... 4
Loss and Loss Adjustment Expense Reserves .............................................. 5
Narrative Description of Business .......................................................... 8
General ................................................................................ 8
Reinsurance ............................................................................ 8
Investments ............................................................................ 9
Regulation and Other Restrictions ...................................................... 9
ITEM 2. Properties ................................................................................. 10
ITEM 3. Legal Proceedings .......................................................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders ........................................ 10
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters .................. 11
ITEM 6. Selected Financial Data .................................................................... 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 11
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 11
ITEM 8. Financial Statements and Supplementary Data ................................................ 11
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....... 11
PART III
ITEM 10. Directors and Executive Officers of the Registrant ......................................... 11
ITEM 11. Executive Compensation ..................................................................... 11
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ............................. 11
ITEM 13. Certain Relationships and Related Transactions ............................................. 11
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................ 12
SIGNATURES ................................................................................................. 14
INDEPENDENT AUDITORS' REPORT ............................................................................... 15
SCHEDULE I Summary of Investments - Other than Investments in Related Parties, December 31, 1998....... S-1
SCHEDULE II Condensed Financial Information of Registrant .............................................. S-2
SCHEDULE VIII Valuation and Qualifying Accounts .......................................................... S-5
</TABLE>
2
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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, and its
affiliate, American Indemnity Lloyds, 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, its subsidiaries, and its affiliate, American Indemnity
Lloyds, 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.
On March 4, 1999, the Company announced that it had signed a definitive
agreement with United Fire & Casualty Company providing for United Fire's
acquisition of the Company. The acquisition is conditioned upon approval by the
Company's common shareholders, approvals from insurance regulators in Texas,
Colorado and Iowa, where the insurance companies are domiciled, compliance with
all applicable provisions of the Hart-Scott-Rodino Antitrust Improvements Act of
1976 and the expiration of all applicable waiting periods thereunder and certain
other customary conditions. It is anticipated that the acquisition will be
completed by June 30, 1999.
United Fire & Casualty Company and its subsidiaries are engaged in the
business of writing property and casualty insurance and life insurance. United
Fire's headquarters are in Cedar Rapids, Iowa.
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Texas .......................................................................... 62.4% 68.9% 71.9%
Florida ........................................................................ 8.6 7.8 6.6
Louisiana ...................................................................... 7.1 7.3 7.3
Alabama ........................................................................ 5.5 4.8 3.5
Illinois........................................................................ 4.6 0.1 0.1
Mississippi .................................................................... 4.1 3.8 3.8
Tennessee ...................................................................... 2.8 2.7 2.5
Kentucky ....................................................................... 2.5 2.5 2.1
All other ...................................................................... 2.4 2.1 2.2
----------- ----------- -------
Total .......................................................................... 100.0% 100.0% 100.0%
</TABLE>
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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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Personal Lines ................................................................. 39% 38% 37%
Commercial Lines ............................................................... 61 62 63
----- ----- ----
Total ................................................................. 100% 100% 100%
</TABLE>
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,
------------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Personal automobile ................................ $14,411 25.0% $15,598 25.3% $17,844 25.9%
Commercial multiple peril .......................... 12,620 21.9 13,911 22.6 15,973 23.2
Commercial automobile .............................. 12,282 21.3 14,974 24.4 16,272 23.6
Other liability .................................... 7,092 12.3 5,786 9.4 7,646 11.1
Homeowners multiple peril .......................... 6,488 11.3 6,133 10.0 5,506 8.0
Fire and allied lines .............................. 3,385 5.9 3,667 6.0 3,506 5.1
Inland marine ...................................... 1,251 2.2 1,361 2.2 1,366 2.0
All other .......................................... 50 0.1 58 0.1 750 1.1
======= ===== ======= ===== ======= =====
Net premiums written .......................... $57,579 100.0% $61,488 100.0% $68,863 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
In April 1998, 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 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.
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The following table sets forth the Company's statutory combined ratios
for the periods indicated.
STATUTORY COMBINED RATIOS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Premiums earned .................................................. $62,080 $64,052 $64,579
Statutory losses incurred ........................................ 40,278 41,025 38,505
Loss adjustment expenses incurred ................................ 9,031 13,411 7,360
Loss ratio ................................................... 64.9% 64.0% 59.6%
Loss and loss adjustment expense ratio ....................... 79.3 84.8 70.9
Underwriting expense ratio ................................... 41.7 36.4 36.4
Retrospective premium adjustment ratio ....................... 0.7 (0.9) 0.8
====== ======= =======
Statutory combined ratio ................................. 121.7% 120.3% 108.1%
====== ======= =======
</TABLE>
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
RESERVES FOR INSURED EVENTS. American Indemnity maintains a provision
for losses and loss adjustment expenses to cover the ultimate net cost of losses
on reported and unreported claims. The estimation of unpaid losses and loss
adjustment expenses is perhaps the most crucial and important aspect affecting
underwriting results of the Company and the industry as a whole. The Company
follows the practice of reserving for losses for reported and unreported claims
and for related loss adjustment expenses, in each case based on the terms and
limits of liability as specified in the Company's policies. There has not been a
significant change in reserving assumptions or methodologies during the year,
nor a material change in the geographic locations of business produced.
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 continually 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 and
incurred, 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.
For each year end since 1987, the Company has obtained an independent
actuarial review of its reserves for insured events. As of December 31, 1998,
management believes that the Company's reserves for losses and loss adjustment
expenses are reasonable and near the mid-point of the reserve range estimated by
the Company's independent actuary. As of December 31, 1997, the Company analysis
indicated that the Company's reserves were below the reserve
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range. After extensive review of the data and discussions with the Company's
independent actuary, management believed it to be prudent to further increase
reserves. Loss and loss adjustment expenses were impacted by a total of
approximately $7,700,000 during 1997 as a result of these reserve increases and
other changes in reserves during the year.
The Company establishes reserves for reported losses based upon
historical experience and upon a case-basis evaluation of the type of loss,
knowledge of the circumstances surrounding each loss and the policy provisions
relating to the type of loss. The amount of reserves for unreported losses is
determined by estimating unreported losses on the basis of historical and
statistical information for each line of insurance with respect to the probable
number and nature of losses arising from occurrences which have not yet been
reported. Established reserves are closely monitored and are adjusted as needed.
Loss reserves are estimates at a given time of the ultimate amount
expected to be paid on incurred losses based on facts and circumstances known
when the estimates are made. Reserves are not discounted. The settlement period
on insurance losses may be many years, and as additional facts regarding
individual losses become known, it often becomes necessary to refine and adjust
the estimates of liability on a loss.
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 1998 was approximately
$2,300,000, compared with $470,000 for 1997 and $3,525,000 for 1996.
With respect to losses for insured events, the Company continues to
limit the potential 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 1998 Annual Report to Stockholders (the "Annual Report") incorporated
herein by reference.
The following table presents the changes in loss reserves for the three
most recent years.
RECONCILIATION OF CONSOLIDATED LOSS RESERVES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Beginning reserve, net .................................................................. $45,440 $36,833 $39,191
------- ------- -------
Provision for:
Insured events of the current year ............................................. 45,366 44,016 44,431
Insured events of prior years .................................................. 4,127 7,820 1,777
--------- --------- ---------
Incurred loss and loss adjustment expenses ..................................... 49,493 51,836 46,208
-------- -------- --------
Payments for losses and loss adjustment expenses:
Attributable to insured events of the current year ............................. 23,385 21,708 24,941
Attributable to insured events of prior years .................................. 22,294 21,521 23,625
-------- -------- --------
Total payments ................................................................. 45,679 43,229 48,566
-------- -------- --------
Ending reserve, net ..................................................................... $49,254 $45,440 $36,833
======= ======= =======
</TABLE>
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The following table presents the Company's loss reserve development for
the ten years ended December 31, 1998:
CONSOLIDATED LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITY FOR UNPAID CLAIMS AND CLAIM
ADJUSTMENT EXPENSE (1)...................... 51,624 54,449 47,643 43,407 40,841 40,293 39,191 36,833 45,440 49,254
PAID (CUMULATIVE) AS OF:
One year later.............................. 26,186 25,009 25,514 21,184 20,375 22,759 23,625 21,521 22,294 --
Two years later............................. 36,055 39,030 35,756 29,795 31,375 32,389 33,613 34,575 -- --
Three years later........................... 44,317 45,892 40,170 36,068 36,407 37,503 40,591 -- -- --
Four years later............................ 48,515 48,736 42,984 39,180 38,909 41,641 -- -- -- --
Five years later............................ 50,044 50,500 44,914 40,438 41,114 -- -- -- -- --
Six years later............................. 51,324 51,824 45,772 42,164 -- -- -- -- -- --
Seven years later........................... 52,491 52,538 47,436 -- -- -- -- -- -- --
Eight years later........................... 52,935 54,118 -- -- -- -- -- -- -- --
Nine years later............................ 54,330 -- -- -- -- -- -- -- -- --
LIABILITY RE-ESTIMATED AS OF (1):
One year later.............................. 52,934 53,674 48,803 44,183 42,135 42,700 40,968 44,653 49,567 --
Two years later............................. 54,949 57,612 51,887 46,609 45,516 46,267 48,576 48,821 -- --
Three years later........................... 56,414 59,599 52,202 48,749 47,640 50,242 49,825 -- -- --
Four years later............................ 57,264 59,693 52,947 50,016 50,017 51,118 -- -- -- --
Five years later............................ 57,112 60,474 53,737 51,085 49,445 -- -- -- -- --
Six years later............................. 57,552 60,995 54,681 50,814 -- -- -- -- -- --
Seven years later........................... 57,957 61,788 54,373 -- -- -- -- -- -- --
Eight years later........................... 58,475 61,629 -- -- -- -- -- -- -- --
Nine years later............................ 58,232 -- -- -- -- -- -- -- -- --
REDUNDANCY (DEFICIENCY)........................ (6,608) (7,180) (6,730) (7,407) (8,604) (10,825) (10,634)(11,988) (4,127) --
Gross liability - end of year.................. 55,602 71,055 71,796
Reinsurance recoverable........................ 18,769 25,615 22,542
Net liability - end of year.................... 36,833 45,440 49,254
Gross re-estimated liability - latest.......... 74,193 77,598
Re-estimated recoverable - latest.............. 25,372 28,031
Net re-estimated liability - latest............ 48,821 49,567
Gross cumulative deficiency.................... (18,591) (6,543)
</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): 1989, $838; 1990, $(2,229); 1991, $(1,004); 1992, $(2,454);
1993, $(1,958); 1994, $(2,223); 1995, $(623); 1996, $170; and 1997,
$(580). 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): 1989, $4,060; 1990, $4,958; 1991, $2,415; and 1992, $603,
and the re-estimated liability shown above has been increased (decreased)
by the following amounts (dollars in thousands): 1989, $751; 1990, $401;
1991, $(366); 1992, $(642); 1993, $(214); 1994, $42; 1995, $54; and 1996,
$91. Such amounts are also reconciling items between this table and
Schedule P of the statutory financial statements.
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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 1992, but incurred in
1989, will be included in the cumulative deficiency amount for years 1989, 1990
and 1991. 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 $49,254,000 at December 31,
1998. 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, inland marine 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 522 agencies. All such agencies are permitted to, and usually do,
represent other insurance companies. In addition, American Indemnity maintains
five service offices in three states to service its agencies and policyholders.
In five other states, the Company has a marketing representative. During the
second quarter of 1998, the Company began offering nonstandard personal
automobile insurance in Illinois.
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, 1998, the Company and American Indemnity had 147
home office employees and 76 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.
During 1998, property insurance risks were reinsured under treaty
arrangements whereby $900,000 of losses in excess of $100,000 are automatically
reinsured. Effective January 1, 1999, American Indemnity's retention for
property risks increased to $150,000 from $100,000. During 1998, American
Indemnity carried excess catastrophe reinsurance which covered 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. Effective January 1, 1999, the aggregate excess reinsurance under
this agreement was terminated. 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.
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All claims on automobile liability and casualty insurance over $175,000
up to $2,000,000 are automatically reinsured under a treaty. All claims on
non-standard personal automobile risks in Illinois are reinsured under a fifty
percent quota share reinsurance agreement.
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, 1998 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, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
AVERAGE CASH ANNUAL PERCENTAGE NET CAPITAL
AND INVESTMENTS EARNED ON GAINS (LOSSES)
------------------------------------- NET ------------------------- ------------------------
INVEST- INVESTMENT INVESTMENTS INVESTMENTS UNREAL-
YEAR CASH MENTS(1) TOTAL INCOME(2) AND CASH ONLY REALIZED IZED
- ------------ ------ --------- ------- ---------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996........ $4,566 $86,388 $90,954 $4,592 5.05% 5.32% $ 658 $ (304)
1997........ 6,262 87,902 94,164 4,368 4.64 5.00 1,482 4,445
1998........ 8,998 86,718 95,716 4,709 4.92 5.43 1,601 (1,005)
</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.
The Insurance Holding Company System Regulatory Act (the "Texas Act")
regulates insurance companies authorized to do business in the State of Texas
which are members of an insurance holding company system. Under the Texas Act,
no insurance company may pay dividends within any twelve-month period which
exceed the greater of 10% of such insurer's statutory surplus as regards
policyholders, as reported at the end of the preceding calendar year, or the
statutory net investment income of such insurer for such year, without the
consent of the Commissioner of Insurance of the State of Texas. Furthermore,
only such earnings of American Indemnity determined on the statutory basis,
exclusive of restricted surplus and special surplus funds, are available for
distribution as cash dividends and are subject to declaration by American
Indemnity's Board of Directors and to such restrictions imposed by law or
regulation on the payment of dividends. For amounts available for payment of
dividends by American Indemnity, see Note 7 of "Notes to Consolidated Financial
Statements" in the Annual Report.
9
<PAGE> 10
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. 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. 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
December 31, 1996.
ITEM 2. PROPERTIES.
The home office facilities consist of two adjacent and connected
buildings owned by American Indemnity with an aggregate of 152,000 square feet
located in the business section of Galveston, Texas. The Company's home office
facilities are 99.9% occupied by the Company and 0.1% leased to other parties.
All other facilities of the Company consist of a total of five service offices
in three 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, except in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
10
<PAGE> 11
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" in 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" in 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" in the Annual
Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations- Results of
Operations-Quantitative and Qualitative Market Risk Disclosures" in 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", "Independent Auditors' Report" and "Selected
Quarterly Financial Data" in the Annual Report is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Election of Directors",
"Executive Officers" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Company's Proxy Statement with respect to the
Company's 1999 Annual Meeting of Stockholders (the "Proxy Statement"), is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation" in
the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the captions "Principal Stockholders",
"Election of Directors" and "Executive Officers" in the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Other Transactions" in the
Proxy Statement is incorporated herein by reference.
11
<PAGE> 12
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 in the Annual Report. Such
financial statements are incorporated herein by reference.
Consolidated Balance Sheets, December 31, 1998 and 1997
Consolidated Statements of Income for the Three Years Ended December
31, 1998
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1998
Consolidated Statements of Stockholders' Equity for the Three Years
Ended December 31, 1998
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Schedule I - Summary of Investments - Other Than Investments
in Related Parties, December 31, 1998 .......................... S-1
Schedule II - Condensed Financial Information of Registrant:
Balance Sheets, December 31, 1998 and 1997 ..................... S-2
Statements of Income for the Three Years Ended
December 31, 1998 .............................................. S-3
Statements of Cash Flows for the Three Years Ended
December 31, 1998 .............................................. S-4
Schedule VIII - Valuation and Qualifying Accounts,
December 31, 1998 and 1997 ..................................... 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.
12
<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.
2.1 Agreement and Plan of Merger, dated March 4, 1999, by and
among the Company, United Fire & Casualty Company and AI
Acquisition Corporation (Exhibit 2.1 to the Company's Current
Report on Form 8-K, filed March 10, 1999, is incorporated by
reference herein).
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 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).
+10.2. 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).
+10.3. 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).
+10.4. 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).
+10.5. 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).
+10.6. 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).
+10.7. 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).
+10.8. The Company's 1997 Non-Employee Director Stock Option Plan
(Exhibit 4.4 to the Company's Registration Statement on Form
S-8 (No. 333-42439), 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. 333-42439), is incorporated by reference
herein).
*13.1. Portions of the Company's Annual Report to Stockholders for
the fiscal year ended December 31, 1998.
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.
- ----------
* Filed herewith.
+ 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.
None.
13
<PAGE> 14
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
-----------------------------------------
Dated March 29, 1999 Phillip E. Apgar
Vice President, Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on the 29th day of March, 1999, by the
following persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/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)
WILLIAM C. LEVIN, M.D.* DIRECTOR
- ----------------------------------------------------
(WILLIAM C. LEVIN, M.D.)
HARRIS L. KEMPNER, JR.* DIRECTOR
- ----------------------------------------------------
(HARRIS L. KEMPNER, JR.)
MARVIN L. WEST* DIRECTOR
- ----------------------------------------------------
(MARVIN L. WEST)
DIRECTOR
- ----------------------------------------------------
(JACK T. CURRIE)
HENRY W. HOPE* DIRECTOR
- ----------------------------------------------------
(HENRY W. HOPE)
SYNOTT L. MCNEEL* DIRECTOR
- ----------------------------------------------------
(SYNOTT L. MCNEEL)
JAMES W. MCFARLAND, PH.D.* DIRECTOR
- ----------------------------------------------------
(JAMES W. MCFARLAND, PH.D.)
FRED C. BURNS* DIRECTOR
- ----------------------------------------------------
(FRED C. BURNS)
*By /s/ PHILLIP E. APGAR
-----------------------------------------------
(Phillip E. Apgar, pursuant to Power of Attorney)
</TABLE>
14
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
AMERICAN INDEMNITY FINANCIAL CORPORATION:
We have audited the consolidated financial statements of American
Indemnity Financial Corporation and subsidiaries (the "Company") as of December
31, 1998 and 1997, and for each of the three years in the period ended December
31, 1998, and have issued our report thereon dated March 19, 1999; such
consolidated financial statements and report are included in your 1998 Annual
Report to Stockholders and are incorporated herein by reference. Our audits also
included the financial statement schedules of the Company, 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 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 19, 1999
15
<PAGE> 16
SCHEDULE I
AMERICAN INDEMNITY FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
-----------------------------------------------------
AMOUNT
AT WHICH SHOWN
MARKET IN THE BALANCE
TYPE OF INVESTMENT COST(a) VALUE SHEET
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds
United States government and government
agencies and authorities ....................................... $21,209,268 $21,631,169 $21,631,169
Mortgage-backed securities issued by U.S.
government agencies and authorities ............................ 21,476,324 21,546,319 21,546,319
Collateralized mortgage obligations .............................. 9,772,422 9,833,412 9,833,412
States, municipalities and political subdivisions ................ 1,119,869 1,207,010 1,207,010
All other......................................................... 12,025,991 12,609,642 12,609,642
------------ ------------ ------------
Total fixed maturities ....................................... 65,603,874 66,827,552 66,827,552
----------- ----------- -----------
Equity securities:
Common stocks
Public utilities ................................................. $ 4,467,773 $ 6,515,439 $ 6,515,439
Banks, trusts and insurance companies ............................ 2,452,982 3,967,098 3,967,098
Industrial, miscellaneous and all other .......................... 4,386,973 5,112,512 5,112,512
Nonredeemable preferred stocks ..................................... 1,127,601 1,136,433 1,136,433
------------ ------------ ------------
Total equity securities ...................................... 12,435,329 16,731,482 16,731,482
----------- ----------- -----------
Total investments ............................................ $78,039,203 $83,559,034 $83,559,034
=========== =========== ===========
</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> 17
SCHEDULE II
AMERICAN INDEMNITY FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C>
CURRENT ASSETS:
Bonds........................................................................ $ $ 298,331
Cash and cash equivalents ................................................... 282,984 37,704
Receivable from affiliate ................................................... 54,926 37,037
------------- -------------
Total current assets ......................................... 337,910 373,072
INVESTMENTS IN SUBSIDIARIES AND AFFILIATE - At equity, including
unrealized appreciation in market value of investments held
by subsidiaries ............................................................. 32,476,029 39,292,839
----------- -----------
TOTAL ASSETS ................................................. $32,813,939 $39,665,911
=========== ===========
LIABILITIES
Accounts Payable ............................................................... $ 573 $ 1,010
------------- -------------
STOCKHOLDER'S EQUITY
Common stock, $3.33 1/3 par value, authorized 2,500,000 shares;
outstanding shares, 1,962,410 at December 31, 1998 and 1997 .................. $ 6,541,351 $ 6,541,351
Preferred stock, authorized 2,000,000 shares; none outstanding .................
Paid-in surplus ................................................................ 13,097,668 13,097,668
Unrealized appreciation in market value of investments held by
subsidiaries and affiliate.................................................... 5,519,831 6,525,256
Retained earnings (substantially all of which represent equity in
undistributed earnings of subsidiaries and affiliate) ........................ 7,654,516 13,500,626
----------- -----------
TOTAL ........................................................ $32,813,366 $39,664,901
----------- -----------
TOTAL LIABILITIES AND EQUITY ................................................... $32,813,939 $39,665,911
=========== ===========
</TABLE>
S-2
<PAGE> 18
SCHEDULE II
AMERICAN INDEMNITY FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<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 ............................. $ $ 725,583 $ 215,876
Investment income .................................................. 7,476 16,896 21,110
----------- ----------- -----------
Total ............................................... 7,476 742,479 236,986
EXPENSES .............................................................. 60,090 50,624 46,938
----------- ----------- -----------
INCOME BEFORE FEDERAL INCOME TAX AND EQUITY IN
EARNINGS OF WHOLLY OWNED SUBSIDIARIES .............................. (52,614) 691,855 190,048
CREDIT FOR FEDERAL INCOME TAX - CURRENT ............................... (17,889) (12,950) (702)
----------- ----------- -----------
INCOME BEFORE EQUITY IN EARNINGS OF
WHOLLY OWNED SUBSIDIARIES ......................................... (34,725) 704,805 190,750
INCOME (LOSS) OF WHOLLY OWNED SUBSIDIARIES AND AFFILIATE, IN EXCESS OF
DIVIDENDS RECEIVED .................................................. (5,811,385) (6,585,979) 1,757,203
----------- ----------- -----------
NET INCOME (LOSS) .................................................... $(5,846,110) $(5,881,174) $ 1,947,953
=========== =========== ===========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE ........................ $ (2.98) $ (3.00) $ 1.00
=========== =========== ===========
</TABLE>
S-3
<PAGE> 19
SCHEDULE II
AMERICAN INDEMNITY FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................................... $(5,846,110) $(5,881,174) $ 1,947,953
Adjustments to reconcile net income
to net cash flows from operating activities:
Excess of equity in income of
subsidiaries and affiliate over dividends received therefrom 5,811,385 6,585,979 (1,757,203)
Realized investment gains (losses) ........................... (7,911)
Decrease (Increase) in accrued investment income ............. 596 6,299
Increase in receivable from affiliate ........................ (17,889) (9,749) (702)
Other ........................................................ (437) (3,082) 127
----------- ----------- -----------
Net cash flow from operating activities .......... (53,051) 692,570 188,563
----------- ----------- -----------
INVESTING ACTIVITIES:
Sales and maturities of bonds ................................... 550,000 715,000 929,898
Purchase of bonds ............................................... (251,669) (899,655) (558,626)
----------- ----------- -----------
Net cash flow from investing activities .......... 298,331 (184,655) 371,272
----------- ----------- -----------
FINANCING ACTIVITIES:
Cash dividends paid to stockholders ............................. (588,725) (584,650)
Proceeds received from exercise of stock options ................ 70,959 30,624
----------- ----------- -----------
Net cash flow from financing activities .......... (517,766) (554,026)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents ............ 245,280 (9,851) 5,809
Cash and Cash Equivalents - January 1 ........................... 37,704 47,555 41,746
----------- ----------- -----------
Cash and Cash Equivalents - December 31 ......................... $ 282,984 $ 37,704 $ 47,555
=========== =========== ===========
</TABLE>
S-4
<PAGE> 20
SCHEDULE VIII
AMERICAN INDEMNITY FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------ --------------------- ------------------- ------------------ --------------------
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING ADDITIONS DEDUCTIONS END
OF PERIOD OF PERIOD
- ------------------------------------------------ --------------------- ------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998:
Allowance for doubtful accounts.......... $500 $380 $(500) $380
Year Ended December 31, 1997:
Allowance for doubtful accounts.......... -- 500 -- 500
</TABLE>
S-5
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated March 4, 1999, by and
among the Company, United Fire & Casualty Company and AI
Acquisition Corporation (Exhibit 2.1 to the Company's Current
Report on Form 8-K, filed March 10, 1999, is incorporated by
reference herein).
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 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).
+10.2. 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).
+10.3. 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).
+10.4. 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).
+10.5. 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).
+10.6. 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).
+10.7. 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).
+10.8. The Company's 1997 Non-Employee Director Stock Option Plan
(Exhibit 4.4 to the Company's Registration Statement on Form
S-8 (No. 333-42439), 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. 333-42439), is incorporated by reference
herein).
*13.1. Portions of the Company's Annual Report to Stockholders for
the fiscal year ended December 31, 1998.
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.
</TABLE>
- ----------
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14 of Form 10-K.
<PAGE> 1
EXHIBIT 13.1
AMERICAN
INDEMNITY
FINANCIAL
CORPORATION
ANNUAL REPORT
FOR 1998
<PAGE> 2
ABOUT THE COMPANY
AMERICAN INDEMNITY FINANCIAL CORPORATION is a Galveston, Texas, based
holding company that is made up 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.
The Company offers personal and commercial lines of insurance through
independent agents representing American Indemnity Company, American Fire and
Indemnity Company, American Indemnity Lloyds, and Texas General Indemnity
Company.
<PAGE> 3
CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Statement Data:
Net premiums earned $ 62,080,128 $ 64,052,155 $ 66,961,281
Net investment income 4,708,703 4,367,807 4,591,651
Realized investment gains 1,601,453 1,481,695 657,875
Net income (loss) (5,846,110) (5,881,173) 1,947,953
Per share (2.98) (3.00) 1.00
Dividends declared per share -- .30 .30
Balance Sheet Data:
Total assets $ 152,607,655 $161,648,714 $144,899,748
Stockholders' equity 32,813,366 39,664,901 41,618,973
Per share 16.72 20.21 21.32
Average investment yield 5.43% 5.00% 5.32%
Statutory Ratios:
Statutory combined ratio 121.7% 120.3% 108.1%
Net premiums written/statutory surplus ratio 2.6 TO 1 2.0 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>
1998 QUARTER ENDED:
MARCH 31 14 1/2 9 1/2 -
JUNE 30 13 11 3/8 -
SEPTEMBER 30 15 3/8 10 1/4 -
DECEMBER 31 13 1/4 10 5/8 -
1997 Quarter Ended:
March 31 14 10 1/8 .075
June 30 13 1/2 12 .075
September 30 15 1/2 12 1/8 .075
December 31 15 11 1/4 .075
</TABLE>
NET PREMIUMS WRITTEN (IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Personal automobile $14,411 25.0% $15,598 25.3% $17,844 25.9%
Commercial multiple peril 12,620 21.9 13,911 22.6 15,973 23.2
Commercial automobile 12,282 21.3 14,974 24.4 16,272 23.6
Other liability 7,092 12.3 5,786 9.4 7,646 11.1
Homeowners multiple peril 6,488 11.3 6,133 10.0 5,506 8.0
Fire and allied lines 3,385 5.9 3,667 6.0 3,506 5.1
Inland Marine 1,251 2.2 1,361 2.2 1,366 2.0
All other 50 0.1 58 0.1 750 1.1
Net premiums written $57,579 100.0% $61,488 100.0% $68,863 100.0%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
As of February 8, 1999 there were approximately 427 stockholders, not including
shares held beneficially in nominee accounts.
<PAGE> 4
To The Owners of American Indemnity Financial Corporation
An unanticipated increase in automobile and commercial package policy claims,
catastrophe losses primarily in the Southeast and floods in Texas were the
primary contributing factors in a most difficult year.
Despite an increase in investment income, the net loss for the year totaled
$5,846,110 or $2.98 per share, compared to a net loss of $5,881,173 or $3.00 per
share in 1997. Shareholders equity at year end 1998 was $32,813,366 compared to
$39,664,901 in 1997 resulting in book value of $16.72 per share compared to
$20.21 at year end 1997.
While our statutory loss and loss adjustment ratio improved during the last half
of 1998, the combined loss and expense ratio was an unacceptable 121.7 percent
compared to last year's 120.3 percent. The relationship of statutory surplus to
net premiums written stood at 2.6 to 1.
The highly competitive market place and the initiation of a comprehensive
reunderwriting program resulted in a decline in net premiums written in 1998 to
$57,578,664 compared to $61,488,103 in 1997. Ceded reinsurance premiums are
expected to decline in 1999 therefore resulting in a positive impact on net
premiums written.
Our industry and your company utilize computer technology extensively. As the
turn of the century approaches we are finalizing our systems for compliance for
the Year 2000. Testing continues on all systems and has been completed on the
principal portion of our policy processing system, and our financial reporting
systems should be compliant during the first half of 1999.
During the second quarter of the year, we began offering nonstandard personal
automobile insurance in Illinois. Direct premiums as of December 31 totaled
$3,324,198 and yielded acceptable underwriting loss ratios. Two reinsurers
provide a 50% quota share agreement in this endeavor and assist in monitoring
pricing and claims practices. Product design and claims management will play a
critical role in this marketplace.
On March 4, 1999, the Company and United Fire & Casualty Company announced the
signing of an agreement providing for United Fire and Casualty Company's
acquisition of American Indemnity Financial Corporation. It is anticipated that
the acquisition will be completed by June 30, 1999. I would be remiss without
expressing my appreciation to all of our dedicated associates and the loyalty of
our independent agents.
Respectfully submitted,
/s/ J. FELLMAN SEINSHEIMER, III
J. Fellman Seinsheimer, III
President and Chief Executive Officer
<PAGE> 5
FIVE YEAR COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Premiums earned $ 62,080,128 $ 64,052,155 $ 66,961,281 $ 67,136,782 $ 65,346,464
Net investment income 4,708,703 4,367,807 4,591,651 4,009,564 4,703,398
Realized investment gains (losses) 1,601,453 1,481,695 657,875 (276,311) (31,355)
Net income (loss) (5,846,110) (5,881,173) 1,947,953 (5,093,755) 8,249,105
Net Income (loss) per share (2.98) (3.00) 1.00 (2.62) 4.24
Dividends declared per share -- .30 .30 .285 .21
Balance Sheet Data:
Total assets $152,607,655 $161,648,714 $144,899,748 $138,113,936 $131,201,491
Long-term debt 341,357 432,473 515,981 -- --
Stockholders' equity 32,813,366 39,664,901 41,618,973 40,529,114 33,438,366
Equity per share 16.72 20.21 21.32 20.82 17.18
Average investment yield 5.43% 5.00% 5.32% 4.82% 5.58%
Statutory Ratios:
Loss and loss adjustment
expenses to premiums
earned 79.3% 84.8% 70.9% 73.0% 66.8%
Underwriting expenses to
premiums written 41.7 36.4 36.4 37.4 36.1
Retrospective premium
adjustments to premiums
written .7 (.9) .8 3.0 .4
- -------------------------------------------------------------------------------------------------------------------
Statutory combined ratio 121.7% 120.3% 108.1% 113.4% 103.3%
- -------------------------------------------------------------------------------------------------------------------
Net premiums written/statutory
surplus ratio 2.6 TO 1 2.0 to 1 2.1 to 1 2.3 to 1 2.1 to 1
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Net Premiums Premiums Net Earnings
Written Earned Income Per Share
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
FIRST QUARTER $13,863,572 $15,778,094 $ (1,813,047) $ (.92)
SECOND QUARTER 16,436,358 15,787,024 (2,377,013) (1.21)
THIRD QUARTER 13,741,689 15,086,097 (644,342) (.33)
FOURTH QUARTER 13,537,045 15,428,913 (1,011,708) (.52)
1997
First Quarter $16,408,628 $15,944,356 $ (258,833) $ (.13)
Second Quarter 15,872,624 15,736,393 387,907 .20
Third Quarter 16,959,852 16,904,968 337,056 .17
Fourth Quarter 12,246,999 15,466,438 (6,347,303) (3.23)
</TABLE>
<PAGE> 6
\
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 10 to 22,
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. During 1998, the net cash flow from operating activities
was negative primarily as a result of a decrease in net premiums written and
unfavorable underwriting results compared with 1997.
Net premiums written decreased approximately $3,909,000 or 6.4%
during 1998 compared with 1997 primarily as a result of soft market conditions
during 1998, as the Company has tried to remain competitive without engaging in
severe price competition or compromising its underwriting guidelines. The number
of policies in force decreased 9.7% in 1998 compared with 1997; however, the
average premium per policy remained essentially the same, which indicates that
the Company maintained consistent, conservative pricing for policies in all
lines of business. During 1998, the Company entered the non-standard automobile
market in Illinois ("Illinois NSA"). While no assurances can be given,
management believes this market will be profitable and offers significant
potential for growth in Illinois as well as Indiana and Ohio once the marketing
presence is firmly established.
The unfavorable underwriting results were caused primarily by the
occurrence of several weather-related natural catastrophes and an increase in
the frequency of new claims occurrences for the automobile, homeowners,
commercial multiple peril and other liability lines of business during 1998
compared with 1997. During 1998, the Company's total net loss resulting from
weather-related catastrophes was approximately $2,300,000 compared with $500,000
during 1997. Management does not believe that the unfavorable underwriting
results of 1998 and 1997 are indicative of a trend due to the factors and
events discussed herein.
Operating activities during 1997 produced positive net cash flow
despite a decrease in net premiums written and unfavorable underwriting results
during 1997 compared with 1996. The positive cash flow was primarily the result
of a decrease in the amount of funds required for claim payments during 1997
compared with 1996. Net premiums written decreased approximately $7,375,000 or
10.7% during 1997 compared with 1996 primarily as a result of an increase in the
cost of reinsurance during 1997 as discussed below in Results of Operations.
Direct premiums written decreased $2,983,000 or 3.6% during 1997 compared with
1996 primarily as a result of competitive pricing pressures. The increase in
premiums written that were ceded to reinsurors was due to unfavorable loss
experience under the Company's retrospectively rated casualty reinsurance
contract. Retrospective premium adjustments increased to $7,714,000 during 1997
compared with $1,333,000 during 1996. The Company negotiated a fixed price
contract for its casualty excess of loss program for 1998. Despite unfavorable
underwriting results, the amount of funds required for claim payments decreased
approximately $2,856,000 or 7.0% during 1997 compared with 1996, primarily
attributable to the Company's automobile liability line of business.
Underwriting results during 1997 were adversely impacted as a result of an
increase of approximately $7,700,000 to the Company's loss and loss adjustment
expense reserves during 1997 as discussed below in Results of Operations.
Operating activities provided negative cash flow during 1996 primarily
as a result of the occurrences of several weather-related natural catastrophes
which was partially offset by the positive effect on cash flow from a decrease
in policy acquisition costs and an increase in net investment income.
INVESTING ACTIVITIES. During 1998, the net cash flow from investing activities
was positive because total investment sales and maturities exceeded total
investment purchases. During 1998, 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 and preferred stocks.
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
<PAGE> 7
result in changes to the Company's unrealized investment gains or losses and
have a corresponding impact on the Company's accumulated comprehensive income.
As shown in the Company's consolidated balance sheets, the unrealized
appreciation in market value of investments was approximately $5,520,000 at
December 31, 1998, compared to an unrealized appreciation of approximately
$6,525,000 at December 31, 1997, resulting in unrealized losses for 1998 of
approximately $1,005,000. With respect to these amounts, unrealized gains in the
Company's bond portfolio were approximately $1,346,000 offset by $2,351,000 in
unrealized losses on equity securities. The unrealized investment gains from
debt securities were primarily the result of the positive effect of declining
interest rates during 1998 on the market value of the Company's debt portfolio
and derivative investment activity discussed in the following paragraph. The
unrealized investment losses from equity securities were primarily the result of
stock market fluctuations during 1998. During 1998, management elected to
dispose of several issues of common stock which produced approximately
$1,749,000 net realized capital gains.
The $1,346,000 unrealized investment gains on debt securities included
approximately $839,000 of unrealized investment gains related to five derivative
issues purchased by the Company in 1993. As a result of the maturity of
$13,350,000 par value and the sale of $2,500,000 par value of these derivative
securities, the value carried on the Company's balance sheet at December 31,
1998 for the remaining single issue was $3,960,000. This derivative security is
known as an inverse floater as its yield, which is adjusted periodically, varies
inversely to certain LIBOR rates. Because this derivative security was issued by
a government agency, the Company believes that its principal is assured at
maturity. Barring unforeseen circumstances, the Company has the ability to hold
this debt security until its stated maturity. However, if market conditions are
favorable, the Company may dispose of all or a portion of this security prior to
maturity. During 1998, the Company was able to reduce its exposure in derivative
securities by the sale of $2,500,000 par value of one issue of the derivative
securities that resulted in a realized investment loss of $175,000. As a matter
of investment policy, the Company no longer invests in inverse floating rate
securities.
During 1997, the Company invested a portion of available cash balances
and the proceeds received from disposition of investments into investment grade
bonds and common stocks. The net cash flow from investing activities was
positive for 1997 because total investment sales and maturities exceeded total
investment purchases.
The unrealized appreciation in market value of investments was
approximately $6,525,000 at December 31, 1997, compared to an unrealized
appreciation of approximately $2,080,000 at December 31, 1996, resulting in
unrealized gains for 1997 of approximately $4,445,000. Of that amount,
unrealized gains in the Company's bond portfolio were approximately $1,366,000,
with unrealized gains on equity securities constituting the balance of
$3,079,000. These unrealized investment gains were primarily the result of
favorable bond and stock markets which resulted in significant price
appreciation in the Company's debt and equity portfolios during 1997.
Approximately $788,000 of the total $1,366,000 in unrealized investment gains on
bonds in 1997 were related to the derivative securities purchased by the Company
in 1993.
The net cash flow from investing activities was positive for 1996
because total investment sales and maturities exceeded total investment
purchases. 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.
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. With respect to these
amounts, unrealized losses in the Company's bond portfolio were approximately
$1,067,000, offset by 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 the
derivative securities purchased by the Company in 1993.
FINANCING ACTIVITIES. There were no new financing commitments entered into in
1998 and no significant increase in the cost of current financing arrangements.
In February 1998, the Company announced the suspension of regular quarterly cash
dividends to stockholders as a result of increases
<PAGE> 8
made in the Company's loss and loss adjustment reserves during the fourth
quarter of 1997 as discussed below in Results of Operations. It is not
anticipated that dividends to stockholders will resume within the foreseeable
future. Future dividends, if any, will be dependent upon future favorable
operating results of the Company.
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 sufficient capital is retained in the business to provide funds to
meet its obligations. Management believes that the Company meets all statutory
and regulatory requirements and that sufficient funds have been retained to meet
its obligations.
On March 4, 1999, the Company and United Fire & Casualty Company
announced the signing of an agreement providing for United Fire & Casualty
Company's acquisition of American Indemnity Financial Corporation for
approximately $30.6 million in cash, subject to adjustments relating to
indemnities. It is anticipated that the acquisition will be completed by June
30, 1999.
RESULTS OF OPERATIONS
Premiums earned decreased during 1998 compare to 1997 primarily as a result of
soft market conditions experienced during the year. Despite such conditions, the
Company endeavored to remain competitive without engaging in severe price
competition or compromising its underwriting guidelines. Management intends to
continue marketing all lines of business at prices that reflect its experience.
Net investment income increased 7.8% during 1998 compared with 1997
primarily as a result of higher yields earned from the reinvestment of proceeds
received from derivative investment activity. During 1998, the Company received
approximately $15,675,000 proceeds from several maturities and one disposal of
derivative debt securities. These securities earned an average investment yield
of 4.3% during 1997. As proceeds from these derivative investments were
reinvested during 1998, the Company was able to purchase higher yielding fixed
maturity investments. As a result, the average investment yield increased to
5.43% in 1998 from 5.00% in 1997.
The loss and loss adjustment expense ratio was 79.7% for 1998 compared
with 80.9% for 1997. This ratio indicates an improvement in underwriting
results; however, these results are disappointing considering the underwriting
results during 1997 included the adverse impact of approximately $7,700,000 of
increases to loss and loss adjustment expense reserves. The unfavorable
underwriting results for 1998 were caused primarily by the occurrence of several
weather-related natural catastrophes and an increase in the frequency of new
claims occurrences for the automobile, homeowners, commercial multiple peril and
other liability lines of business during 1998 compared with 1997. Claims from
weather-related natural catastrophes resulted in approximately $2,300,000 in net
losses during 1998 compared with approximately $500,000 for 1997.
The policy acquisition cost ratio was 40.7% for 1998 compared with
38.1% for 1997. The increase in this ratio was primarily the result of an
increase in amortization of deferred policy acquisition costs resulting from the
decrease in net premiums written during 1998.
The Company no longer writes workers' compensation, however this
business was written in previous years on a participation and assessment basis,
whereby the policyholder participated 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 was less
than premiums earned under the policy, the difference was refunded to the
insured. Conversely, if the same total exceeded premiums earned under the
policy, the insured was assessed for the excess. As there have been no premiums
earned for workers' compensation since 1996, this expense will vary with loss
experience under the expired workers' compensation policies. Such loss
experience during 1998 created a refund due to insureds compared with 1997 in
which loss experience created an assessment.
The Company's deferred tax asset is projected based on the existence of
net operating loss carryforwards available to the Company and its projection of
future taxable income. Based on a review of anticipated future taxable earnings,
management has concluded that the Company's deferred tax asset recognized of
$3,889,000 will likely be realized. As a result, management determined that a
change in the deferred tax asset and a corresponding provision for federal
income tax expense was not necessary for the year ended December 31, 1998.
<PAGE> 9
The net loss of the Company was approximately $5,846,000 for 1998
compared with a net loss of approximately $5,881,000 during 1997. This net loss
resulted primarily from the decrease in net premiums earned, unfavorable
underwriting results and an increase in policy acquisitions costs during 1998.
Premiums earned decreased during 1997 compare to 1996 primarily as a
result of soft market conditions experienced during the year. Despite such
conditions, the Company endeavored to remain competitive without engaging in
severe price competition or compromising its underwriting guidelines.
Reinsurance costs, which reduce premiums earned, increased as a result of
unfavorable loss experience under the first layer of the Company's casualty
excess of loss reinsurance contract. When unfavorable loss experience occurs, it
creates a retrospective premium adjustment due the reinsurer, and the total of
such adjustments increased during 1997 compared with 1996. Management believes
that the use of a fixed price excess loss reinsurance contract in 1998 and 1999
should reduce the overall cost of the Company's reinsurance program during 1999.
Management intends to continue marketing all lines of business at prices that
reflect its experience.
Net investment income decreased during 1997 compared with 1996 due to a
reduction in invested assets as well as lower portfolio yields. During 1997,
proceeds from the sale of certain investments were used to fund operating
activities of the Company, which resulted in net dispositions of invested
assets. The portfolio's average investment yield also declined to 5.00% in 1997
from 5.32% in 1996 as a result of increased allocations to lower yielding common
stocks and a decline in the yields offered on new purchases of fixed maturity
investments.
In an effort to maximize the overall return on the Company's investment
portfolio, the Company 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 $1,482,000 during 1997 compared with $658,000 during
1996.
Underwriting results were adversely impacted as a result of increases
made during 1997 in the Company's reserves. As a result, the loss and loss
adjustment expense ratio was 80.9% for 1997 compared with 69.0% for 1996. The
Company's analysis indicated unexpected development in loss and loss adjustment
expenses for the commercial multiple peril and other liability lines of business
and that the Company's reserves were below the reserve range called for by such
development. After extensive review of the data and discussions with the
Company's independent actuary, management believed it to be prudent to further
increase reserves. Loss and loss adjustment expenses were impacted by a total of
approximately $7,700,000 during 1997 as a result of these reserve increases and
other changes in reserves during the year.
The policy acquisition cost ratio was 38.1% for 1997 compared with
36.6% for 1996. This increase was primarily the result of the Company's costs
remaining essentially flat while, as discussed above, its premiums earned
decreased due primarily to the impact on premiums of soft market conditions
during 1997 and increased reinsurance premiums. Certain costs associated with
acquiring new business vary directly with premium volume while others remain
essentially fixed. While advances were made in 1997 and 1996 in reducing fixed
costs of operating the Company, the costs associated with the Company's Year
2000 compliance initiative and system upgrades resulted in fixed costs remaining
flat during 1997 when compared with 1996. When such fixed costs do not decline
at the same time as premiums earned decline, the policy acquisition cost ratio
is increased.
Workers' compensation loss experience during 1997 created an assessment
due from insureds compared with 1996 in which workers' compensation loss
experience created a refund.
As previously mentioned, the Company's deferred tax asset is projected
based on the existence of net operating loss carryforwards available to the
Company and its projection of future taxable income. As a result of the
additions made to the Company's reserves during 1997, the loss and loss
adjustment expense ratios used in the projection of future taxable income
increased. This reduced projected future taxable income and also the total
deferred tax asset, which resulted in a deferred tax provision for 1997 compared
with a deferred tax credit during 1996.
The net loss of the Company was approximately $5,881,000 for 1997
compared with net income of approximately $1,948,000 during 1996. This resulted
primarily from the increase in the Company's reserves during 1997 as discussed
above.
<PAGE> 10
YEAR 2000 ISSUES. The Year 2000 issue (i.e. the ability of computer systems to
accurately identify and process dates beginning with the year 2000 and beyond)
affects virtually all companies and organizations. Some of the Company's
computer systems are already Year 2000 compliant. However, certain of the
Company's computer systems use only two digits to identify a year in a date
field. For example, the year 2000 would be represented in these systems as "00,"
but might in many cases be interpreted by the computer as "1900" rather than
"2000," thereby potentially resulting in processing errors.
The ability to process information in a timely and accurate manner is
vital to the Company's data-intensive insurance business. The Company recognizes
that the computer systems used must be Year 2000 compliant by December 31, 1999
and, in some instances, well in advance of that date (e.g., by January 1999 in
the case of certain property and casualty insurance policies with one-year terms
expiring on or after January 1, 2000). The Company has been taking steps it
deems appropriate to meet this challenge, including replacing or upgrading
certain of its existing computer applications that improve functionality in
addition to being Year 2000 compliant, and planning alternative measures, if
necessary, including manual processing of data.
During 1997, the Company upgraded the principal portion of its policy
processing and claims system to the PMSC Point system as a part of its
technology enhancement and Year 2000 compliance initiatives. The Point system is
one of the Company's most critical software programs as it is used for the daily
administration of the insurance operations. A migration plan was developed and
implemented to move from a non-compliant release of the PMSC Point system to a
subsequent release which, the Company was advised by PMSC, is fully Year 2000
compliant. This migration was completed in September 1998. Company personnel
tested the system for compliance before moving the upgrade into production. In
order to perform this testing, the software's system date was moved forward into
the years 2000 and 2001. In every test case, the software generated the expected
results.
A year 2000 project plan has been developed and all Company systems
have been addressed as to Year 2000 compliance. According to the plan, 86% of
all software packages have been identified as year 2000 compliant by either
their vendors or Company resources. The remaining non-compliant software can be
classified into three groups: i) non-critical, ii) scheduled to be modified or
replaced before the year 2000 and iii) those scheduled to be discarded. Computer
related hardware has been found to be 70% compliant, and the remaining hardware,
which includes items such as desktop personal computers and network equipment is
currently being tested for compliance. The telecommunications system is
non-compliant, however, plans are for this to be compliant by mid-1999. All
other types of equipment such as copiers and fax machines have been found to be
60% compliant and the remaining items are under investigation for compliance. In
general, 80% of all the items in the Year 2000 project plan have been completed
and with one exception, the remaining items are scheduled to be completed in the
first six months of 1999.
The Company currently utilizes a policy processing system for
commercial lines of business for states other than Texas that is not year 2000
compliant. During 1998, the Company intended to purchase the rating algorithms
from PMSC which are required to process this business under the Point system.
However, this decision was not implemented during 1998 pending the outcome of
identifying the strategic alternatives for the Company which has now lead to the
previously discussed merger with United Fire and Casualty Company. The Company
was informed by PMSC in December 1998 that even if it purchased and proceeded
with implementation of these rating algorithms during the first quarter of 1999
that it was unlikely that all states would be implemented in time. The Company
currently processes the majority of its commercial business utilizing a
combination of manual and automated systems. Management believes that, if
necessary, the policies issued by these systems could be entirely processed
on a manual basis.
The Company has received information from certain of its vendors to
assure their systems' compliance as well, or alternatively, to determine to the
extent possible the extent the Company is vulnerable to those third parties'
failure to achieve Year 2000 compliance, and if necessary, to develop
alternatives. As a result of the Company's ongoing efforts to reengineer its
business processes and assuming compliance by third parties with whom the
Company conducts business, management believes that the impact on future
earnings from efforts to achieve Year 2000 compliance will not be significant.
However, there can be no assurance that the systems of other companies on which
the Company's systems and operations rely will be timely compliant, or that a
failure to be compliant by another company would not have a material adverse
effect on the Company's future operations.
<PAGE> 11
The Company believes that in an emergency situation resulting from the
severe failure of computer systems, it could revert to the use of manual systems
that rely on personal computers and spreadsheet software. Through these manual
systems, the Company could perform the minimum functions required to maintain
insurance services and provide a minimum level of information reporting to
maintain a level of control over the business processes. Should the Company have
to utilize manual systems in an emergency as noted above, it is uncertain that
it could maintain current levels of operations and this could have a material
adverse impact on the business. The Company intends to maintain constant
surveillance on its Year 2000 issues.
Historical expenses recognized directly related to replacing existing
applications with Year 2000 compliant applications cannot be determined with
precise accuracy because the Point system project was initiated as a result of
management's decision to modernize the business processes of the Company and
accomplish Year 2000 compliance at the same time. Also, the implementation of
the Point system resulted in some staff reductions within the Company. Including
the total costs of conversion to PMSC Point system, expenses recognized directly
related to replacing existing applications with Year 2000 compliant applications
totaled approximately $1,700,000 from January 1, 1996 through December 31, 1998
with funds obtained through operating revenues. The Company currently
anticipates that it will incur future costs of less than $100,000 for additional
third-party vendors and other expenses to achieve Year 2000 readiness for its
information technology systems ("IT systems") excluding the Point System rating
algorithms previously discussed.
Equipment and systems other than IT systems could also be affected.
Such systems typically include built-in or "embedded" technology such as
microcontrollers. The Company has reviewed non-IT system issues relating to Year
2000 compliance. As a result, the Company believes there are no such issues
which might have a significant effect on the Company's operations as a result of
failure to be Year 2000 compliant.
The foregoing statements in this section are intended to be and are
hereby designated "Year 2000 Readiness Disclosure" statements within the meaning
of the Year 2000 Information and Readiness Disclosure Act.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES. The Company could incur
losses due to adverse changes in market rates and prices. The Company's primary
market risk exposures are changes in price for equity securities and changes in
interest rates and credit ratings for fixed maturity securities. The Company,
with the Board of Directors, administers and oversees investment risk through
the Investment Committee, which provides executive oversight of investment
activities. The Company has specific investment guidelines and policies that
define the overall framework used daily by the investment portfolio manager to
limit the Company's exposure to market risk.
The Company places reinsurance with other companies in the insurance
industry which exposes the Company to credit risk. Generally, such placements
are with A-rated companies. At December 31, 1998, reinsurance recoverable from
the Company's largest single reinsurer and top five reinsurers amounted to
approximately $18,975,000 and $23,102,000, respectively. Credit losses from
reinsurance have historically been immaterial.
RECENT ACCOUNTING PRONOUNCEMENTS. In 1998, the Company adopted several
Statements of Financial Accounting Standards and is aware of several newly
issued accounting pronouncements which require adoption by the Company either in
1999 or 2000. These recent accounting pronouncements are more thoroughly
discussed in the accompanying notes to consolidated financial statements.
FORWARD-LOOKING STATEMENTS. Certain statements made herein and in other public
filings and releases by the Company contain "forward-looking" information (as
defined in the Private Securities Litigation Reform Act of 1995) that involve
risk and uncertainty including, but not limited to changes in interest rates;
changes in premium volumes; the frequency and severity of catastrophic events;
increased competition; regulatory and legislative changes; changes in loss
payment patterns; changes in estimated overall adequacy of loss and loss
adjustment expense reserves; changes in key management personnel; Year 2000
compliance problems; changes in general market or economic conditions; and other
risk factors. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Company can give no assurance that these expectations will be achieved. Actual
results and trends in the future may differ materially depending on a variety of
factors including, but not limited to, the factors that are disclosed in
conjunction with the forward-looking statements included herein and in other
public filings and releases by the Company.
<PAGE> 12
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments - at market value: Fixed maturities - bonds:
Available for sale (amortized cost $65,603,873
in 1998 and $71,335,875 in 1997) $ 66,827,552 $ 71,213,819
Equity securities - Available for sale:
Preferred stocks (cost $1,127,601 in 1998
and $949,905 in 1997) 1,136,433 972,407
Common stocks (cost $11,307,728 in 1998
and $11,065,265 in 1997) 15,595,049 17,690,075
------------ ------------
Total investments 83,559,034 89,876,301
Cash and Cash Equivalents 9,822,369 8,174,074
Accrued Investment Income 767,166 761,421
Premiums in Course of Collection 4,697,268 4,615,040
Direct Premium Bills Receivable (Net of allowance for doubtful accounts
of $380,000 in 1998 and $500,000 in 1997) 9,671,775 11,855,079
Reinsurance Balances Receivable 23,470,118 26,280,329
Prepaid Reinsurance Premiums 2,580,950 1,803,202
Property and Equipment, Net 3,768,975 3,888,399
Deferred Policy Acquisition Costs 8,799,976 8,562,238
Deferred Income Taxes 3,889,000 3,889,000
Other Assets 1,581,024 1,943,631
------------ ------------
Total $152,607,655 $161,648,714
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and Loss Adjustment Expenses:
Unpaid losses $ 53,800,504 $ 54,291,620
Unpaid loss adjustment expenses 17,995,708 16,763,162
Unearned Premiums 31,189,456 34,913,172
Reinsurance Balances Held or Payable 6,889,131 6,703,466
Notes Payable to Bank 341,357 432,473
Accounts Payable and Other Accrued Liabilities 9,578,133 8,879,920
------------ ------------
Total Liabilities 119,794,289 121,983,813
------------ ------------
Commitments and 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 1,962,410 in 1998 and 1997 6,541,351 6,541,351
Paid-in surplus 13,097,668 13,097,668
Accumulated comprehensive income 5,519,831 6,525,256
Retained earnings 7,654,516 13,500,626
------------ ------------
Total Stockholders' Equity 32,813,366 39,664,901
------------ ------------
Total $152,607,655 $161,648,714
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 13
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and Other Income
Premiums earned $ 62,080,128 $ 64,052,155 $ 66,961,281
Net investment income 4,708,703 4,367,807 4,591,651
Realized investment gains 1,601,453 1,481,695 657,875
Interest on premium bills receivable and other income 898,508 723,319 743,892
------------- ------------- -------------
Total 69,288,792 70,624,976 72,954,699
------------- ------------- -------------
Expenses
Losses and loss adjustment expenses:
Losses incurred 40,583,691 38,532,416 38,916,069
Loss adjustment expenses 8,908,924 13,303,194 7,292,287
Policy acquisition costs 25,244,410 24,400,724 24,531,623
Retrospective premium adjustments on workers'
compensation policies 397,877 (580,984) 511,767
------------- ------------- -------------
Total 75,134,902 75,655,350 71,251,746
------------- ------------- -------------
Income (Loss) Before Federal Income Tax (5,846,110) (5,030,374) 1,702,953
Provision (Credit) for Federal Income Tax
Current (3,201)
Deferred 854,000 (245,000)
------------- -------------
Total 850,799 (245,000)
------------- -------------
Net Income (Loss) $ (5,846,110) $ (5,881,173) $ 1,947,953
------------- ------------- -------------
Basic and Diluted Net Income (Loss) Per Share $ (2.98) $ (3.00) $ 1.00
Dividends Declared Per Share $ -- $ .30 $ .30
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ (5,846,110) $ (5,881,173) $ 1,947,953
Adjustments to reconcile net income (loss) to net cash
flow from operating activities:
Decrease (Increase) in:
Premiums in course of collection (82,228) (521,564) 200,093
Direct premium bills receivable 2,183,304 (2,195,357) (1,391,982)
Reinsurance balances receivable 2,810,211 (7,590,917) (6,521,653)
Prepaid reinsurance premiums (777,748) (1,152,152) 65,582
Deferred policy acquisition costs (237,738) 812,895 (533,428)
Deferred income taxes 854,000 (245,000)
Other assets 362,607 567,521 274,116
Increase (Decrease) in:
Unpaid losses and loss adjustment expenses 741,430 15,452,853 4,436,505
Unearned premiums (3,723,716) (1,411,901) 1,835,695
Reinsurance balances held or payable 185,665 5,045,592 (1,186,824)
Accounts payable and other accrued liabilities 698,213 (299,998) 94,596
Realized investment gains (1,601,453) (1,481,695) (657,875)
Gain on sale of property and equipment (78,086)
Depreciation 343,301 412,396 455,274
Other (18,934) 160,478 73,634
- -------------------------------------------------------------------------------------------------------------------
Net cash flow from (used in) operating activities (5,041,282) 2,770,978 (1,153,314)
- -------------------------------------------------------------------------------------------------------------------
Investing Activities
Sale of bonds 9,039,129 5,215,019 9,848,321
Maturity of bonds 26,756,436 5,567,344 9,304,151
Sale of preferred stocks 184,396
Redemption of preferred stocks 258,260 455,302 705,368
Sale of common stocks 6,579,371 3,230,021 2,936,366
Sales of property and equipment 81,750
Purchase of bonds (30,209,938) (8,307,715) (19,746,127)
Purchase of preferred stocks (427,696)
Purchase of common stocks (5,072,742) (3,973,749) (2,090,731)
Purchase of property and equipment (223,877) (250,632) (446,893)
Other (281,172) 64,895
- -------------------------------------------------------------------------------------------------------------------
Net cash flow from investing activities 6,780,693 1,654,418 759,746
- -------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds received from bank loan 580,500
Payments on bank loan (91,116) (83,508) (64,519)
Cash dividends paid to stockholders (588,726) (584,650)
Proceeds received from exercise of stock options 70,959 30,624
- -------------------------------------------------------------------------------------------------------------------
Net cash flow used in financing activities (91,116) (601,275) (38,045)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,648,295 3,824,121 (431,613)
Cash and Cash Equivalents, January 1 8,174,074 4,349,953 4,781,566
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, December 31 $ 9,822,369 $ 8,174,074 $ 4,349,953
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
For the Three Years Ended December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock Accumulated Total
Issued Paid-in Retained Comprehensive Shareholders'
Shares Par Value Surplus Earnings Income Equity
- ------------------------------------- ------------ ------------ ------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 1,947,110 $6,490,351 $13,047,085 $18,607,222 $ 2,384,456 $ 40,529,114
Net income 1,947,953 1,947,953
Change in market value of
investments (304,068) (304,068)
-------------
Comprehensive income 1,643,885
Cash dividends ($.30 per share) (584,650) (584,650)
Stock options exercised 4,800 16,000 14,624 30,624
- ------------------------------------- ------------ ------------ ------------- -------------- ---------------- --------------
Balance, December 31, 1996 1,951,910 6,506,351 13,061,709 19,970,525 2,080,388 41,618,973
Net loss (5,881,173) (5,881,173)
Change in market value of
investments 4,444,868 4,444,868
------------
Comprehensive income (1,436,305)
Cash dividends ($.30 per share) (588,726) (588,726)
Stock options exercised 10,500 35,000 35,959 70,959
- ------------------------------------- ------------ ------------ ------------- -------------- ---------------- --------------
Balance, December 31, 1997 1,962,410 6,541,351 13,097,668 13,500,626 6,525,256 39,664,901
Net loss (5,846,110) (5,846,110)
Change in market value of
investments (1,005,425) (1,005,425)
-------------
Comprehensive income (6,851,535)
- ------------------------------------- ------------ ------------ ------------- -------------- ---------------- --------------
BALANCE, DECEMBER 31, 1998 1,962,410 $6,541,351 $13,097,668 $ 7,654,516 $ 5,519,831 $ 32,813,366
===================================== ============ ============ ============= ============== ================ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 1998
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 and American Indemnity's affiliate,
American Indemnity Lloyds. 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 and fixtures is capitalized and
depreciation is recorded thereon; while under the statutory method
certain assets are depreciated over different lives and certain costs
are expensed as incurred.
(c) Under GAAP, a deferred federal income tax asset is recorded which is
attributable to the estimated recognition of the tax benefit of a
portion of the Company's net operating loss carryforward. No deferred
federal income tax is recorded under the statutory method.
(d) Under GAAP, certain reserves required for statutory purposes are
recorded as restrictions of retained earnings; such reserves, under the
statutory method, are classified as liabilities on the balance sheet.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
periods. Actual results could differ from 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. The
Company's investments in fixed maturities are recorded entirely as available for
sale and are stated at market value, accordingly.
Investments in equity securities are recorded as available for sale and are
stated at market value.
Unrealized gains or losses on investments which are reported at market
value are credited or charged to accumulated comprehensive income, net of a
provision for federal income tax, if any. Gains or losses on disposition are
computed by the specific identification method and are recorded in the income
statement at the date of disposition.
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,
receivables and payables 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, 1998 and 1997, 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 ranging from three to forty years.
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.
<PAGE> 17
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES. Losses and loss adjustment expenses
are charged to income as incurred. The reserve for unpaid losses and loss
adjustment expenses represents the accumulation of estimates for reported losses
and includes provisions for losses incurred but not reported based on data
available at this time. The methods of determining such estimates and
establishing resulting reserves are continually reviewed and updated, and
adjustments therefrom are necessary to maintain an adequate reserve for unpaid
claims. As more fully explained in Note 4, such estimates are management's best
estimates of the expected values. The actual results may vary from these values
since the evaluation of losses inherently subjective and susceptible to
significant changing factors.
REINSURANCE. Management believes all of the Company's reinsurance contracts with
reinsurers meet the criteria for risk transfer and the revenue and cost
recognition provisions in order to be accounted for as a reinsurance.
Reinsurance contracts do not relieve the Company from its obligation to
policyholders. In addition, failure of reinsurers to honor their obligations
could result in losses to the Company. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy.
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. In 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share". This statement requires that
basic and diluted earnings per share be presented. The weighted average number
of shares outstanding was 1,962,410 for 1998, 1,961,602 for 1997, 1,948,710 for
1996. The weighed average number of shares outstanding on the diluted basis was
1,962,410 for 1998, 1,961,602 for 1997 and 1,954,067 for 1996. As the effect of
the diluted shares was immaterial, all per share amounts presented represent
both basic and diluted earnings per share.
RECENT ACCOUNTING PRONOUNCEMENTS. In 1998, the company adopted several
Statements of Financial Accounting Standards (SFAS). SFAS No. 130, "Reporting
Comprehensive Income," requires financial statement reporting of comprehensive
income, which includes net income and other items, such as the change in
unrealized gains on investments, net of income taxes.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires certain information to be reported about operating
segments on a basis consistent with the Company's internal organizational
structure. Following the guidance of SFAS No. 131, the Company operates in one
industry segment, property and casualty insurance. All of the Company's
operations are located in the United States.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," revises the disclosures for pensions and other postretirement
benefits and standardizes them into a combined format.
The Company has made all required disclosures and prior years' information has
been reclassified for the impact of SFAS Nos. 130, 131 and 132.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides
guidance on accounting by insurance and other enterprises for insurance-related
assessments. The Company is required to adopt the provisions of SOP 97-3 in
fiscal year 1999.
In March 1998, the AICPA issued SOP 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides a framework
for determining the accounting treatment of costs incurred to obtain or develop
computer software. The Company is required to adopt the provisions of SOP 98-1
in fiscal year 1999, without adjustment to previously reported amounts.
In June 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires immediate expensing of certain organizational and
start-up costs. The Company is required to adopt the provisions of SOP 98-5 in
fiscal year 1999.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The Company is required to adopt the provisions of SFAS
No. 133 in the third quarter of 1999.
In October 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts that Do Not Transfer Insurance Risk." SOP
98-7 addresses deposit accounting for certain insurance and reinsurance
contracts and direct business by insurance enterprises and other enterprises.
The Company is required to adopt the provisions of SOP 98-7 in fiscal year 2000.
Management is currently evaluating but has not yet determined what effect, if
any, there will be on the Company's financial statements and related
disclosures from the above-mentioned pronouncements that are not yet effective.
<PAGE> 18
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, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and Government
Agencies and Authorities $ 21,209,268 $ 457,197 $ 35,296 $ 21,631,169
Mortgage-backed Securities issued by U. S.
Government Agencies and Authorities 21,476,324 269,995 200,000 21,546,319
Collateralized Mortgage Obligations 9,772,422 78,562 17,572 9,833,412
States, Municipalities and Political Subdivisions 1,119,868 87,338 196 1,207,010
All Other 12,025,991 585,090 1,439 12,609,642
- -------------------------------------------------------------------------------------------------------------------
Totals $ 65,603,873 $ 1,478,182 $ 254,503 $ 66,827,552
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and Government
Agencies and Authorities $ 18,688,192 $ 208,941 $ 39,266 $ 18,857,867
Mortgage-backed Securities issued by U. S.
Government Agencies and Authorities 29,274,280 74,247 723,989 28,624,538
Collateralized Mortgage Obligations 13,963,442 80,478 26,838 14,017,082
States, Municipalities and Political Subdivisions 1,326,375 80,272 909 1,405,738
All Other 8,083,586 225,008 8,308,594
- -------------------------------------------------------------------------------------------------------------------
Totals $ 71,335,875 $ 668,946 $ 791,002 $ 71,213,819
===================================================================================================================
</TABLE>
At December 31, 1998, bonds with an amortized cost of approximately
$8,691,000 were on deposit with regulatory authorities.
The amortized cost and estimated market value of fixed maturities at
December 31, 1998, by estimated maturity are shown below. Actual maturities may
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, 1998
Estimated
Amortized Market
Maturity Distribution Cost Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 20,550,791 $ 20,696,161
Due after one year through five years 29,563,210 29,801,403
Due after five years through ten years 14,693,214 15,508,327
Due after ten years 796,658 821,661
- -------------------------------------------------------------------------------------------------------------------
Totals $ 65,603,873 $ 66,827,552
===================================================================================================================
</TABLE>
<PAGE> 19
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,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized Investment Gains (Losses):
Fixed maturities-Bonds $ (155,900) $ (15,535) $ 72,391
Equity securities 1,757,353 1,497,230 585,484
- -------------------------------------------------------------------------------------------------------------------
Total 1,601,453 1,481,695 657,875
- -------------------------------------------------------------------------------------------------------------------
Unrealized Appreciation (Decline)
in Market Value of Investments:
Fixed maturities-Bonds 1,345,734 1,365,736 (1,068,353)
Equity Securities (2,351,159) 3,079,132 772,620
- -------------------------------------------------------------------------------------------------------------------
Total (1,005,425) 4,444,868 (295,733)
- -------------------------------------------------------------------------------------------------------------------
Total $ 596,028 $ 5,926,563 $ 362,142
===================================================================================================================
</TABLE>
Proceeds from sales of investments during 1998, 1997 and 1996 were
$15,618,500, $8,445,040 and $12,969,083, respectively. The gross realized
investment gains and losses for such sales were as follows: Realized investment
gains: 1998 - $1,917,734; 1997 - $1,487,300; and 1996 - $803,138. Realized
investment losses: 1998 - $438,815; 1997 - $20,773; and 1996 - $160,025. The
gross unrealized gains and losses on equity securities at December 31, 1998 were
approximately $5,846,000 and $1,550,000, respectively. The gross unrealized
gains and losses on equity securities at December 31, 1997 were approximately
$6,942,000 and $295,000, respectively.
NET INVESTMENT INCOME. Investment income and expenses are as follows:
<TABLE>
<CAPTION>
===================================================================================================================
Years Ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Maturities - Bonds $ 4,107,572 $ 3,909,666 $4,150,909
Equity Securities:
Common stocks 632,693 537,601 464,839
Preferred stocks 85,107 90,547 146,513
Mortgage Loans on Real Estate 1,313 2,199
Other Short-Term Investments 282,966 214,857 227,643
- -------------------------------------------------------------------------------------------------------------------
Total Investment Income 5,108,338 4,753,984 4,992,103
Less Investment Expenses 399,635 386,177 400,452
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income $ 4,708,703 $ 4,367,807 $4,591,651
===================================================================================================================
</TABLE>
<PAGE> 20
3. PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation are as follows:
<TABLE>
<CAPTION>
===================================================================================================================
December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 263,503 $ 263,503
Building and Improvements 5,880,787 5,862,085
Furniture, Fixtures and Equipment 3,100,998 2,838,240
Automobiles 32,812 261,575
- -------------------------------------------------------------------------------------------------------------------
Total 9,278,100 9,225,403
Less Accumulated Depreciation 5,509,125 5,337,004
- -------------------------------------------------------------------------------------------------------------------
Property and Equipment, Net $3,768,975 $3,888,399
===================================================================================================================
</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.
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>
==========================================================================================================================
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross reserves, beginning of year $71,055,000 $55,602,000 $51,165,000
Reinsurance recoverable, beginning of year 25,615,000 18,769,000 11,974,000
- --------------------------------------------------------------------------------------------------------------------------
Net reserves, beginning of year 45,440,000 36,833,000 39,191,000
- --------------------------------------------------------------------------------------------------------------------------
Net incurred loss and loss adjustment expenses related to:
Current year 45,366,000 44,016,000 44,431,000
Prior years 4,127,000 7,820,000 1,777,000
- --------------------------------------------------------------------------------------------------------------------------
Total net incurred 49,493,000 51,836,000 46,208,000
Net paid loss and loss adjustment expenses related to:
Current year 23,385,000 21,708,000 24,941,000
Prior years 22,294,000 21,521,000 23,625,000
- --------------------------------------------------------------------------------------------------------------------------
Total net paid 45,679,000 43,229,000 48,566,000
- --------------------------------------------------------------------------------------------------------------------------
Net reserves, end of year 49,254,000 45,440,000 36,833,000
Reinsurance recoverable, end of year 22,542,000 25,615,000 18,769,000
- --------------------------------------------------------------------------------------------------------------------------
Gross reserves at December 31 $71,796,000 $71,055,000 $55,602,000
==========================================================================================================================
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision of loss and loss adjustment expenses increased by $4,127,000 in 1998
and $7,820,000 in 1997 because of higher than anticipated losses and related
expenses. This is most apparent in personal and commercial automobile liability,
commercial multiple peril and other liability lines of business during 1998. As
of December 31, 1997, the Company strengthened its reserves by approximately
$7,700,000 as a result of unexpected development in losses and loss adjustment
expenses in several major lines.
The Company does not ordinarily insure against environmental liabilities.
However, in some instances, claims may be made against insureds for these
matters. Historically, the Company's exposure to environmental type claims has
been insignificant. 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.
The Company does not issue policies specifically covering Year 2000
("Y2K") liabilities. However, in some instances, claims may be made against
insureds for this matters. Management has taken steps to avoid underwriting
certain classes of business that are perceived to have the greatest amount of
Y2K exposure and at the same time more closely scrutinizing, through the use of
Y2K surveys and questionnaires, other risks which could have limited exposure.
In addition to this, management has endeavored to educate our insureds on Y2K
preparedness and issues through brochures attached to new and renewal policies.
Management believes that these actions will limit the Company's exposure to loss
as a result of Y2K.
<PAGE> 21
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, 1998 and December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $ (2,991,992) $ (2,911,161)
Differences between book and tax basis of property (496,210) (301,974)
Unrealized investments gains (1,876,743) (2,218,587)
Other (241,871) (303,863)
- -------------------------------------------------------------------------------------------------------------------------
(5,606,816) (5,735,585)
- -------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Reserves not currently deductible 5,074,193 5,355,530
Operating loss carryforwards 15,343,309 14,230,288
- -------------------------------------------------------------------------------------------------------------------------
20,417,502 19,585,818
- -------------------------------------------------------------------------------------------------------------------------
Net asset 14,810,686 13,850,233
Valuation allowance (10,921,686) (9,961,233)
- -------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 3,889,000 $ 3,889,000
=========================================================================================================================
</TABLE>
The Company is required to establish a valuation allowance for any portion
of the deferred tax asset that management believes will not be realized. The net
change in the total valuation allowance for the year ended December 31, 1998,
was an increase of $960,453. 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 $3,889,000 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,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax provision (credit)
computed at statutory rate (34%) $ (1,987,677) $ (1,710,327) $ 579,004
Increase in tax credit, or decrease in tax
provision, resulting from:
Tax exempt bond interest (27,595) (37,303) (75,135)
Tax exempt dividends (70% of amount
received from domestic corporations) (170,836) (149,499) (145,502)
Recognition of deferred tax asset 854,000 (245,000)
Other 40,236 37,285 33,102
Reduction in tax provision (credit) for
current year net operating loss limitation
and change in valuation allowance 2,145,872 1,856,643 (391,469)
- -------------------------------------------------------------------------------------------------------------------------
Provision (credit) for federal income tax $ -0- $ 850,799 $ (245,000)
=========================================================================================================================
</TABLE>
The Company has a net operating loss carryforward for tax purposes of
$45,127,379, which expires if not previously utilized, in 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 - $989,347; 2012 - $6,147,189; and 2018
- - $6,437,589. During 1998, an unutilized net operating loss carryforward of
$3,163,998 exceeded the fifteen year federal income tax limitation, therefore it
expired.
The Company received federal income tax refunds of $15,000 in 1998 and
$3,201 in 1997 and paid federal income tax of $15,000 in 1996.
<PAGE> 22
6. REINSURANCE AND CONTINGENCIES
American Indemnity follows the customary practice of reinsuring with other
insurance companies a portion of certain risks under the policies it has
written. 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.
Generally, such placements are with A- rated companies. At December 31, 1998,
reinsurance recoverable from the Company's single largest reinsurer and top five
reinsurers amounted to approximately $18,975,000 and $23,102,000, respectively.
Credit losses from reinsurance have historically been immaterial. American
Indemnity does not assume reinsurance from other insurance companies.
Property insurance risks are reinsured under treaty arrangements whereby
$900,000 of losses in excess of $100,000 are automatically reinsured. Effective
January 1, 1999, American Indemnity's retention for property risks will increase
to $150,000 from $100,000. American Indemnity has additional property
facultative reinsurance agreements for losses in excess of $1,000,000.
American Indemnity carries excess catastrophe reinsurance which covers 95%
of all losses up to $36,000,000 in excess of $4,000,000. During 1998, American
Indemnity carried aggregate excess property and automobile catastrophe
reinsurance which covered 95% of all losses up to $4,000,000 in excess of
$2,000,000, subject to a $200,000 per occurrence retention. Effective January 1,
1999, the aggregate excess reinsurance under this agreement was terminated.
All claims on automobile liability and casualty insurance over $175,000
up to $2,000,000 are automatically reinsured under a treaty.
American Indemnity has a fifty percent quota share reinsurance agreement
for non-standard personal automobile risks in Illinois.
American Indemnity, however, is contingently liable if the reinsurance
companies are unable to meet their obligations since such obligations would
remain a direct liability of American Indemnity.
Premiums earned, losses and loss adjustment expenses incurred, and unpaid
losses and loss adjustment expenses have been reduced by transactions with
reinsurance companies as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums written:
Catastrophe reinsurance $ 3,270,933 $ 3,862,049 $ 4,216,768
Other reinsurance 12,889,070 15,170,057 9,423,392
- -------------------------------------------------------------------------------------------------------------------
Total 16,160,003 19,032,106 13,640,160
- -------------------------------------------------------------------------------------------------------------------
Premiums Earned:
Catastrophe reinsurance 3,270,933 3,862,049 4,216,768
Other reinsurance 11,154,341 14,017,891 10,488,973
- -------------------------------------------------------------------------------------------------------------------
Total 14,425,274 17,879,940 14,705,741
- -------------------------------------------------------------------------------------------------------------------
Losses and Loss Adjustment Expenses Incurred:
Catastrophe reinsurance
Other reinsurance 9,257,008 15,779,541 13,025,638
- -------------------------------------------------------------------------------------------------------------------
Total 9,257,008 15,779,541 13,025,638
- -------------------------------------------------------------------------------------------------------------------
Unpaid Losses and Loss Adjustment
Expenses at December 31 $ 22,541,936 $ 25,614,536 $ 18,768,740
- -------------------------------------------------------------------------------------------------------------------
</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.
<PAGE> 23
7. STOCKHOLDERS' EQUITY
American Indemnity may pay cash dividends only from statutory basis retained
earnings, exclusive of special surplus funds and restricted reserves.
Furthermore, under Texas law, American Indemnity may not pay a dividend without
the consent of the Texas Insurance Commissioner if such dividend and all other
dividends paid during the preceding twelve months would exceed the greater of
(i) 10% of its statutory surplus as regards to policyholders as of the end of
the preceding calendar year or (ii) its statutory net investment income for such
year.
The National Association of Insurance of Insurance Commissioners (the
"NAIC") has established various model laws, regulations and guidelines as part
of its regulatory oversight of insurance companies. The NAIC Model Insurance
Company System Regulatory Act ("NAIC Model Act") contains restrictions regarding
payment of dividends which differ from restrictions under Texas law. 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 carry forward 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.
The Company announced in February 1998 the suspension of regular quarterly
cash dividends to stockholders. It is not anticipated that dividends to
stockholders will resume within the foreseeable future. Future dividends, if any
will be dependent upon future favorable operating results of the Company.
At December 31, 1998, American Indemnity had no statutory retained earnings
available for payment of cash dividends. At December 31, 1998, American
Indemnity's reported statutory surplus as regards to policyholders was
$20,238,129. For the year ended December 31, 1998, American Indemnity's
unconsolidated statutory net investment income (including realized capital
gains) was $5,683,173 and its unconsolidated net income (loss) (excluding
realized capital gains) was $(5,471,898). The Company's stockholders' equity at
December 31, 1998, 1997 and 1996 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 (Loss)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 $22,598,630 $(3,397,906)
1997 $30,407,297 $(3,755,332)
1996 $32,556,876 $ 2,159,102
</TABLE>
<PAGE> 24
8. EMPLOYEE AND NON-EMPLOYEE DIRECTOR STOCK OPTION PLANS
The Company maintains 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 January 2002.
Activity of shares under the plans was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Number of Exercise Average
Shares Price Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, January 1, 1996 20,800 $ 6.38 - 13.50 $ 7.99
Options exercised in 1996 (4,800) (6.38) (6.38)
- -------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1996 16,000 6.38 - 13.50 8.47
Options exercised in 1997 (10,500) (6.38 - 7.01) (6.76)
Options forfeited in 1997 (1,500) (7.01) (7.01)
- -------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1997 4,000 13.50 13.50
- -------------------------------------------------------------------------------------------------------------------
Options outstanding and exercisable, December 31, 1998 4,000 $ 13.50 $ 13.50
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, 108,500 shares of common stock were reserved for
issuance pursuant to the terms of the Company's employee stock option plan. At
December 31, 1998, the remaining contractual life for all outstanding options
was four months.
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. In 1997, the Company adopted the 1997 Non-Employee Directory
Stock Option Plan, which includes similar provisions. 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 Exercise Average
Shares Price Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, January 1, 1996 11,000 $ 7.75 - 14.00 $ 11.59
Options granted, April 1996 8,000 11.50 - 12.75 12.59
- -------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1996 19,000 7.75 - 14.00 12.01
Options granted, February 1997 1,000 12.25 12.25
- -------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1997 20,000 7.75 - 14.00 12.03
Options granted, January 1998 8,000 13.87 13.87
- -------------------------------------------------------------------------------------------------------------------
Options outstanding and exercisable, December 31, 1998 28,000 7.75 - 14.00 $ 12.55
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, 25,000 shares of common stock were reserved for
issuance pursuant to the terms of the Company's 1997 Non-Employee Director Stock
Option Plan. At December 31, 1998, the weighed average remaining contractual
life for outstanding options was 6.0 years. All stock options are granted at
fair market of the common stock on the date the option is granted. The fair
value of the options granted during 1998, 1997 and 1996 was $24,000, $3,000 and
$24,000, respectively.
The Company accounts for stock based compensation in accordance with SFAS
No. 123, "Stock Based Compensation." Under this statement, a company may elect
to continue its previous method of accounting for stock-based compensation and
include additional disclosure in its financial statements or record expenses for
such compensation based on the fair value of the instruments on the date of
grant. The Company has elected to continue accounting for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
under which no compensation costs have been recognized for stock awards.
Accordingly, the consolidated financial statements do not include any charge for
the fair value of grants for stock-based compensation instruments. Had
compensation expense been determined under SFAS No. 123, the Company's pro forma
net income (loss) would have been ($5,870,110), ($5,884,173) and $1,923,953 for
1998, 1997 and 1996, respectively and the Company's pro forma net income (loss)
per share would have been ($2.99), ($3.00) and $0.99 for 1998, 1997 and 1996,
respectively.
<PAGE> 25
9. RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS
American Indemnity sponsors a defined contribution plan, whereby eligible
employees may elect to contribute a portion of their annual salary, subject to
limitation, to the plan. American Indemnity's contribution is discretionary and
is determined annually but cannot exceed the amount deductible for federal
income tax purposes. American Indemnity's contributions charged to expense with
respect to the plan during the years ended December 31, 1998, 1997 and 1996 were
approximately $138,000, $142,000 and $153,000, respectively.
The Company also sponsors a cash balance pension plan. 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 percentage of contribution and rate of interest is discretionary
and is determined at the beginning of each plan year.
The Company accrues the cost of providing other postretirement benefits to
employees during the employees' service period. The benefits provided to retired
employees are principally health care and life insurance. All of these benefits
are funded by the Company on a cash basis. The Company has capped the annual per
capita contributions for the benefits provided to retired employees. As a
result, increases in the assumed health care cost trend rate will have no
significant effect on the accumulated postretirement benefit obligation as of
December 31, 1998 or on the net periodic postretirement benefit cost.
The following table sets forth summarized information on the Company's
defined benefit pension plan and other post-retirement benefit plans (000's
omitted):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
- ---------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,846 $ 2,437 $ 1,884 $ 1,723
Service cost 152 141 38 27
Interest cost 202 206 145 134
Actuarial loss 45 445 374 94
Benefits paid (187) (383) (88) (94)
- ---------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 3,058 $ 2,846 $ 2,353 $ 1,884
===============================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 3,129 $ 2,807
Employer contributions 230
Actual return on plan assets 412 475
Benefits paid (187) (383)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 3,354 $ 3,129
================================================================================
Funded status:
Funded status at end of year $ 296 $ 282 $(2,353) $(1,884)
Unrecognized transitional obligation 475 594 347 373
Unrecognized prior service cost (943) (1,014) (49) (55)
Unrecognized net actuarial (gain) loss (428) (364) 764 430
- ---------------------------------------------------------------------------------------------------------------
Accrued benefit cost $ (600) $ (502) $(1,291) $(1,136)
===============================================================================================================
</TABLE>
The following summarizes the weighted-average assumptions for the plans as
of December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 6.75% 7.50% 6.75% 6.75%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 4.00% 4.00%
</TABLE>
The components of the net periodic benefit cost for 1998 and 1997 include
the following (000's omitted):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
- -----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 152 $ 141 $ 152 $ 38 $ 49 $ 57
Interest cost 202 206 200 145 170 155
Expected return on plan assets (413) (474) (462)
Net amortization and deferral 181 274 343 60 75 75
- -----------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 122 $ 147 $ 233 $ 243 $ 294 $ 287
=================================================================================================================
</TABLE>
<PAGE> 26
10. POLICY ACQUISITION COSTS
Policy acquisition costs that vary with and are primarily related to the
acquisition of new and renewal business (such as premium taxes, agents'
commissions and a portion of other underwriting expenses) are deferred and
amortized over the terms of the policies. Policy acquisition costs incurred and
expensed and policy acquisition costs amortized to expense were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Costs Incurred and Expensed $ 6,029,266 $ 5,694,425 $ 6,538,408
Costs Amortized to Expense 18,941,144 18,706,299 17,993,215
- -------------------------------------------------------------------------------------------------------------------
Total $ 24,970,410 $ 24,400,724 $ 24,531,623
===================================================================================================================
</TABLE>
11. LEASE COMMITMENTS
The Company has several operating leases for office space and equipment. Total
lease expense was approximately $729,000 for 1998, $577,000 for 1997, and
$682,000 for 1996. Future minimum lease commitments for the Company are
approximately $723,000 for 1999, $560,000 for 2000, $268,000 for 2001,$106,000
for 2002 and $28,000 for 2003.
12. NOTE PAYABLE TO BANK AND LINE OF CREDIT
In January 1997, the Company received $580,500 proceeds from a loan used to
purchase computer software. The Company is required to make monthly installments
of $10,447 including interest. The interest rate is fixed at 8.75% and the loan
maturity date is February 1, 2002. At December 31, 1998 the principal balance of
the loan was $341,357. The future principal payments of the note payable to bank
are as follows: 1999 - $99,416; 2000 - $108,472; 2001 - $118,353; and 2002 -
$15,116. Interest paid was $34,245 for 1998, $41,852 for 1997 and $39,948 for
1996.
The Company and United States National Bank, Galveston, Texas, renewed an
existing line of credit in the principal amount of $5,000,000. 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 1998, 1997
or 1996. No security collateral is required until the Company has an outstanding
balance under the line of credit.
13. SEGMENT INFORMATION
The Company is organized and operates principally in a single industry, property
and casualty insurance. All of the Company's operations are located in the
United States.
The following table sets forth the net premium written by line of business
(000's omitted):
<TABLE>
<CAPTION>
- ------------------------------------- --------------------------------------------------------------------------------
For the Years Ended December 31,
1998 1997 1996
- ------------------------------------- ------------------------- ---------------------------- -------------------------
<S> <C> <C> <C>
Personal Automobile $ 14,411 $ 15,598 $ 17,844
Commercial multiple peril 12,620 13,911 15,973
Commercial Automobile 12,282 14,974 16,272
Other liability 7,092 5,786 7,646
Homeowners multiple peril 6,488 6,133 5,506
All other 4,686 5,086 5,622
- ------------------------------------- ------------------------- ---------------------------- -------------------------
Net premiums written $ 57,579 $ 61,488 $ 68,863
===================================== ========================= ============================ =========================
</TABLE>
The company does not allocate investment income, policy acquisition costs,
federal income tax or identifiable assets by line of business for internal
reporting purposes; therefore, this information is not presented.
14. RECENT EVENTS
On March 4, 1999, the Company and United Fire & Casualty Company announced the
signing of an agreement providing for United Fire and Casualty Company's
acquisition of American Indemnity Financial Corporation. It is anticipated that
the acquisition will be completed by June 30, 1999 subject to customary closing
conditions.
<PAGE> 27
Independent Auditors' Report
[DELOITTE & TOUCHE LLP LETTERHEAD]
To The Stockholders of American Indemnity Financial Corporation:
We have audited the accompanying consolidated balance sheets of American
Indemnity Financial Corporation and subsidiaries (the "Company") as of December
31, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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 the Company as of December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE
Houston, Texas
March 19, 1999
<PAGE> 28
AMERICAN INDEMNITY FINANCIAL CORPORATION
DIRECTORS
FRED C. BURNS (5)
Managing Partner
John L. Wortham & Son, L.L.P.
Houston, Texas
JACK T. CURRIE (3),(4),(5)
Investments
Houston, Texas
HENRY W. HOPE (2),(5)
Partner
Fulbright & Jaworski L.L.P.
Attorneys at Law
Houston, Texas
HARRIS L. KEMPNER, JR. (2),(4)
President
Kempner Capital Management, Inc.
Galveston, Texas
WILLIAM C. LEVIN, M.D.
Consultant in Hematology
Galveston, Texas
JAMES W. MCFARLAND, PH.D. (1)
Dean, A. B. Freeman School of Business
Tulane University
New Orleans, Louisiana
SYNOTT L. MCNEEL (1),(3)
Investments
Galveston, Texas
J. FELLMAN SEINSHEIMER, III (3),(4),(5)
President and Chief Executive Officer
MARVIN L. WEST (1),(2)
Bank Consultant
Houston, Texas
CHAIRMAN EMERITUS
J. F. SEINSHEIMER, JR.
EXECUTIVE OFFICERS
J. FELLMAN SEINSHEIMER, III
President and Chief Executive Officer
PHILLIP E. APGAR, CPA
Vice President, Treasurer
and Chief Financial Officer
HELEN K. LOHEC
Secretary
(1) Member, Audit Committee
(2) Member, Compensation Committee
(3) Member, Executive Committee
(4) Member, Investment Committee
(5) Member, Nominating and Management
Development Committee
THE AMERICAN INDEMNITY COMPANIES
DIRECTORS
FRED C. BURNS
Managing Partner
John L. Wortham & Son, L.L.P
Houston, Texas
JACK T. CURRIE
Investments
Houston, Texas
HENRY W. HOPE
Partner
Fulbright & Jaworski L.L.P.
Attorneys at Law
Houston, Texas
ROBERT K. HUTCHINGS
Investments
Galveston, Texas
HARRIS L. KEMPNER, JR.
President
Kempner Capital Management, Inc.
Galveston, Texas
WILLIAM C. LEVIN, M.D.
Consultant in Hematology
Galveston, Texas
JAMES W. MCFARLAND, PH.D.
Dean, A. B. Freeman School of Business
Tulane University
New Orleans, Louisiana
SYNOTT L. MCNEEL
Investments
Galveston, Texas
J. FELLMAN SEINSHEIMER, III
President and Chief Executive Officer
American Indemnity Financial Corporation
Galveston, Texas
MARVIN L. WEST
Bank Consultant
Houston, Texas
EXECUTIVE OFFICERS
J. FELLMAN SEINSHEIMER, III
President and Chief
Executive Officer
PHILLIP E. APGAR, CPA
Vice President, Treasurer
and Chief Financial Officer
HELEN K. LOHEC
Secretary
VICE PRESIDENTS
ROGER F. BRIGGS
JAMES G. CARPENTER
WILLIAM H. FELTS, JR.
EUGENE HORNSTEIN
ROBERT S. LEE
ROBERT A. PAYNE
VAUGHN V. VAUGHAN
ASSISTANT VICE PRESIDENTS
JAMES V. GLYNN
RICHARD C. IVEY, III
MILDRED L. PHILLIPS
ROBERT L. SEINSHEIMER
<PAGE> 29
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
2-78856, Registration Statement No. 33-47359, Registration Statement No.
33-47546 and Registration Statement No. 333-42439 of American Indemnity
Financial Corporation on Form S-8 of our reports dated March 19, 1999 appearing
in and incorporated by reference in the Annual Report on Form 10-K of American
Indemnity Financial Corporation for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Houston, Texas
March 30, 1999
<PAGE> 1
EXHIBIT 24.1
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, 1998, to be filed with the Securities
and Exchange Commission, together with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorneys, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all intents
and purposes as the undersigned might or could do if personally present, hereby
ratifying and confirming all that said attorney-in-facts and agents, or either
of them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
25th day of March, 1999.
/s/ WILLIAM C. LEVIN, M.D.
-----------------------------------
William C. Levin, M.D.
<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, 1998, 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
24th day of March, 1999.
/s/ HARRIS L. KEMPNER, JR.
----------------------------------
Harris L. Kempner, Jr.
<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, 1998, 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
24th day of March, 1999.
/s/ MARVIN L. WEST
-----------------------------
Marvin L. West
<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, 1998, 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
24th day of March, 1999.
/s/ HENRY W. HOPE
---------------------------------
Henry W. Hope
<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, 1998, 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
24th day of March, 1999.
/s/ SYNOTT L. MC NEEL
-----------------------------
Synott L. McNeel
<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, 1998, 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
24th day of March, 1999.
/s/ JAMES W. MC FARLAND, PH.D.
----------------------------------------
James W. McFarland, Ph.D.
<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, 1998, 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
29th day of March, 1999.
/s/ FRED C. BURNS
----------------------------
Fred C. Burns
<TABLE> <S> <C>
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<NAME> AMERICAN INDEMNITY FINANCIAL CORPORATION
<S> <C>
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<PERIOD-END> DEC-31-1998
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0
0
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62,080,128
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<INCOME-TAX> 0
<INCOME-CONTINUING> (5,846,110)
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<NET-INCOME> (5,846,110)
<EPS-PRIMARY> (2.98)
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<RESERVE-OPEN> 45,440,000
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