THE PENN CENTRAL CORPORATION
One East Fourth Street
Cincinnati, Ohio 45202
Telephone (513) 579-6660
Facsimile (513) 579-0110
Robert F. Amory
Vice President and Controller
May 13, 1994
1934 Act Filing Desk
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D. C. 20549
RE: American Premier Underwriters, Inc.
Form 10-Q Quarterly Report for the Quarter
Ended March 31, 1994
Dear Sir or Madam:
Transmitted for filing on behalf of American Premier
Underwriters, Inc. is Form 10-Q Quarterly Report for the
Quarter Ended March 31, 1994.
If you have any questions concerning this filing, please
telephone the undersigned at the number indicated above.
Very truly yours,
Robert F. Amory
<PAGE>
Part I - Financial Information
1. FINANCIAL STATEMENT
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
INCOME STATEMENT
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
Revenues
Insurance operations
Premiums earned $ 357.4 $ 271.1
Net investment income 30.5 26.9
Net realized gains .5 5.4
Other operations
Net sales 38.0 52.9
Interest and dividend income 7.1 13.9
Provision for loss on sale of General
Cable Corporation notes (75.8) -
Net realized gains (losses) .1 -
357.8 370.2
Expenses
Insurance operations
Losses 197.6 157.7
Loss adjustment expenses 36.3 29.5
Commissions and other insurance
expenses 81.0 60.6
Policyholder dividends 33.0 17.1
Other operations
Cost of sales 18.4 21.5
Operating expenses 18.7 29.2
Corporate and administrative expenses 5.2 4.6
Interest and debt expense 13.6 17.3
Realized loss on sale of subsidiaries - 1.7
Other expense (income), net 1.0 4.4
404.8 343.6
Income (loss) from continuing operations before
income taxes (47.0) 26.6
Income tax (expense) benefit (8.9) 4.5
Income (loss) from continuing operations (55.9) 31.1
Income from discontinued operations - 2.8
Net income (loss) $ (55.9) $ 33.9
Earnings (loss) per share data:
Continuing operations $ (1.16) $ .67
Discontinued operations - .06
$ (1.16) $ .73
Weighted average number of common shares 48.4 46.6
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
1<PAGE>
<PAGE>
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEET
(In Millions)
<TABLE>
<CAPTION> March 31, December 31,
1994 1993
<S> <C> <C>
Assets
Investments held by insurance operations
Fixed maturity securities
Held for investment-stated at amortized
cost (market $1,208.7 and $1,173.0) $1,205.9 $1,113.0
Available for sale-stated at market
(cost $415.8 and $408.7) 421.2 432.8
Short-term investments 51.3 56.9
1,678.4 1,602.7
Parent Company investments
Fixed maturity securities
Held for investment-stated at amortized
cost (market $281.8 and $251.7) 282.7 248.9
Short-term investments 370.8 387.9
General Cable Corporation notes 169.8 286.8
Equity in affiliates 17.0 20.1
840.3 943.7
Cash 30.5 32.4
Accrued investment income 39.2 43.4
Agents' balances and premiums receivable 316.9 289.9
Reinsurance receivable 47.1 47.6
Other receivables 47.7 51.4
Deferred policy acquisition costs 85.0 77.4
Property, plant and equipment 90.5 95.2
Cost in excess of net assets acquired 403.6 406.8
Deferred tax asset 294.7 295.8
Net assets of discontinued operations 9.9 9.8
Other assets 149.7 153.5
Total $4,033.5 $4,049.6
Liabilities And Common Shareholders' Equity
Unpaid losses and loss adjustment expenses $ 987.1 $ 961.4
Policyholder dividends 127.4 111.8
Unearned premiums 397.5 352.3
Debt 507.4 523.2
Minority interests in subsidiaries 17.4 15.1
Accounts payable and other liabilities 352.6 363.5
Total liabilities 2,389.4 2,327.3
Common Stock 47.5 47.4
Capital surplus 746.9 746.2
Retained earnings (from October 25, 1978) 845.9 912.3
Net unrealized gains on investments 3.8 16.4
Total common shareholders' equity 1,644.1 1,722.3
Total $4,033.5 $4,049.6
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
2<PAGE>
<PAGE>
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CASH FLOWS
(In Millions)
<TABLE>
<CAPTION>
Three Months ended
March 31,
1994 1993
<S> <C> <C>
Cash flows of operating activities:
Income (loss) from continuing operations $ (55.9) $ 31.1
Adjustments to reconcile income from continuing
operations to net cash provided by continuing
activities
Deferred Federal income tax 7.9 (5.3)
Depreciation, depletion and amortization 7.6 7.9
Net (gain) loss on disposals of businesses, investments
and property, plant and equipment 72.1 (5.3)
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures of businesses
Increase in receivables (22.1) (43.2)
Increase in other assets (5.4) (11.1)
Increase (decrease) in accounts payable and
other liabilities (14.4) 8.3
Increase in unpaid losses and loss
adjustment expenses 23.4 20.8
Increase in policyholder dividends 15.6 2.4
Increase in unearned premiums 39.7 47.3
Other, net .5 .6
Net cash flows of operating activities 69.0 53.5
Cash flows of investing activities:
Purchases of available for sale investments (10.9) (21.4)
Maturities and sales of available for sale investments 14.6 52.7
Purchases of held for investment securities (148.0) (166.0)
Maturities and sales of held for investment securities 66.5 54.2
Net decrease in temporary investments 22.7 28.9
Proceeds from sale of businesses 9.8 -
Acquisitions of businesses, net of cash acquired - (3.7)
Capital expenditures (4.0) (3.0)
Other, net .8 .9
Net cash flows of investing activities (48.5) (57.4)
Cash flows of financing activities:
Repayment of debt (16.6) (.9)
Common Stock dividends (10.1) (9.5)
Exercise of stock options and conversion of
Career Shares 1.3 9.4
Purchases of Company Common Stock (1.6) (1.1)
Other, net 4.6 (.5)
Net cash flows of financing activities (22.4) (2.6)
Net cash flows from continuing operations (1.9) (6.5)
Net cash to discontinued operations - (2.1)
Decrease in cash (1.9) (8.6)
Cash - beginning of year 32.4 36.2
Cash - end of period $ 30.5 $ 27.6
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3<PAGE>
<PAGE>
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Effective March 25, 1994, the Company changed its corporate name
from The Penn Central Corporation to American Premier Underwriters,
Inc. in order to better reflect its new identity as a property and
casualty insurance specialist.
In the opinion of management, the accompanying unaudited
financial statements of American Premier Underwriters, Inc. and
Consolidated Subsidiaries (the "Company") include all adjustments,
which are of a normal recurring nature, necessary to present fairly
the Company's results of operations, financial position and cash
flows. As permitted by the rules and regulations of the Securities
and Exchange Commission ("SEC"), the financial statements do not
include all of the accounting information normally included with
financial statements prepared in accordance with generally accepted
accounting principles. Accordingly, these financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1993. Results for the three months ended
March 31, 1994 are not necessarily indicative of the results for any
other interim period or for the year as a whole. Certain amounts for
the three months ended March 31, 1993 have been reclassified to
conform to the current presentation.
Accounting for Certain Investments in Debt and Equity Securities
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The adoption of
SFAS No. 115 did not have a material effect on the Company's
financial position or results of operations.
Accounting for Postemployment Benefits
Effective January 1, 1994 the Company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits". An actuarial
evaluation of the Company's postemployment benefits has been
prepared. Based on this evaluation, the Company's adoption of SFAS
No. 112 did not have a material effect on the Company's financial
position or results of operations.
2. ACQUISITIONS AND DIVESTITURES
On May 5, 1994, the Company announced that, as part of an
agreement for the purchase of all of the outstanding shares of
General Cable Corporation ("General Cable") by Wassall PLC
("Wassall"), it will be paid $169.8 million in cash for the General
Cable subordinated notes (the "Notes") owned by the Company. At
March 31, 1994, the outstanding principal and accrued interest of the
Notes totalled $253.4 million. The Company will also receive the
same $6 per share consideration for its 1.15 million shares of
General Cable common stock that the public shareholders of General
Cable are to receive under the agreement. Also as part of the
agreement, the Company has agreed to assume responsibility for
certain actual and potential environmental and other liabilities
principally associated with General Cable's recent sales of Marathon
LeTourneau Company and Indiana Steel and Wire Company, in exchange
for a payment from Wassall of $27.4 million, less any pre-closing
payments made by General Cable for such liabilities on or after
January 1, 1994 (the "Indemnity Payment"). The Company believes that
the Indemnity Payment to be received from Wassall will be sufficient
to permit the Company to discharge such liabilities. At the closing
of the transaction, the Company will receive cash for its General
Cable shares and short-term notes of Wassall (the "Wassall Notes")
for the General Cable Notes and the Indemnity
4PAGE
<PAGE>
Payment. The Wassall Notes will bear a market rate of interest, will
be due not later than forty calendar days after the closing date and
will be secured principally by the General Cable Notes and all of the
General Cable common stock owned by Wassall. At March 31, 1994,
American Financial Corporation ("AFC"), which owned 40.5% of the
Company's common stock, also owned 45.6% of the outstanding common
stock of General Cable. The Chairman of the Board and Chief
Executive Officer of the Company is the Chairman of the Board of
General Cable. The transaction was approved by the Company's Board
of Directors based on the recommendation of a special committee of
the Company's independent directors. In making its recommendation,
the special committee relied on an opinion from Donaldson, Lufkin &
Jenrette Securities Corp. that the aggregate consideration to be
received by the Company in the transaction is fair to the Company
from a financial point of view. Completion of the transaction is
subject to certain conditions, including completion of Wassall's
financing arrangements, Wassall's acquisition in a tender offer that
commenced on May 11, 1994, of at least 3.75 million General Cable
shares and approval of the transaction by Wassall's shareholders.
The Company recorded a pre-tax loss of approximately $75.8 million in
the first quarter of 1994 for the anticipated disposition of the
Notes and General Cable stock, and the Company did not accrue
interest income on the Notes during the 1994 first quarter.
On February 14, 1994, General Cable delivered to the Company
cash and promissory notes issued by a subsidiary of Rowan Companies,
Inc. ("Rowan") totalling $52.1 million as a partial payment of the
General Cable Notes. The cash portion of the payment was $10.4
million. The Rowan notes, which are guaranteed by Rowan, have a face
value of $41.7 million, an interest rate of 7 percent and are due in
1999. Quarterly interest payments are payable in cash beginning
March 31, 1994. The receipt of the cash and Rowan notes resulted
from the sale by General Cable of its Marathon LeTourneau unit to
Rowan. As a result of these receipts, the Company credited General
Cable with $48.1 million of principal and interest payments on the
General Cable Notes. The non cash portion of this transaction is not
included in the statement of cash flows.
On February 10, 1994, the Company announced that it is
considering a proposal from AFC for the purchase by the Company of
the personal lines insurance businesses owned by Great American
Insurance Company ("GAIC") for a proposed purchase price of
approximately $380 million in cash. GAIC's personal lines insurance
businesses principally provide standard private passenger automobile
insurance and multiperil homeowners' insurance. GAIC is a wholly-
owned subsidiary of AFC. Completion of a transaction would be
subject to certain conditions, including approval by a special
committee of the Company's directors which has been empowered to
negotiate all aspects of the proposed acquisition, including the
proposed purchase price, receipt by the Company of an appropriate
fairness opinion from an independent investment banking firm, and any
required regulatory approvals. AFC beneficially owned 40.5 percent
of the Company's outstanding common shares at December 31, 1993 and
AFC's Chairman, Chief Executive Officer and principal shareholder is
Chairman and Chief Executive Officer of the Company.
The intended divestitures of businesses announced in December
1992 included five small diversified industrial companies, two of
which were sold during 1993 and one of which was sold during the
first quarter of 1994 for $9.8 million in cash resulting in a pre-tax
gain of $3.2 million. For the three months ended March 31, 1994, the
operations sold during 1994 and the two operations to be sold had
aggregate sales of $17.2 million and reported an operating loss of
$3.2 million. At March 31, 1994, the aggregate book value of the two
businesses remaining to be sold was $32.3 million.
5<PAGE>
<PAGE>
3. INSURANCE OPERATIONS
Investments of Insurance Operations
Amortized cost, gross unrealized gains and losses and market
values of the insurance operations' investments in fixed maturity
securities are presented in the table below.
At March 31, 1994, the insurance operations' investments
included unrated or less than investment grade corporate securities
with a carrying value of $118.6 million (market value $119.0
million). Investments of insurance operations include a net payable
for securities purchased but not settled of $19.9 million at March
31, 1994.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
March 31, 1994 Cost Gains Losses Value
(In Millions)
<S> <C> <C> <C> <C>
Held for investment
Corporate securities $ 901.0 $ 21.9 $ 19.8 $ 903.1
Public utilities 212.4 3.5 5.3 210.6
Mortgage-backed securities 84.3 2.4 .6 86.1
State and local obligations 8.2 .7 - 8.9
Total held for investment 1,205.9 28.5 25.7 1,208.7
Available for sale
Corporate securities 261.3 9.1 4.8 265.6
Public utilities 21.5 .4 .6 21.3
Mortgage-backed securities 60.4 2.7 .8 62.3
U.S. government securities 61.6 1.7 .9 62.4
State and local obligations 5.1 - - 5.1
Foreign securities 25.8 - 1.4 24.4
Total available for sale 435.7 13.9 8.5 441.1
Total fixed maturity
securities $1,641.6 $ 42.4 $ 34.2 $1,649.8
</TABLE>
At March 31, 1994, the carrying value of short-term investments,
principally U.S. Treasury securities and commercial paper, approximates
market value.
Investment Income of Insurance Operations
Investment income consists of the following:
(In Millions)
March 31,
1994 1993
Income from fixed maturity
securities $ 31.2 $ 27.2
Income from equity securities - .2
Gross investment income 31.2 27.4
Investment expenses (.7) (.5)
Net investment income $ 30.5 $ 26.9
6<PAGE>
<PAGE>
Income from fixed maturity securities includes income from
short-term investments.
Realized gains (losses) consist of the following:
March 31,
1994 1993
Gross realized gains on:
Fixed maturity securities $ .8 $ 5.5
Gross realized losses on:
Fixed maturity securities (.3) (.1)
Net realized gains (losses) $ .5 $ 5.4
For the three months ended March 31, 1994, proceeds from sales
of fixed maturity securities, excluding proceeds from sales at or
near maturity totalled $10.0 million, of which $4.3 million were from
securities classified as available for sale and $5.7 million were
from securities classified as held for investment. All of the held
for investment securities were sold as a result of deterioration in
the issuers' credit rating. The gross realized gains (losses)
attributable to these sales were:
Fixed Maturity Securities
Available For Held For
Sale Investment
Gross realized gains $ .1 $ .2
Gross realized loss (.1) (.1)
Net realized gains (losses) $ - $ .1
Proceeds from sales of investments in fixed maturity securities for
the three months ended March 31, 1993, excluding proceeds from sales
at or near maturity, totaled $57.6 million.
Reinsurance
The insurance operations assume and cede a portion of their
written business with other insurance companies in the normal course
of business. To the extent that any reinsuring companies are unable
to meet their obligations under agreements covering reinsurance
ceded, the Company's insurance subsidiaries would remain liable.
Amounts deducted from insurance losses and loss adjustment expenses
and net written and earned premiums in connection with reinsurance
ceded to affiliates and non-affiliated companies, as well as amounts
included in net written and earned premiums for reinsurance assumed
from affiliates and non-affiliated companies, were as follows:
(In Millions)
Three Months Ended March 31, 1994 1993
Reinsurance ceded:
Premiums written $ 4.7 $ 1.8
Premiums earned 3.7 1.7
Incurred losses and loss adjustment
expenses 1.7 (.8)
Reinsurance assumed:
Premiums written 50.9 38.6
Premiums earned 40.6 25.9
Substantially all of the policies written in the workers'
compensation insurance operations during 1994 and 1993 were eligible
for policyholder dividend consideration.
7<PAGE>
<PAGE>
4. PARENT COMPANY INVESTMENTS
Amortized cost, gross unrealized gains and losses and market
values of the Parent Company investments in fixed maturity securities
held for investment, other than the General Cable Notes, are
presented in the table below.
At March 31, 1994 the carrying value of unrated or less than
investment grade corporate securities, other than the General Cable
Notes, totalled $52.5 million, substantially all of which did not
have readily available market values.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
March 31, 1994 Cost Gains Losses Value
<S> <C> <C> <C> <C>
(In Millions)
Corporate securities $ 177.9 $ 1.5 $ 2.0 $ 177.4
Public utilities 25.0 - .3 24.7
U.S. government securities 26.6 - .1 26.5
Mortgage-backed securities .9 - - .9
Other debt securities 52.3 - - 52.3
Total fixed maturity
securities $ 282.7 $ 1.5 $ 2.4 $ 281.8
</TABLE>
The carrying value of short-term investments, principally U.S.
Treasury securities and commercial paper, approximates market value.
5. DEBT
On March 25, 1994, the Company redeemed all of the outstanding
$16.2 million principal amount of its 9 1/2 percent subordinated
debentures due August 1, 2002 at the redemption price of 100 percent
of the principal amount of each debenture plus accrued and unpaid
interest to the redemption date.
<PAGE>
6. CHANGES IN COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gains
Common Stock Capital Retained (Losses) On
(Dollars in Millions) Shares Amount Surplus Earnings Investments Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 47,446,094 $ 47.4 $746.2 $912.3 $16.4 $1,722.3
Net income (loss) - - (55.9) - (55.9)
Dividends declared on
Common Stock - - (10.5) - (10.5)
Purchases of Company
Common Stock (44,219) - (1.5) - - (1.5)
Exercise of stock options 96,322 .1 1.7 - - 1.8
Issuance of Common Stock
under ESPP 4,022 - .1 - - .1
Change in net unrealized gains
(losses) on investments - - - (12.6) (12.6)
Other, net - .4 - - .4
Balance, March 31, 1994 47,502,219 $ 47.5 $746.9 $845.9 $ 3.8 $1,644.1
</TABLE>
8<PAGE>
<PAGE>
7. EARNINGS PER SHARE
Earnings per share for the three month period ended March 31,
1994 are calculated on the basis of the weighted average number of
shares of common stock outstanding during the period and the dilutive
effect of assumed conversion of common stock equivalents (stock
options and career shares). For the three month period ended March
31, 1993, the potential dilution represented by shares issuable from
the exercise of outstanding stock options and conversion of
outstanding Career Shares, was less than three percent and is
therefore not reflected in the earnings per share presentation for
such period.
8. INCOME TAXES
The Company's substantial tax loss carryforwards and temporary
differences give rise to deferred tax assets. Based on an analysis
of the likelihood of realizing the Company's gross deferred tax asset
(taking into consideration applicable statutory carryforward
periods), the Company has determined that the recognition criteria
set forth in SFAS No. 109, "Accounting For Income Taxes", are not met
for the entire gross deferred tax asset and, accordingly, the gross
deferred tax asset is reduced by a valuation allowance. The analysis
of the likelihood of realizing the gross deferred tax asset is
reviewed and updated periodically. Any required adjustments to the
valuation allowance are made in the period in which the developments
on which they are based become known. Results for the 1993 first
quarter include a $15 million tax benefit attributable to such an
adjustment.
Components of the provision for income tax benefit (expense)
were as follows:
(In Millions)
Three Months Ended
March 31,
1994 1993
Current
Federal $ (.7) $ (.6)
Foreign, state & local (.3) (.2)
Total current (1.0) (.8)
Deferred
Federal (7.9) 5.3
Foreign, state & local - -
Total deferred (7.9) 5.3
Total $ (8.9) $ 4.5
Consolidated income tax benefit (expense) differs from the
amount computed using the United States statutory income tax rate for
the reasons set forth in the following table:
(In Millions)
Three Months Ended
March 31,
1994 1993
Income (loss) before income taxes $(47.0) $ 26.6
Expected tax benefit (expense) at
U.S. statutory income tax rate $ 16.5 $ (9.0)
Amortization of goodwill (.9) (.9)
Revision to valuation allowance - 15.0
Loss disallowance (24.6) -
Other, net .1 (.6)
Consolidated income tax benefit
(expense) $ (8.9) $ 4.5
9<PAGE>
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
Claims are pending against the Company for reimbursement of
clean-up costs under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") for alleged contamination
caused by release of polychlorinated biphenyls at the Paoli,
Pennsylvania railyard ("Paoli Yard") formerly owned by the Company's
railroad predecessor, Penn Central Transportation Company ("PCTC").
A Record of Decision was issued by the U.S. Environmental Protection
Agency on July 21, 1992 presenting a final selected remedial action
for the Paoli Yard in accordance with CERCLA having an estimated cost
of approximately $28.3 million. In March 1992, the Company filed a
lawsuit seeking to enjoin the U.S. Government, Consolidated Rail
Corporation ("Conrail") and other parties from prosecuting claims
against the Company for such clean-up costs on the grounds that the
Paoli Yard environmental claims are barred by: (1) the terms by which
the Paoli Yard was transferred by PCTC to Conrail "as is" in 1976
pursuant to the Regional Rail Reorganization Act of 1973 (the "Rail
Act"); (2) the 1980 settlement of the Valuation Case proceedings to
determine compensation to be paid by the U.S. Government for the
railroad properties transferred by PCTC pursuant to the Rail Act; and
(3) the U.S. Constitution. In addition, the Company believes that it
has other substantial defenses to claims for clean-up costs at the
Paoli Yard, including its position that other parties are responsible
for substantial percentages of such clean-up costs, and the Company
intends to make claims against certain insurance carriers for
reimbursement of any clean-up costs that the Company may incur. The
Company has not established any accrual for potential liability for
clean-up costs at the Paoli Yard.
There are certain other claims involving the Company and certain
of its subsidiaries, including claims relating to the generation,
disposal or release into the environment of allegedly hazardous
substances and pre-reorganization personal injury claims, that allege
or involve amounts that are potentially substantial in the aggregate.
The Paoli Yard litigation and the preponderance of the other
claims arose out of railroad operations disposed of by PCTC prior to
its 1978 reorganization and, accordingly, any ultimate liability
resulting therefrom in excess of previously established loss accruals
would be attributable to such pre-reorganization events and
circumstances. In accordance with the Company's reorganization
accounting policy, any such ultimate liability will reduce the
Company's capital surplus and shareholders' equity, but will not be
charged to income.
The Company believes that its maximum aggregate potential
exposure at March 31, 1994 with respect to the foregoing
environmental claims (other than Paoli Yard), net of related loss
accruals, was approximately $15 million for claims arising out of
pre-reorganization operations and in the range of $1 million to $4
million for claims arising out of post-reorganization operations
(which range depends upon the method of remediation, if any,
required). The Company believes that it has meritorious defenses in
such matters, including its position that other parties are
responsible for substantial percentages of such amounts claimed and,
in the case of the post-reoganization matter referred to above, its
belief that the relevant regulatory authority will permit remediation
to be deferred until there is a change in the use of the facility
which the Company believes is unlikely.
In management's opinion, the outcome of the foregoing claims
will not, individually or in the aggregate, have a material adverse
effect on the financial condition or results of operations of the
Company. In making this assessment, management has taken into
account previously established loss accruals in its financial
statements and probable recoveries from insurance carriers and other
third parties.
10PAGE
<PAGE>
10. STATEMENT OF CASH FLOWS
During the three month periods ended March 31, 1994 and 1993,
state and other income taxes paid were $1.2 million and $2.1 million,
respectively. For each of the same periods, interest paid, net of
amounts capitalized, was $10.6 million.
On March 31, 1993, General Cable elected to pay 100 percent, or
$19.1 million, of the interest due on that date on its subordinated
note (the "General Cable Note") with an additional 9.98 percent
subordinated note ("Interest Note") in lieu of cash. This non-cash
transaction, which increased the Parent Company's investments and
decreased accrued interest receivable, was not included in the
statement of cash flows.
11PAGE
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis is provided to assist the
reader in understanding the Company's financial condition as of March
31, 1994 and December 31, 1993 and its results of operations for the
three months ended March 31, 1994 and 1993. Amounts presented in the
discussion and analysis relate only to continuing operations unless
otherwise indicated.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
(Dollars in millions,
except per share amounts)
March 31, December 31,
1994 1993
<S> <C> <C>
Cash, Parent Company short-term investments
and Parent Company fixed maturity securities $ 684.0 $ 669.2
Deduct items not readily available for
corporate purposes:
Cash held by the insurance operations (25.0) (23.2)
Securities held in bank escrow accounts (20.3) (20.2)
Private placement notes (52.3) (14.6)
Cash, temporary investments and marketable
securities $ 586.4 $ 611.2
Total debt as a percentage of total
capital 23% 23%
Book value per share of Common Stock $ 34.61 $ 36.30
</TABLE>
The Company's Federal income tax loss carryforward is available
to offset taxable income and, as a result, the Company's requirement
to pay current Federal income tax is substantially eliminated. The
$24.8 million decrease during the three months ended March 31, 1994
in the cash, temporary investments and marketable securities included
in the preceding table was principally attributable to period to
period variations in the timing of tax allocation payments to the
Parent Company from the insurance operations.
Net Cash Provided by Operating Activities
During the three months ended March 31, 1994, cash provided by
continuing operating activities was $69.0 million, an increase of
$15.5 million as compared with the same period in 1993. This
increase resulted primarily from an increase in the insurance
operations' operating cash flow at the workers' compensation
insurance operations ("Republic Indemnity") and the non-standard
private passenger automobile insurance companies (the "NSA Group")
primarily due to continued growth in written premiums. Also
contributing to the favorable comparison are payments made during
the first quarter of 1993 on assumed losses on a reinsurance contract
that was terminated at the end of 1993. These favorable variances
were partially offset by lower operating cash flow from the
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LIQUIDITY AND CAPITAL RESOURCES (Continued)
Net Cash Provided by Operating Activities (cont'd)
Company's non-insurance operations. Management expects that the
Company's operating cash flow and financial resources will continue
to be adequate to meet its operating needs in the short-term and
long-term (i.e. more than twelve months) future. Cash flow of the
Company may be influenced by a variety of factors, including changes
in the property and casualty insurance industry, the insurance
regulatory environment and general economic conditions.
During the three months ended March 31, 1994, the insurance
operations generated $88.4 million of operating cash flow,
substantially all of which was retained by the insurance companies to
purchase investments, principally marketable debt securities. During
the same period in 1993, the insurance operations generated $69.0
million of operating cash flow, substantially all of which was
retained by the insurance companies to purchase investments.
The Company's insurance operations are subject to state
regulations which limit, by reference to specified measures of
statutory operating results and policyholders' surplus, the dividends
that can be paid to the Parent Company without prior regulatory
approval. Under these restrictions, the maximum amount of dividends
which can be paid to the Parent Company during 1994 by these
subsidiaries is $96.5 million.
Investing and Financing Activities
During the three months ended March 31, 1994, maturities of the
Parent Company investment portfolio (net of purchases of investments)
provided $28.9 million, including the cash received from General
Cable as a partial principal payment on the General Cable Notes. For
a description of this transaction, see Note 2 of Notes to Financial
Statements. The Company also received $9.8 million from the sale of
one of its industrial businesses. During this same period, the
Company used $16.2 million to redeem all of its outstanding 9 1/2
percent subordinated debentures and $10.1 million for the payment of
Common Stock dividends. The Company's insurance operations made net
purchases of investments of $84.0 million during the first three
months of 1994. During the same 1993 period, maturities of the
Parent Company investment portfolio (net of purchases of investments)
provided $19.4 million and the Company received $9.4 million from the
issuance of shares of Company Common Stock pursuant to the exercise
of stock options. The Company used cash of $9.5 million for the
payment of Common Stock dividends and $3.7 million for the purchase
of an investment in an insurance company located in the United
Kingdom. During the first three months of 1993, the Company's
insurance operations made net purchases of investments of $71.0
million.
On May 5, 1994, the Company announced that it will be paid
$169.8 million in cash for the General Cable Notes owned by it and
approximately $6.9 million for its shares of General Cable common
stock as part of an agreement for the purchase of all of the
outstanding shares of General Cable by Wassall. In addition, the
Company will receive $27.4 million, subject to the adjustment as set
forth in Note 2 of Notes to Financial Statements, in cash from
Wassall to assume responsibility for certain actual and potential
environmental and other liabilities principally associated with
businesses recently sold by General Cable. The Company managed these
liabilities prior to the spin-off of General Cable to Company
shareholders in July of 1992 and believes that the funds to be
received will be sufficient to permit it to discharge such
liabilities. Including this transaction and all prior payments by
General Cable, the Company will have received approximately 76
percent of all amounts owed to it, including accrued interest, by
General Cable since its spin-off. For further information on this
transaction, see Note 2 of Notes to Financial Statements.
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LIQUIDITY AND CAPITAL RESOURCES (Continued)
Investing and Financing Activities (cont'd)
On March 31, 1994, General Cable elected to pay 100 percent, or
$12.0 million, of the interest due on that date on the General Cable
Note with an Interest Note in lieu of cash. This Interest Note is
included with the General Cable Notes to be sold to Wassall by the
Company.
At March 31, 1994, the Parent Company investment portfolio held
unrated or less than investment grade corporate debt securities,
excluding the General Cable Notes, with carrying values of $52.5
million. At that date, the Company's
insurance operations held $118.6 million of such unrated or less than
investment grade debt securities and preferred stocks. The Company
continues to limit its investment in unrated or less than investment
grade securities of any one issuer and regularly monitors the
condition of the issuers and their industries. At March 31, 1994,
the largest investment of the Company and its insurance operations in
such securities of any one issuer, excluding the General Cable and
Rowan notes, totaled $10.4 million.
During the three months ended March 31, 1994, the Company's
continuing operations did not have large capital spending
requirements. The Company presently has no plans or commitments for
material capital expenditures.
Borrowing Facilities and Debt Obligations
At March 31, 1994, the Company's total debt to total capital
ratio of 23 percent was unchanged from year-end 1993. Total capital
as defined for this ratio consists of debt, minority interests in
subsidiaries and common shareholders' equity.
RESULTS OF OPERATIONS
Analysis of Continuing Operations
The Company reported a loss from continuing operations for the
1994 first quarter of $55.9 million, or $1.16 per share. Results for
the quarter include a net realized capital loss of $75.2 million, or
$1.52 per share, principally from the anticipated disposal of the
General Cable Notes owned by the Company. The Company's first
quarter earnings do not include any accrued interest income on the
General Cable Notes. Income from continuing operations, excluding
the net realized capital loss, was $17.5 million, or $.36 per share.
Income from continuing operations for the 1993 first quarter was
$31.1 million, or $.67 per share, which included net realized capital
gains from sales of investments and subsidiaries of $3.7 million, or
$.05 per share, and $15 million, or $.32 per share, from a deferred
tax benefit attributable to an increase in the estimated realizable
value of the Company's net deferred tax asset. Income from
continuing operations, excluding realized capital gains and the
deferred tax benefit, was $13.8 million, or $.30 per share. In
addition, the 1993 results included $6.4 million, or $.09 per share,
of interest income on the General Cable Notes.
Revenues in the Insurance segment increased to $388.4 million
for the first quarter of 1994 as compared with $303.4 million for the
same period in 1993 primarily due to an increase in earned premiums
at both the NSA Group and Republic Indemnity. Investment income
before realized gains and losses on sales of investments in the
insurance operations' portfolio also increased due to higher average
investment balances, partially offset by a decrease in the average
yield. Operating income for the first three months of 1994 increased
to $40.5 million as compared with $38.5 million in 1993, primarily
due to increases in underwriting profit at Republic Indemnity and the
NSA Group and higher investment income, partially offset by lower net
realized gains. Net realized gains from
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sales of investment securities in the insurance operations' portfolio
totaled $.5 million for the first quarter of 1994 compared with $5.4
million for the same period in 1993. The combined ratio for the
Insurance segment was 96.5 percent and 96.6 percent, respectively,
for the three months ended March 31, 1994 and
1993.
The following table presents certain information with respect to
the NSA Group's insurance operations.
(Dollars in Millions)
Three Months Ended March 31, 1994 1993
Net Written Premiums $275.3 $201.2
Net Earned Premiums $245.5 $167.3
Loss and Loss Adjustment Expense ("LAE") 180.3 120.0
Underwriting Expenses 58.9 41.8
Underwriting Profit $ 6.3 $ 5.5
GAAP Ratios:
Loss and LAE Ratio 73.4% 71.7%
Underwriting Expense Ratio 24.0 25.0
Combined Ratio 97.4% 96.7%
The NSA Group reported earned premiums of $245.5 million and
underwriting profit of $6.3 million for the first quarter of 1994 as
compared with 1993 first quarter amounts of $167.3 million and $5.5
million, respectively. The growth in net written premiums of 37
percent was principally due to increased market penetration in its
existing states and the acquisition of Leader National Insurance
Company in the second quarter of 1993. The increase in underwriting
profit was mainly attributable to the continued growth in earned
premiums, partially offset by an increase in the frequency and
severity of losses resulting from storm related activity in several
midwestern and southeastern states. The combined ratio for the NSA
Group was 97.4 percent for the first quarter of 1994, as compared
with 96.7 percent for the same period in 1993.
The following table presents certain information with respect to
Republic Indemnity's insurance operations.
(Dollars in Millions)
Three Months Ended March 31, 1994 1993
Net Written Premiums $120.0 $112.4
Net Earned Premiums $111.4 $101.0
Loss and LAE 53.3 64.4
Underwriting Expenses 19.2 15.8
Policyholder Dividends 33.0 17.1
Underwriting Profit $ 5.9 $ 3.7
GAAP Ratios:
Loss and LAE Ratio 47.9% 63.8%
Underwriting Expense Ratio 17.2 15.6
Policyholder Dividend Ratio 29.6 16.9
Combined Ratio 94.7% 96.3%
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Republic Indemnity reported first quarter earned premiums of $111.4
million and $101.0 million for 1994 and 1993, respectively. An
underwriting profit of $5.9 million was reported for the first three
months of 1994, as compared with $3.7 million for the same period in
1993. Republic Indemnity has continued to experience growth in
earned and net written premiums due to its favorable competitive
position in the industry. However, the rate of such growth has
declined relative to the 1993 period partly due to mandatory premium
rate reductions of 7 percent and 12.7 percent which took effect July
16, 1993 and January 1, 1994, respectively. The impact of the
January 1, 1994 rate reduction, which is applicable only to new and
renewal policies entered into on and after January 1, 1994, was not
fully reflected in the 1994 first quarter results. Furthermore,
competitive pressure in the California workers' compensation
insurance market is increasing and there can be no assurance that
increases in written and earned premiums will continue in 1994.
Republic Indemnity had a combined ratio of 94.7 percent for the first
quarter of 1994, compared with 96.3 percent for the same period in
1993. The decrease in the combined ratio for the 1994 first quarter
was mainly attributable to favorable loss development relating to
prior years' claims activity, partially offset by a corresponding
increase in reserves for policyholder dividends.
Interest and Dividend Income
Interest and dividend income of the Parent Company investments
decreased $6.8 million in the first quarter of 1994, as compared with
the same period in 1993, due primarily to the exclusion of interest
income on the General Cable Notes as a result of the pending sale of
General Cable. Interest income on the General Cable Notes for the
first quarter of 1993 was $6.4 million.
Interest and Debt Expense
Interest expense decreased $3.7 million for the three month period
ended March 31, 1994, compared to the same period in 1993, primarily
due to the Company's redemption of all $133.3 million principal
amount of its 11 percent subordinated debentures during the 1993
third quarter.
Other expense (income) - net
Other expense (income) - net consists of the following:
(In Millions)
Three Months Ended
March 31,
1994 1993
Settlement of claims and
contingencies, net $ - $ 2.2
Taxes, other than income 1.7 1.7
Minority interests in earnings
of consolidated subsidiaries .1 (.4)
Other (.8) .9
$ 1.0 $ 4.4
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Income Taxes
For the first quarter of 1994, the Company recorded income tax
expense of $8.9 million as compared with an income tax benefit of
$4.5 million for the same period in 1993. The 1993 benefit was
attributable to an increase of $15.0 million in the Company's net
deferred tax asset due to revisions to the estimated future taxable
income during the Company's tax loss carryforward period.
Management believes that it is more likely than not that the net
deferred tax asset at March 31, 1994 will be realized primarily
through the generation of taxable income during the loss carryforward
period. This belief derives from an analysis of estimated future
taxable income based on certain assumptions concerning future events
during the loss carryforward period. The estimate of future taxable
income used in determining the net deferred tax asset is not
necessarily indicative of the Company's future results of operations.
As is the case with any estimate of future results, there will be
differences between assumed and actual economic and business
conditions of future periods. Moreover, the estimate may also be
affected by unpredictable future events, including but not
necessarily limited to changes in the Company's capital structure and
future acquisitions and dispositions. Therefore, the analysis of
estimated future taxable income will be reviewed and updated
periodically, and any required adjustments, which may increase or
decrease the net deferred tax asset, will be made in the period in
which the developments on which they are based become known.
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PART II - OTHER INFORMATION
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K filed during the quarter ended March 31,
1994:
None
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
AMERICAN PREMIER UNDERWRITERS, INC.
(Registrant)
Date: May 13, 1994 By /s/ R. F. Amory
R. F. Amory
Vice President and Corporate Controller
(Principal Accounting Officer and
duly Authorized Signatory)
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