PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF INCOME
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues
Insurance operations
Premiums earned $ 377.5 $ 391.3 $ 759.4 $ 748.7
Net investment income 37.0 31.7 74.5 62.2
Net realized gains 3.3 1.3 3.8 1.8
Equity in net earnings
of investee corporations 1.6 - 1.6 -
Other operations
Net sales 3.7 37.1 7.2 75.1
Interest and dividend income 16.6 8.5 27.2 15.6
Provision for loss on
sale of General Cable
Corporation securities - - - (75.8)
Net realized gains (losses) (1.7) - (2.4) .1
438.0 469.9 871.3 827.7
Expenses
Insurance operations
Losses 262.2 236.9 511.7 434.5
Loss adjustment expenses 46.5 37.3 84.0 73.6
Commissions and other
insurance expenses 84.9 88.8 174.7 169.8
Policyholder dividends (1.9) 18.9 5.1 51.9
Other operations
Cost of sales 1.3 17.4 2.7 35.8
Interest and debt expense 13.1 13.2 26.3 26.8
Other operating and
general expenses 9.8 28.8 18.5 53.7
415.9 441.3 823.0 846.1
Earnings (loss) before income taxes 22.1 28.6 48.3 (18.4)
Income tax expense (8.5) (12.0) (18.4) (20.9)
Net earnings (loss) from
continuing operations 13.6 16.6 29.9 (39.3)
Loss on disposal of
discontinued operations - (1.4) - (1.4)
Extraordinary loss (4.1) - (4.1) -
Net earnings (loss) $ 9.5 $ 15.2 $ 25.8 $ (40.7)
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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PAGE
<PAGE>
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEET
(In Millions)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
<S> <C> <C>
Assets
Investments held by insurance operations
Fixed maturity securities
Held for investment - stated at amortized cost
(market $1,138.8 and $1,244.5) $1,116.3 $1,317.9
Available for sale - stated at market
(cost $739.6 and $524.1) 762.5 501.0
Short-term investments 41.5 51.7
Investment in investee corporation 45.1 -
1,965.4 1,870.6
Parent Company investments
Fixed maturity securities
Held for investment - stated at amortized cost
(market $ - and $271.5) - 279.3
Available for sale - stated at market
(cost $98.0 and $328.0) 97.8 323.4
Short-term investments 5.8 199.1
Equity in affiliates 11.6 11.7
Amounts due from affiliates 538.7 -
653.9 813.5
Cash 31.3 36.7
Accrued investment income 35.9 46.6
Agents' balances and premiums receivable 356.0 343.8
Reinsurance receivable 53.2 52.7
Other receivables 29.7 42.2
Deferred policy acquisition costs 97.3 92.1
Cost in excess of net assets acquired 392.9 394.5
Deferred tax asset 243.9 267.7
Other assets 197.1 233.6
Total $4,056.6 $4,194.0
Liabilities And Common Shareholders' Equity
Unpaid losses and loss adjustment expenses $1,156.9 $1,130.9
Policyholder dividends 79.2 102.4
Unearned premiums 472.8 440.2
Debt 422.1 507.3
Minority interests in subsidiaries - 6.2
Accounts payable and other liabilities 404.6 458.3
Total liabilities 2,535.6 2,645.3
Common Stock 47.0 46.3
Capital surplus 578.7 662.2
Retained earnings (from October 25, 1978) 881.2 867.5
Net unrealized gains (losses) on investments 14.1 (27.3)
Total common shareholders' equity 1,521.0 1,548.7
Total $4,056.6 $4,194.0
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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<PAGE>
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CASH FLOWS
(In Millions)
<TABLE>
<CAPTION> Six Months ended
June 30,
1995 1994
<S> <C> <C>
Cash flows of operating activities:
Net earnings (loss) from continuing operations $ 29.9 $ (39.3)
Adjustments to reconcile earnings from continuing
operations to net cash provided by continuing activities
Deferred Federal income tax 15.9 18.5
Equity in net earnings of investee corporations (1.6) -
Depreciation, depletion and amortization 13.0 14.5
Net (gain) loss on disposals of businesses,
investments and property, plant and equipment (.8) 70.9
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures of businesses
Increase in receivables (12.9) (47.0)
Increase in other assets (4.2) (5.5)
Decrease in accounts payable and other liabilities (9.7) (11.5)
Increase in unpaid losses and loss
adjustment expenses 25.8 69.2
Increase (decrease) in policyholder dividends (23.2) 7.6
Increase in unearned premiums 33.7 60.6
Dividends from investees .2 -
Other, net 3.2 (.2)
Net cash flows of operating activities 69.3 137.8
Cash flows of investing activities:
Purchases of available for sale investments (153.1) (52.6)
Maturities and sales of available for sale investments 660.0 36.9
Purchases of held for investment securities (101.9) (236.7)
Maturities of held for investment securities 38.3 105.1
Purchases of short-term investments - (180.0)
Sales and maturities of short-term investments 140.5 73.9
Net (increase) decrease in short-term investments 63.3 (5.5)
Sales of businesses 20.7 33.4
Sale of General Cable Corporation notes - 146.9
Acquisitions of businesses, net of cash acquired (13.4) -
Capital expenditures (6.9) (14.3)
Other, net (.4) (.5)
Net cash flows of investing activities 647.1 (93.4)
Cash flows of financing activities:
Repayment of debt (89.4) (17.1)
Common Stock dividends (21.7) (20.3)
Exercise of stock options and conversion of career shares .5 13.9
Purchases of Company Common Stock (87.6) (16.3)
Net advances (to) from affiliates (523.2) -
Other, net (.4) 4.0
Net cash flows of financing activities (721.8) (35.8)
Increase (decrease) in cash (5.4) 8.6
Cash - beginning of year 36.7 32.4
Cash - end of period $ 31.3 $ 41.0
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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<PAGE>
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND BASIS OF PRESENTATION
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, 1994. Results for the three months and six months
ended June 30, 1995 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 and six months ended June 30, 1994 have been reclassified to
conform to the current presentation.
2. ACQUISITION OF AMERICAN FINANCIAL CORPORATION
On April 3, 1995, the Company became a wholly owned subsidiary of
American Premier Group, Inc., a new corporation formed by the Company for
the purpose of acquiring all of the common stock of American Financial
Corporation (the "Acquisition"). On June 9, 1995, American Premier Group
changed its name to American Financial Group, Inc. ("AFG"). Under the
terms of the Acquisition, (a) the Company merged with a subsidiary of AFG
(the "Merger") and each share of Company Common Stock then outstanding was
converted into one share of AFG Common Stock, and (b) American Financial
Corporation ("AFC") merged with another subsidiary of AFG and all shares
of AFC common stock were exchanged for 28.3 million shares of AFG Common
Stock. As a result of the Acquisition, all of the common stock of the
Company and AFC is owned by AFG and AFG is the Company's successor as the
issuer of publicly held common stock.
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<PAGE>
3. INSURANCE OPERATIONS
Investments of Insurance Operations
The insurance operations' investments in fixed maturity securities
at June 30, 1995 consisted of the following:
<TABLE>
<CAPTION> Gross Gross
Amortized Unrealized Unrealized Market
(In Millions) Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held for investment
Corporate securities $ 838.5 $ 26.9 $ 9.3 $ 856.1
Public utilities 168.4 4.5 1.4 171.5
Mortgage-backed securities 92.8 1.3 .2 93.9
State and local obligations 8.0 .8 - 8.8
Foreign securities 8.6 .1 .2 8.5
Total held for investment 1,116.3 33.6 11.1 1,138.8
Available for sale
Corporate securities 518.2 25.3 6.1 537.4
Public utilities 46.0 .7 .8 45.9
Mortgage-backed securities 58.5 2.1 .4 60.2
U.S. government securities 78.9 2.9 .5 81.3
State and local obligations 2.3 - - 2.3
Foreign securities 50.5 .2 .5 50.2
Total available for sale 754.4 31.2 8.3 777.3
Total fixed maturity
securities $1,870.7 $ 64.8 $ 19.4 $1,916.1
</TABLE>
In connection with the Acquisition, fixed maturity securities of the
insurance operations classified as held for investment at April 3, 1995
with a carrying value of $274.1 million (market value of $269.0 million)
were reclassified as available for sale. Proceeds and net realized gains
from sales of certain of these securities during the 1995 second quarter
totalled $56.6 million and $2.3 million, respectively.
At June 30, 1995, the insurance operations' investments included
unrated or less than investment grade corporate securities with a carrying
value of $118.1 million (market value $116.1 million). Investments of
insurance operations include a net payable for securities purchased but not
settled of $14.8 million at June 30, 1995.
At June 30, 1995, short-term investments consisted principally of
U.S. Treasury securities and commercial paper.
The insurance operations investment in investee corporation reflects
the Company's 6 percent ownership (3.2 million shares) of the common stock
of Chiquita Brands International ("Chiquita") which is accounted for under
the equity method. AFG and its other subsidiaries own an additional 39
percent interest in the common stock of Chiquita. Chiquita is a leading
international marketer, processor and producer of quality food products.
The market value of the Company's investment in Chiquita was approximately
$45.3 million at June 30, 1995.
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<PAGE>
Investment Income of Insurance Operations
Investment income consists of the following:
<TABLE>
<CAPTION> (In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Income from fixed maturity
securities $ 37.8 $ 32.7 $ 76.1 $ 63.9
Investment expenses (.8) (1.0) (1.6) (1.7)
Net investment income $ 37.0 $ 31.7 $ 74.5 $ 62.2
</TABLE>
Income from fixed maturity securities includes income from short-term
investments.
Realized gains (losses) consist of the following:
<TABLE>
<CAPTION> (In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Gross realized gains on:
Fixed maturity securities $ 5.0 $ 1.9 $ 5.6 $ 2.7
Gross realized losses on:
Fixed maturity securities (1.7) (.6) (1.8) (.9)
Net realized gains (losses) $ 3.3 $ 1.3 $ 3.8 $ 1.8
</TABLE>
For the three months and six months ended June 30, 1995, proceeds from
sales of fixed maturity securities, excluding proceeds from sales at or near
maturity, totalled $140.3 million and $163.3 million, respectively, all of
which were from securities classified as available for sale. For the three
months and six months ended June 30, 1994, proceeds from sales of fixed
maturity securities totalled $29.7 million and $39.7 million, respectively,
of which $23.8 million and $28.1 million, respectively, were from securities
classified as available for sale and $5.9 million and $11.6 million,
respectively, were from securities classified as held for investment. All
such sales of the held for investment securities were made as a result of
deterioration in the issuers' credit rating.
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<PAGE>
The gross realized gains (losses) attributable to sales of fixed maturity
securities, excluding sales at or near maturity, were:
<TABLE>
<CAPTION> (In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Available for sale:
Gross realized gains $ 4.9 $ .7 $ 5.5 $ .8
Gross realized losses (1.7) (.6) (1.8) (.7)
3.2 .1 3.7 .1
Held for investment:
Gross realized gains $ - $ 1.1 $ - $ 1.3
Gross realized losses - - - (.1)
- 1.1 - 1.2
Net realized gains (losses) $ 3.2 $ 1.2 $ 3.7 $ 1.3
</TABLE>
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 affiliated and non-affiliated companies, as well as
amounts included in net written and earned premiums for reinsurance assumed
from affiliated and non-affiliated companies, were as follows:
<TABLE>
<CAPTION> (In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Reinsurance ceded:
Premiums written
Affiliates $ - $ - $ - $ -
Non-affiliates 4.3 5.2 9.5 9.9
Premiums earned
Affiliates - - - -
Non-affiliates 4.3 5.8 9.0 9.5
Incurred losses and
loss adjustment expenses
Affiliates .6 (1.1) .7 (1.5)
Non-affiliates 1.7 6.9 6.0 9.0
Reinsurance assumed:
Premiums written
Affiliates 37.0 46.6 75.5 87.3
Non-affiliates 4.9 7.4 10.1 17.6
Premiums earned
Affiliates 20.5 35.7 46.3 58.8
Non-affiliates 7.4 11.4 15.6 28.9
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<PAGE>
Other
During the six months ended June 30, 1995 and 1994, approximately 45
percent and 95 percent, respectively, of net written premiums in the workers'
compensation insurance operations were for policies eligible for policyholder
dividend consideration.
4. PARENT COMPANY INVESTMENTS
The Parent Company investments in fixed maturity securities at June 30,
1995 consisted of the following:
</TABLE>
<TABLE>
<CAPTION> Gross Gross
Amortized Unrealized Unrealized Market
(In Millions) Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available for sale
Corporate securities $ 68.8 $ .8 $ .9 $ 68.7
Public utilities .3 - - .3
Mortgage-backed securities .2 - - .2
U.S. government securities 28.7 - .1 28.6
Total fixed maturity
securities $ 98.0 $ .8 $ 1.0 $ 97.8
</TABLE>
In connection with the Acquisition, all Parent Company fixed maturity
securities classified as held for investment at April 3, 1995 with a carrying
value of $273.0 million (market value of $268.3 million) were reclassified as
available for sale. Proceeds and net realized losses from sales of certain
of these securities during the 1995 second quarter totalled $135.5 million and
$2.3 million, respectively.
At June 30, 1995, short-term investments consisted principally of U.S.
Treasury securities and commercial paper.
At June 30, 1995, the carrying value of unrated or less than investment
grade corporate securities, totalled $23.1 million.
For the three months and six months ended June 30, 1995, proceeds from
sales of Parent Company investments in fixed maturity securities, excluding
proceeds from sales at or near maturity, totalled $299.8 million and $482.7
million, respectively, all of which were from securities classified as
available for sale. The net realized losses attributable to such sales were
$1.7 million and $2.4 million, respectively.
Subsequent to the Acquisition, the Company entered into a subordinated
credit agreement with AFC under which the Company will make loans available
to AFC of up to $675 million (the "Subordinated Credit Agreement"). The credit
line bears interest at 11 5/8 percent and converts to a four-year term loan
in March 2005 with scheduled principal payments to begin in April 2005. At
June 30, 1995 loans outstanding and accrued interest receivable under the
Subordinated Credit Agreement totalled $513.0 million and $13.4 million,
respectively.
Also included in amounts due from affiliates at June 30, 1995 are
advances to AFG related primarily to expenses of the Acquisition.
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<PAGE>
5. DEBT
In May 1995, rating agencies downgraded the Company's outstanding $500
million principal amount of subordinated notes (the "Notes"). As a result of
the Acquisition and the subsequent ratings downgrade, the holders of the Notes
had the right (which has since expired) to require the Company to purchase
all or any portion of the Notes on August 10, 1995 at par plus accrued
interest (the "Put Right"). The Put Right was exercised for Notes totalling
approximately $44 million.
During the 1995 second quarter, the Company repurchased $26.0 million of
its 10 5/8 percent subordinated notes and $59.5 million of its 10 7/8 percent
subordinated notes for an average of approximately 104 percent of principal
amount which resulted in an extraordinary loss of $4.1 million.
During the third quarter, the Company repurchased an additional $9.3
million of its 10 7/8 percent subordinated notes.
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, 1994 46,282,157 $ 46.3 $662.2 $867.5 $(27.3) $1,548.7
Net earnings (loss) - - - 25.8 - 25.8
Dividends declared on
Common Stock - - - (12.1) - (12.1)
Purchases of Company
Common Stock (3,259,697) (3.3) (79.5) - - (82.8)
Exercise of stock options 16,582 - .3 - - .3
Issuance of Common Stock
under ESPP 4,239 - .1 - - .1
Change in net unrealized
gains (losses) on
investments - - - - 41.4 41.4
Conversion of shares to
shares of American
Financial Group, Inc. (43,043,281) (43.0) 43.0 - - -
Post-Merger shares
outstanding 47,000,000 47.0 (47.0) - - -
Other, net - - (.4) - - (.4)
Balance, June 30, 1995 47,000,000 $ 47.0 $578.7 $881.2 $14.1 $1,521.0
</TABLE>
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7. 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 Statement of
Financial Accounting Standards ("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.
Components of the provision for income tax expense were as follows:
<TABLE>
<CAPTION> (In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Current
Federal $ (.6) $ (.6) $ (1.3) $ (1.3)
Foreign, state & local (.6) (.8) (1.2) (1.1)
Total current (1.2) (1.4) (2.5) (2.4)
Deferred
Federal (7.3) (10.6) (15.9) (18.5)
Foreign, state & local - - - -
Total deferred (7.3) (10.6) (15.9) (18.5)
Total $ (8.5) $(12.0) $(18.4) $(20.9)
</TABLE>
Consolidated income tax expense differs from the amount computed
using the United States statutory income tax rate for the reasons set forth
in the following table:
<TABLE>
<CAPTION> (In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Earnings (loss) from continuing
operations before income taxes $ 22.1 $ 28.6 $ 48.3 $(18.4)
Expected tax benefit (expense) at
U.S. statutory income tax rate $ (7.7) $(10.1) $(16.9) $ 6.4
Amortization of goodwill (1.0) (1.1) (2.0) (2.0)
Capital loss not utilized - 4.6 - (20.0)
Other, net .2 (5.4) .5 (5.3)
Consolidated income tax expense $ (8.5) $(12.0) $(18.4) $(20.9)
</TABLE>
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<PAGE>
8. COMMITMENTS AND CONTINGENCIES
Pre-Reorganization Contingencies
The following matters arose out of railroad operations disposed of
by the Company's predecessor, Penn Central Transportation Company ("PCTC"),
prior to its bankruptcy reorganization in 1978 and, accordingly, any
ultimate liability arising therefrom in excess of previously established
loss accruals would be attributable to pre-reorganization events and
circumstances. In accordance with the Company's pre-reorganization
accounting policy, any such ultimate liability will reduce the Company's
capital surplus and shareholders' equity, but will not be charged to
income.
USX Litigation
In May 1994, lawsuits were filed against the Company by USX
Corporation ("USX") and its former subsidiary, Bessemer and Lake Erie
Railroad Company ("B&LE"), seeking contribution by the Company, as the
successor to the railroad business conducted by PCTC prior to 1976, for all
or a portion of the approximately $600 million that USX paid in
satisfaction of a judgment against B&LE for its participation in an
unlawful antitrust conspiracy among certain railroads commencing in the
1950's and continuing through the 1970's. The lawsuits argue that USX's
liability for that payment was attributable to PCTC's alleged activities
in furtherance of the conspiracy. On October 13, 1994, the U.S. District
Court for the Eastern District of Pennsylvania enjoined USX and B&LE from
continuing their lawsuits against the Company, ruling that their claims are
barred by the 1978 consummation order issued by that Court in PCTC's
bankruptcy reorganization proceedings. USX and B&LE have appealed the
District Court's ruling to the U.S. Court of Appeals for the Third Circuit.
If the Court of Appeals were to allow these lawsuits to proceed in spite
of the bankruptcy consummation order, the Company believes that it would
prevail on the merits. For further information, see Part II, Item 1 of
this Report.
Environmental Matters
The Company is a party or named as a potentially responsible party
in a number of proceedings and claims by regulatory agencies and private
parties under various environmental protection laws, including the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), seeking to impose responsibility on the Company for hazardous
waste remediation costs at certain railroad sites formerly owned by PCTC
and at certain other sites where hazardous waste allegedly generated by
PCTC's railroad operations is present. It is difficult to estimate the
Company's liability for remediation costs at these sites for a number of
reasons, including the number and financial resources of other potentially
responsible parties involved at a given site, the varying availability of
evidence by which to allocate responsibility among such parties, the wide
range of costs for possible remediation alternatives, changing technology
and the period of time over which these matters develop. Nevertheless, the
Company believes that its previously established loss accruals for
potential pre-reorganization environmental liabilities at such sites are
adequate to cover the probable amount of such liabilities, based on the
Company's estimates of remediation costs and related expenses at such sites
- 11 -
PAGE
<PAGE>
and its estimates of the portions of such costs that will be borne by other
parties. Such estimates are based on information currently available to the
Company and are subject to future change as additional information becomes
available. Such estimates do not assume any recovery from the Company's
insurance carriers, although the Company does intend to seek reimbursement
from certain insurers for such remediation costs as the Company incurs.
In terms of potential liability to the Company, the Company believes
that the most significant such site is the railyard at Paoli, Pennsylvania
("Paoli Yard") which PCTC transferred to Consolidated Rail Corporation
("Conrail") in 1976. A Record of Decision issued by the U.S. Environmental
Protection Agency in 1992 presented a final selected remedial action for
clean-up of polychlorinated biphenyls ("PCB's") at Paoli Yard having an
estimated cost of approximately $28 million. The Company has accrued a
substantial portion of such estimated clean-up costs in its financial
statements (in addition to related expenses) but has not accrued the entire
amount because it believes it is probable that other parties, including
Conrail, will be responsible for substantial percentages of the clean-up
costs by virtue of their operation of electrified railroad cars at Paoli
Yard that discharged PCB's at higher levels than discharged by cars
operated by PCTC.
In management's opinion, the outcome of the foregoing environmental
claims and contingencies will not, individually or in the aggregate, have
a material adverse effect on the financial condition of the Company. In
making this assessment, management has taken into account previously
established loss accruals in its financial statements and probable
recoveries from third parties.
Post-Reorganization Contingencies
In connection with the Company's sale on June 9, 1994 of its General
Cable Corporation subordinated notes and common stock, the Company assumed
responsibility for certain actual and potential environmental and other
liabilities in consideration of a $19.2 million payment to the Company.
On June 30, 1994, the Company established a loss accrual in that amount
in its financial statements. Although it is difficult to estimate future
environmental remediation costs accurately for the reasons discussed above,
the Company believes that the Indemnity Payment will provide sufficient
funds to permit the Company to discharge such liabilities as they become
payable over time.
9. STATEMENT OF CASH FLOWS
During the six month periods ended June 30, 1995 and 1994, state and
other income taxes paid were $2.2 million and $4.4 million, respectively.
For the same periods, interest paid was $27.4 million and $26.8 million,
respectively.
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<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 June 30,
1995 and December 31, 1994 and its results of operations for the three
months and six months ended June 30, 1995 and 1994.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION> (Dollars in Millions)
June 30, December 31,
1995 1994
<S> <C> <C>
Cash, Parent Company short-term investments
and Parent Company fixed maturity securities $ 134.9 $ 838.5
Deduct items not readily available for
corporate purposes:
Cash held by the insurance operations (28.8) (36.3)
Securities held in bank escrow accounts (12.5) (21.2)
Private placement notes (23.6) (23.0)
Cash, short-term investments and marketable
securities $ 70.0 $ 758.0
Total debt as a percentage of total capital 22% 25%
</TABLE>
The Company's Federal income tax loss carryforward is available to
offset taxable income and, as a result, the Company's requirement to
currently pay Federal income tax is substantially eliminated. The $688.0
million decrease during the six months ended June 30, 1995 in the cash,
short-term investments and marketable securities included in the preceding
table was attributable principally to loans made to AFC under the
Subordinated Credit Agreement, the repayment of Company debt and purchases
of Company Common Stock.
Net Cash Provided by Operating Activities
During the six months ended June 30, 1995, cash provided by operating
activities was $69.3 million, a decrease of $68.5 million as compared with
the same period in 1994. This decrease resulted primarily from a decrease
in the insurance operations' operating cash flow at the workers'
compensation insurance operations ("Republic Indemnity") and, to a lesser
extent, the non-standard private passenger automobile insurance companies
(the "NSA Group"). The decrease in operating cash flow at Republic
Indemnity resulted primarily from a decrease in written premiums due to
1994 mandatory premium rate reductions and extremely competitive pricing
in the marketplace resulting from the repeal of the California workers'
compensation minimum rate law effective January 1, 1995. The decrease in
operating cash flow at the NSA Group resulted principally from an increase
in claims payments. Management expects that the Company's operating cash
- 13- PAGE
<PAGE>
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 six months ended June 30, 1995, the insurance operations
generated $93.4 million of operating cash flow, approximately 65 percent
of which was retained by the insurance companies to purchase investments,
principally marketable debt securities. The remainder of the cash provided
by the insurance operations was paid to the Parent Company through
dividends and intercorporate tax allocation payments. During the same
period in 1994, the insurance operations generated $169.4 million of
operating cash flow, 78 percent 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 the remainder of 1995 by these subsidiaries is $67.3
million.
Investing and Financing Activities
During the six months ended June 30, 1995, sales and maturities of
the Parent Company investment portfolio (net of purchases of investments)
provided $707.8 million. The Company also received an aggregate of $20.7
million from the sale of one of its insurance subsidiaries to AFC and from
the sale of one of its industrial businesses. During this same period, the
Company used $513.0 million for loans to AFC under the Subordinated Credit
Agreement, $89.1 million to repurchase a portion of its 10 5/8 percent and
10 7/8 percent subordinated notes, $87.6 million for purchases of shares
of Company Common Stock, $21.7 million for the payment of Common Stock
dividends and $10.2 million for advances to AFG primarily related to
expenses of the Acquisition. The Company's insurance operations made net
purchases of investments of $60.7 million during the first six months of
1995.
During the same 1994 period, net purchases of investments for the
Parent Company investment portfolio totalled $148.8 million. The Company
also used $16.2 million to redeem all of its outstanding 9 1/2 percent
subordinated debentures, $16.3 million for purchases of shares of Company
Common Stock and $20.3 million for the payment of Common Stock dividends.
During this same period, the Company received $146.9 million as partial
consideration from the sale of its General Cable notes and stock and $34.9
million from the sale of three of its non-insurance businesses. During the
first six months of 1994, the Company's insurance operations made net
purchases of investments of $110.1 million.
At June 30, 1995, the Parent Company investment portfolio held
unrated or less than investment grade corporate debt securities with
carrying values of $23.1 million. At that date, the Company's insurance
operations held $118.1 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 June 30, 1995, the largest investment of the Company and
its insurance operations in such securities of any one issuer totalled
$30.7 million.
- 14 -
<PAGE>
During the six months ended June 30, 1995, 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 June 30, 1995, the Company's total debt to total capital ratio
decreased to 22 percent from 25 percent at year-end 1994, principally as
a result of the Company's repurchase of a portion of its subordinated notes
during the 1995 second quarter. Total capital as defined for this ratio
consists of debt, minority interests in subsidiaries and common
shareholders' equity.
During June and July 1995, holders of approximately $44 million
principal amount of Notes tendered their Notes to the Company pursuant to
the Put Right. On August 10, 1995, Notes tendered were purchased at 100
percent of principal amount plus accrued interest. See Note 5 of Notes to
Financial Statements.
RESULTS OF OPERATIONS
Analysis of Continuing Operations
The Company reported net earnings from continuing operations for the
three and six months ended June 30, 1995 of $13.6 million and $29.9
million, respectively, compared to net earnings from continuing operations
of $16.6 million for the 1994 second quarter and a net loss from continuing
operations of $39.3 million for the first six months of 1994. Results for
the first six months of 1994 included a net realized capital loss of $73.5
million principally from the disposal of the General Cable Corporation
subordinated notes previously owned by the Company and tax adjustments
related primarily to the disposal of certain subsidiaries. Income from
continuing operations for the three and six months ended June 30, 1995,
excluding net realized capital gains was $12.7 million and $29.1 million,
respectively. Excluding net realized capital gains and losses and tax
adjustments, income from continuing operations for the same periods in 1994
was $16.7 million and $34.2 million, respectively.
Revenues in the Insurance operations for the 1995 second quarter of
$419.4 million decreased as compared with revenues of $424.3 million for
the same period in 1994. For the six months ended June 30, 1995, revenues
of $839.3 increased as compared with revenues of $812.7 million for the
first six months of 1994. The increase in revenues for the first six
months of 1995 was due primarily to an increase in earned premiums at the
NSA Group, partially offset by a decrease in earned premiums at Republic
Indemnity. Revenues decreased for the second quarter due to the decrease
in earned premiums at Republic Indemnity which more than offset an increase
in earned premiums at the NSA Group. During both the second quarter and
first six months of 1995, investment income before realized gains and
losses on sales of investments in the insurance operations' portfolio
increased due to higher average investment balances. Operating income in
the Insurance operations for the three and six months ended June 30, 1995
- 15 -
PAGE
<PAGE>
of $27.7 million and $63.8 million, respectively, decreased as compared
with operating income of $42.4 million and $82.9 million for the same
periods in 1994, primarily due to a decrease in underwriting profits,
partially offset by higher investment income and net realized gains. The
combined ratio for the Insurance operations was 102.8 percent and 101.2
percent, respectively, for the three and six months ended June 30, 1995,
as compared with 96.8 percent and 96.7 percent for the same periods in
1994.
For the second quarter and first six months of 1995, net written
premiums of the NSA Group grew 11 percent and 12 percent respectively, over
the comparable 1994 periods principally due to increased penetration within
the NSA Group's existing markets, supplemented by limited expansion into
new states. The NSA Group experienced an underwriting loss for both 1995
periods due mainly to hail-related losses aggregating approximately $15.3
million arising from severe weather in central and northern parts of Texas.
In addition, rate levels in certain markets have not been adequate to
maintain profitable underwriting results. These factors were partially
offset by a reduction in the underwriting expense ratio largely due to cost
control measures. Premium rate increases were effected in several states
during 1994 and the NSA Group has continued to increase rates in 1995 in
response to declining underwriting margins. The average rate increase in
1995 across the NSA Group's entire book of business was approximately 11
percent. The higher rate levels and competitive pressures in the non-
standard automobile insurance industry have impacted the written and earned
premium growth rates during the first half of 1995 and there can be no
assurance that growth rates experienced in recent periods will be sustained
in the future.
Republic's net written premiums declined 41 percent and 33 percent
for the second quarter and first six months of 1995, respectively, due to
1994 mandatory premium rate reductions, a portion of which were phased in
over the course of the policy terms in 1994 and 1995, and the impact of the
repeal of the workers' compensation minimum rate law effective January 1,
1995. As a consequence of the repeal of this law, Republic's rate levels
contemplate the change in its mix of business toward non-participating
policies which do not require the payment of policyholder dividends.
Furthermore, Republic has encountered extremely competitive pricing in the
marketplace during the first half of 1995. Despite lower premium volume,
the combined ratio was lower for the three and six months ended June 30,
1995 mainly because of lower policyholder dividends, and a reduction in the
amount of policyholder dividends estimated to be incurred, partially offset
by an increase in the frequency of claims and less favorable loss
development relating to prior years' claim activity than that experienced
during the comparable 1994 periods. Also, the underwriting expense ratio
increased for the 1995 periods primarily due to the decline in earned
premiums coupled with higher commission rates as compared to the 1994
periods.
Interest and Dividend Income
Interest and dividend income from Parent Company investments
increased $8.1 million and $11.6 million for the three and six month
periods ended June 30, 1995, as compared with the same periods in 1994.
Interest and dividend income for 1995 includes $13.4 million of interest
on loans made to AFC pursuant to the Subordinated Credit Agreement.
Excluding such interest, Parent Company interest and dividend income
decreased due primarily to lower average investment balances, partially
offset by an increase in average yields.
- 16 - <PAGE>
Other Operations
For the three and six months ended June 30, 1995, net sales, cost of
sales and other operating and general expenses decreased as compared with
the same periods in 1994 primarily as a result of the sales of the
Company's non-insurance operations during 1994 and the early part of 1995.
Income Taxes
For the three and six months ended June 30, 1995, the Company
recorded income tax expense of $8.5 million and $18.4 million,
respectively. For the 1994 second quarter, the Company recorded income tax
expense of $12.0 million. Despite a pre-tax loss during the first six
months of 1994, the Company recorded income tax expense of $20.9 million
due to the Company's inability to fully realize the tax benefit
attributable to the net realized capital loss recorded in that period. See
Note 7 of Notes to Financial Statements.
Management believes that it is more likely than not that the net
deferred tax asset at June 30, 1995 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.
- 17 -
PAGE
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 - "Legal Proceedings" of the Company's
Annual Report on Form 10-K for 1994 for a description of certain lawsuits
brought against the Company by USX Corporation ("USX") and Bessemer and
Lake Erie Railroad Company ("B&LE"). As stated therein, on October 13,
1994, the U.S. District Court for the Eastern District of Pennsylvania
enjoined USX and B&LE from continuing their lawsuits, ruling that their
claims are barred by the 1978 consummation order issued by the Court in the
Company's bankruptcy proceedings. USX and B&LE appealed the District
Court's ruling to the U.S. Court of Appeals for the Third Circuit.
Briefing of the appeal has been completed, the case was orally argued on
July 24, 1995 and the parties are awaiting the Court of Appeals' decision.
If the Court of Appeals were to reverse the District Court and allow these
lawsuits to proceed in spite of the bankruptcy consummation order, the
Company believes that the defenses described in said Form 10-K would enable
it to prevail on the merits.
Reference is made to Item 3 - "Legal Proceedings" of the Company's
Annual Report on Form 10-K for 1994 for a description of two misdemeanor
charges brought by the U.S. Government that were pending against a
subsidiary of the Company, Buckeye Pipe Line Company ("Buckeye"), arising
out of a pipeline rupture that occurred in 1990. In May 1995, Buckeye paid
a fine of $125,000 in respect of one of the charges, the alleged violation
of the strict liability provisions of the Rivers and Harbors Act, and
reimbursed the U. S. Government $100,000 towards its costs of the
investigation of the incident. The U.S. Government dismissed the other
charge, which alleged a violation of the Clean Water Act.
This matter is not considered material to the Company's financial
condition or results of operations, but is included herein to comply with
Securities and Exchange Commission rules requiring disclosure of
environmental proceedings brought by governmental entities involving
potential sanctions exceeding $100,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial data schedule (Copy included in Report filed
electronically with the Securities and Exchange Commission.)
(b) Reports on Form 8-K filed during the quarter ended June 30, 1995:
Current Report on Form 8-K (Items 5 and 7) dated April 3, 1995.
- 18 -
<PAGE>
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: August 14, 1995 By /s/ R. F. Amory
R. F. Amory
Vice President and Corporate Controller
(Principal Accounting Officer)
- 19 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 860,300<F1>
<DEBT-CARRYING-VALUE> 1,116,300
<DEBT-MARKET-VALUE> 1,138,800
<EQUITIES> 56,700<F2>
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,619,300<F3>
<CASH> 31,300
<RECOVER-REINSURE> 53,200
<DEFERRED-ACQUISITION> 97,300
<TOTAL-ASSETS> 4,056,600
<POLICY-LOSSES> 1,156,900
<UNEARNED-PREMIUMS> 472,800
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 79,200
<NOTES-PAYABLE> 422,100
<COMMON> 47,000
0
0
<OTHER-SE> 1,474,000
<TOTAL-LIABILITY-AND-EQUITY> 4,056,600
759,400
<INVESTMENT-INCOME> 101,700<F4>
<INVESTMENT-GAINS> 1,400<F5>
<OTHER-INCOME> 8,800<F6>
<BENEFITS> 595,700
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 174,700
<INCOME-PRETAX> 48,300<F7>
<INCOME-TAX> (18,400)
<INCOME-CONTINUING> 29,900
<DISCONTINUED> 0
<EXTRAORDINARY> 4,100
<CHANGES> 0
<NET-INCOME> 25,800
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 1,130,900
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,156,900
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes Parent Company investments of $97.8 million
<F2>Includes Parent Company investments of $11.6 million
<F3>Includes Parent Company investments of $653.9 million
<F4>Includes Parent Company interest and dividend income of $27.2 million
<F5>Includes Parent Company realized losses of $2.4 million
<F6>Includes net sales from non-insurance operations of $7.2 million and equity
in net earnings of investee corporations of $1.6 million
<F7>Includes policyholder dividends of $5.1 million, interest and debt expense
of $26.3 million and other non-insurance expenses of $21.2 million
</FN>
</TABLE>
