AMERICAN PREMIER UNDERWRITERS, INC.
One East Fourth Street
Cincinnati, Ohio 45202
Telephone (513) 579-6660
Facsimile (513) 579-0110
Robert F. Amory
Vice President and Controller
May 15, 1995
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, 1995
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, 1995.
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
Item 1. Financial Statements
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF INCOME
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1994
<S> <C> <C>
Revenues
Insurance operations
Premiums earned $ 381.9 $ 357.4
Net investment income 37.5 30.5
Net realized gains .5 .5
Other operations
Net sales 3.5 38.0
Interest and dividend income 10.6 7.1
Provision for loss on sale of General
Cable Corporation securities - (75.8)
Net realized gains (losses) (.7) .1
433.3 357.8
Expenses
Insurance operations
Losses 249.5 197.6
Loss adjustment expenses 37.5 36.3
Commissions and other insurance
expenses 89.8 81.0
Policyholder dividends 7.0 33.0
Other operations
Cost of sales 1.4 18.4
Interest and debt expense 13.2 13.6
Other operating and general expenses 8.7 24.9
407.1 404.8
Earnings (loss) before income taxes 26.2 (47.0)
Income tax expense (9.9) (8.9)
Net earnings (loss) $ 16.3 $ (55.9)
Earnings (loss) per share $ .37 $ (1.16)
Weighted average number of common shares 44.3 48.4
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
1PAGE
<PAGE>
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEET
(In Millions)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
<S> <C> <C>
Assets
Investments held by insurance operations
Fixed maturity securities
Held for investment - stated at amortized cost
(market $1,305.5 and $1,244.5) $1,332.7 $1,317.9
Available for sale - stated at market
(cost $553.4 and $524.1) 546.4 501.0
Short-term investments 54.0 51.7
1,933.1 1,870.6
Parent Company investments
Fixed maturity securities
Held for investment - stated at amortized cost
(market $267.6 and $271.5) 272.4 279.3
Available for sale - stated at market
(cost $144.0 and $328.0) 143.4 323.4
Short-term investments 297.2 199.1
Equity in affiliates 11.8 11.7
724.8 813.5
Cash 40.9 36.7
Accrued investment income 45.9 46.6
Agents' balances and premiums receivable 344.8 343.8
Reinsurance receivable 53.4 52.7
Other receivables 30.5 42.2
Deferred policy acquisition costs 94.6 92.1
Cost in excess of net assets acquired 389.0 394.5
Deferred tax asset 259.1 267.7
Other assets 204.1 233.6
Total $4,120.2 $4,194.0
Liabilities And Common Shareholders' Equity
Unpaid losses and loss adjustment expenses $1,143.4 $1,130.9
Policyholder dividends 87.2 102.4
Unearned premiums 460.0 440.2
Debt 507.2 507.3
Minority interests in subsidiaries 6.7 6.2
Accounts payable and other liabilities 425.0 458.3
Total liabilities 2,629.5 2,645.3
Common Stock 43.0 46.3
Capital surplus 582.9 662.2
Retained earnings (from October 25, 1978) 873.0 867.5
Net unrealized losses on investments (8.2) (27.3)
Total common shareholders' equity 1,490.7 1,548.7
Total $4,120.2 $4,194.0
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
2PAGE
<PAGE>
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CASH FLOWS
(In Millions)
<TABLE>
<CAPTION> Three Months ended
March 31,
1995 1994
<S> <C> <C>
Cash flows of operating activities:
Net earnings (loss) $ 16.3 $ (55.9)
Adjustments to reconcile income from continuing
operations to net cash provided by continuing
activities
Deferred Federal income tax 8.6 7.9
Depreciation, depletion and amortization 6.7 7.6
Net loss on disposals of businesses, investments
and property, plant and equipment .4 72.1
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures of businesses
Decrease (increase) in receivables 3.7 (22.1)
Increase in other assets (6.0) (5.4)
Decrease in accounts payable and other liabilities (.8) (14.4)
Increase in unpaid losses and loss
adjustment expenses 11.4 23.4
Increase (decrease) in policyholder dividends (15.2) 15.6
Increase in unearned premiums 19.3 39.7
Other, net 1.3 .5
Net cash flows of operating activities 45.7 69.0
Cash flows of investing activities:
Purchases of available for sale investments (55.9) (10.9)
Maturities and sales of available for sale investments 214.6 14.6
Purchases of held for investment securities (23.5) (148.0)
Maturities of held for investment securities 18.7 66.5
Purchases of short-term investments - (11.8)
Sales and maturities of short-term investments 50.3 29.5
Net (increase) decrease in short-term investments (150.9) 5.0
Sales of businesses 7.3 9.8
Capital expenditures (2.4) (4.0)
Other, net (.2) .8
Net cash flows of investing activities 58.0 (48.5)
Cash flows of financing activities:
Repayment of debt (.2) (16.6)
Common Stock dividends (11.3) (10.1)
Purchases of Company Common Stock (87.6) (1.6)
Other, net (.4) 5.9
Net cash flows of financing activities (99.5) (22.4)
Increase (decrease) in cash 4.2 (1.9)
Cash - beginning of year 36.7 32.4
Cash - end of period $ 40.9 $ 30.5
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3PAGE
<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 ended March 31,
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
ended March 31, 1994 have been reclassified to conform to the current
presentation.
2. SUBSEQUENT EVENT - ACQUISITION OF AMERICAN FINANCIAL CORPORATION
On April 3, 1995, the Company became a wholly owned subsidiary of
American Premier Group, Inc. ("New American Premier"), a new corporation
formed by the Company for the purpose of acquiring all of the common stock
of American Financial Corporation (the "Acquisition"). Under the terms of
the Acquisition, (a) the Company merged with a subsidiary of New American
Premier and each of the 41.7 million shares of Company Common Stock then
outstanding was converted into one share of New American Premier Common
Stock, and (b) American Financial Corporation ("AFC") merged with another
subsidiary of New American Premier and all shares of AFC common stock were
exchanged for 28.3 million shares of New American Premier Common Stock.
As a result of the Acquisition, the Company and AFC each became wholly
owned subsidiaries of New American Premier and New American Premier is the
Company's successor as the issuer of publicly held common stock. At the
time of the Acquisition, AFC owned approximately 18.7 million shares of the
Company's Common Stock (representing 44.8 percent of the outstanding
shares), which are treated as having been acquired by New American Premier
in the Acquisition. Upon completion of the Acquisition, the former
shareholders of AFC, consisting of Carl H. Lindner, members of his family
and trusts for their benefit, owned approximately 55.2 percent of the
approximately 51.3 million New American Premier common shares then
outstanding. Accordingly, the net increase in outstanding shares resulting
from the Acquisition was approximately 9.6 million shares.
New American Premier intends to change its name to American Financial
Group, Inc., subject to shareholder approval at the 1995 annual meeting in
June.
4PAGE
<PAGE>
Subsequent to the Acquisition, the Company and AFC entered into a
credit agreement whereby the Company will make loans available to AFC (the
"Subordinated Credit Agreement"). The aggregate amount of loans
outstanding at any one time may not exceed $675 million. AFC may use the
loan proceeds for retirement of debt, working capital purposes and advances
to affiliates. The interest rate on the outstanding loan amount is 11.625
percent and interest is payable quarterly beginning July 1, 1995. On March
31, 2005, the principal amount outstanding converts to a four-year term loan
with quarterly installments beginning April 1, 2005 and ending January
1, 2009. Subsequent to the Acquisition, the Company advanced approximately
$549 million to AFC under the Subordinated Credit Agreement.
3. INSURANCE OPERATIONS
Investments of Insurance Operations
The insurance operations' investments in fixed maturity securities
at March 31, 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 $1,023.9 $ 11.7 $ 30.8 $1,004.8
Public utilities 212.4 1.4 8.4 205.4
Mortgage-backed securities 79.8 .4 1.6 78.6
State and local obligations 8.0 .7 - 8.7
Foreign securities 8.6 - .6 8.0
Total held for investment 1,332.7 14.2 41.4 1,305.5
Available for sale
Corporate securities 327.2 6.5 10.8 322.9
Public utilities 16.8 .1 .7 16.2
Mortgage-backed securities 59.4 .5 1.1 58.8
U.S. government securities 89.2 1.2 1.6 88.8
State and local obligations 2.3 - - 2.3
Foreign securities 60.0 .1 1.2 58.9
Total available for sale 554.9 8.4 15.4 547.9
Total fixed maturity
securities $1,887.6 $ 22.6 $ 56.8 $1,853.4
</TABLE>
At March 31, 1995, the insurance operations' investments included
unrated or less than investment grade corporate securities with a carrying
value of $128.1 million (market value $126.0 million). Investments of
insurance operations include a net payable for securities purchased but not
settled of $1.5 million at March 31, 1995.
At March 31, 1995, short-term investments consisted principally of
U.S. Treasury securities and commercial paper.
5<PAGE>
Investment Income of Insurance Operations
Investment income consists of the following:
(In Millions)
Three Months Ended
March 31,
1995 1994
Income from fixed maturity
securities $ 38.3 $ 31.2
Investment expenses (.8) (.7)
Net investment income $ 37.5 $ 30.5
Income from fixed maturity securities includes income from short-term
investments.
Realized gains (losses) consist of the following:
(In Millions)
Three Months Ended
March 31,
1995 1994
Gross realized gains on:
Fixed maturity securities $ .6 $ .8
Gross realized losses on:
Fixed maturity securities (.1) (.3)
Net realized gains (losses) $ .5 $ .5
For the three months ended March 31, 1995, proceeds from sales of
fixed maturity securities, excluding proceeds from sales at or near
maturity, totalled $23.0 million, all of which were from securities
classified as available for sale. For the three months ended March 31,
1994, proceeds from such sales of fixed maturity securities 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 such sales of the held for investment securities were made
as a result of deterioration in the issuers' credit rating. The gross
realized gains (losses) attributable to sales of fixed maturity securities,
excluding sales at or near maturity, were:
Fixed Maturity Securities
1995 1994
Available Available
For For Held For
(In Millions) Sale Sale Investment
Gross realized gains $ .6 $ .1 $ .2
Gross realized losses (.1) (.1) (.1)
Net realized gains(losses) $ .5 $ - $ .1
6<PAGE>
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:
(In Millions)
Three Months Ended March 31, 1995 1994
Reinsurance ceded:
Premiums written
Affiliates $ - $ 1.0
Non-affiliates 5.2 3.7
Premiums earned
Affiliates - 1.0
Non-affiliates 4.7 2.7
Incurred losses and loss adjustment
expenses
Affiliates .1 (.4)
Non-affiliates 4.3 2.1
Reinsurance assumed:
Premiums written
Affiliates 38.5 27.7
Non-affiliates 5.2 23.2
Premiums earned
Affiliates 25.8 23.1
Non-affiliates 8.2 17.5
Other
During the three months ended March 31, 1995 and 1994, approximately
56 percent and 93 percent, respectively, of net written premiums in the
workers' compensation insurance operations were for policies eligible for
policyholder dividend consideration.
7<PAGE>
4. PARENT COMPANY INVESTMENTS
The Parent Company investments in fixed maturity securities at March
31, 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 $ 198.3 $ .2 $ 4.0 $ 194.5
Public utilities 22.9 - .4 22.5
Mortgage-backed securities .3 - - .3
U.S. government securities 50.9 - .6 50.3
Total held for investment 272.4 .2 5.0 267.6
Available for sale
U.S. government securities 144.0 - .6 143.4
Total fixed maturity
securities $ 416.4 $ .2 $ 5.6 $ 411.0
</TABLE>
In connection with the Acquisition, all of the Parent Company fixed
maturity securities will be classified as available for sale.
At March 31, 1995, short-term investments consisted principally of
U.S. Treasury securities and commercial paper.
At March 31, 1995, the carrying value of unrated or less than
investment grade corporate securities, totalled $35.9 million (market value
$35.2 million).
For the three months ended March 31, 1995, proceeds from sales of
Parent Company investments in fixed maturity securities, excluding proceeds
from sales at or near maturity, totalled $182.9 million, all of which were
from securities classified as available for sale. The gross realized
losses attributable to such sales were $.7 million.
5. DEBT
In May 1995, Moody's Investors Services, Inc. ("Moody's") downgraded
the Company's outstanding $500 million principal amount of subordinated
debentures (the "Notes") from Baa3 to Ba3. As a result of the Acquisition
and the subsequent ratings downgrade, the holders of the Notes can 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 must be
exercised prior to August 1, 1995. The Company is unable to predict to
what extent, if any, holders of the Notes will exercise their Put Right.
8<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, 1994 46,282,157 $ 46.3 $662.2 $867.5 $(27.3) $1,548.7
Net earnings (loss) - - - 16.3 - 16.3
Dividends declared on
Common Stock - - - (10.8) - (10.8)
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 - - - - 19.1 19.1
Other, net - - (.2) - - (.2)
Balance, March 31, 1995 43,043,281 $ 43.0 $582.9 $873.0 $(8.2) $1,490.7
</TABLE>
Upon completion of the Acquisition as described in Note 2, the
Company had 47,000,000 shares of Common Stock outstanding, all of which
were owned by New American Premier; none of the remaining 153,000,000
authorized shares of Common Stock were reserved for any purpose; and no
shares of Preference Stock were outstanding.
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.
9<PAGE>
Components of the provision for income tax expense were as follows:
(In Millions)
Three Months Ended
March 31,
1995 1994
Current
Federal $ (.7) $ (.7)
Foreign, state & local (.6) (.3)
Total current (1.3) (1.0)
Deferred
Federal (8.6) (7.9)
Foreign, state & local - -
Total deferred (8.6) (7.9)
Total $ (9.9) $ (8.9)
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:
(In Millions)
Three Months Ended
March 31,
1995 1994
Earnings (loss) before income taxes $ 26.2 $(47.0)
Expected tax benefit (expense) at
U.S. statutory income tax rate $ (9.2) $ 16.5
Amortization of goodwill (1.0) (.9)
Capital loss not utilized - (24.6)
Other, net .3 .1
Consolidated income tax expense $ (9.9) $ (8.9)
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.
10PAGE
<PAGE>
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. The Company believes that these lawsuits
are without merit. 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.
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
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
11PAGE
<PAGE>
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 three month periods ended March 31, 1995 and 1994, state
and other income taxes paid were $.5 million and $1.2 million,
respectively. For the same periods, interest paid was $9.8 million and
$10.6 million, respectively.
12PAGE
<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,
1995 and December 31, 1994 and its results of operations for the three
months ended March 31, 1995 and 1994.
LIQUIDITY AND CAPITAL RESOURCES
(Dollars in Millions)
March 31, December 31,
1995 1994
Cash, Parent Company short-term investments
and Parent Company fixed maturity securities $ 753.9 $ 838.5
Deduct items not readily available for
corporate purposes:
Cash held by the insurance operations (34.9) (36.3)
Securities held in bank escrow accounts (21.6) (21.2)
Private placement notes (31.7) (23.0)
Cash, short-term investments and marketable
securities $ 665.7 $ 758.0
Total debt as a percentage of total
capital 25% 25%
The $92.3 million decrease during the three months ended March 31,
1995 in the cash, short-term investments and marketable securities included
in the preceding table was principally attributable to purchases of Company
Common Stock.
One of the strategic objectives of the AFC Acquisition is to provide
an opportunity to redeploy most of the Company's substantial Parent Company
investment assets to produce a higher rate of return than has been
available on the short-term fixed maturity instruments in which they have
been invested. This objective is expected to be achieved through the
utilization of up to approximately $525 million of the Parent Company
investment portfolio to retire relatively expensive AFC and Company long-
term debt. Subsequent to the Acquisition, the Company advanced
approximately $549 million from sales of Parent Company investments to AFC
under the Subordinated Credit Agreement which was used by AFC principally
to repay approximately $374 million of debt and for other corporate
purposes. See Note 2 of Notes to Financial Statements.
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
Company's consolidated Federal income tax group continues to exist after
the Acquisition, but does not include any companies not in the group prior
thereto, with the exception of New American Premier. Accordingly, the
Company's Federal income tax loss carryforward will continue to offset
taxable income of members of the continuing group through 1996, unless
previously utilized.
13<PAGE>
Net Cash Provided by Operating Activities
During the three months ended March 31, 1995, cash provided by
operating activities was $45.7 million, a decrease of $23.3 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 principally resulted from
an increase in claims payments. These unfavorable variances were partially
offset by higher interest receipts from the Parent Company investment
portfolio. 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, 1995, the insurance
operations generated $55.7 million of operating cash flow, approximately
88 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 intercorporate tax allocation payments. During the same period in
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.
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 1995 by these subsidiaries is $83.8 million.
Investing and Financing Activities
During the three months ended March 31, 1995, sales and maturities
of the Parent Company investment portfolio (net of purchases of
investments) provided $99.9 million. The Company also received $7.3
million from the sale of one of its industrial businesses. During this
same period, the Company used $87.6 million for purchases of shares of
Company Common Stock and $11.3 million for the payment of Common Stock
dividends. The Company's insurance operations made net purchases of
investments of $46.6 million during the first three months of 1995.
14PAGE
<PAGE>
During the same 1994 period, maturities of the Parent Company
investment portfolio (net of purchases of investments) provided $28.9
million. 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.
During the first three months of 1994, the Company's insurance operations
made net purchases of investments of $84.0 million.
At March 31, 1995, the Parent Company investment portfolio held
unrated or less than investment grade corporate debt securities with
carrying values of $35.9 million. At that date, the Company's insurance
operations held $128.1 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 March 31, 1995, the largest investment of the Company and
its insurance operations in such securities of any one issuer totalled
$37.7 million.
During the three months ended March 31, 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 March 31, 1995, the Company's total debt to total capital ratio
of 25 percent was unchanged from year-end 1994. Total capital as defined
for this ratio consists of debt, minority interests in subsidiaries and
common shareholders' equity.
As a result of the Acquisition and subsequent ratings downgrade by
Moody's, the holders of the Company's Notes may exercise their Put Right.
See Note 5 of Notes to Financial Statements. The Company expects that New
American Premier will have available cash, short-term investments and
borrowing capacity that would be sufficient to enable the Company to
purchase all of the Notes in the event that they were all put to the
Company.
15PAGE
<PAGE>
RESULTS OF OPERATIONS
Analysis of Continuing Operations
The Company reported net earnings for the 1995 first quarter of $16.3
million, or $.37 per share, compared to a net loss for the 1994 first
quarter of $55.9 million, or $1.16 per share. Results for the 1994 period
included a net realized capital loss of $73.4 million, or $1.52 per share,
principally from the disposal of the General Cable Corporation subordinated
notes previously owned by the Company. First quarter 1995 and 1994 net
earnings, excluding net realized losses, were $16.4 million, or $.37 per
share, and $17.5 million, or $.36 per share, respectively.
Revenues in the Insurance operations increased to $419.9 million for
the first quarter of 1995 as compared with $388.4 million for the same
period in 1994 primarily due to an increase in earned premiums at the NSA
Group. Investment income before realized gains and losses on sales of
investments in the insurance operations' portfolio also increased due to
higher average investment balances and an increase in the average yield.
These increases were partially offset by a decrease in earned premiums at
Republic Indemnity. Operating income in the Insurance operations for the
first three months of 1995 decreased to $36.1 million as compared with
$40.5 million in 1994, primarily due to a decrease in underwriting profits,
partially offset by higher investment income. The combined ratio for the
Insurance operations was 99.5 percent and 96.5 percent, respectively, for
the three months ended March 31, 1995 and 1994.
The following table presents certain information with respect to the
NSA Group's insurance operations.
(Dollars in Millions)
Three Months Ended March 31, 1995 1994
Net Written Premiums $311.7 $275.3
Net Earned Premiums $292.2 $245.5
Loss and Loss Adjustment Expense ("LAE") 229.1 180.3
Underwriting Expenses 66.2 58.9
Underwriting Profit (Loss) $ (3.1) $ 6.3
GAAP Ratios:
Loss and LAE Ratio 78.4% 73.4%
Underwriting Expense Ratio 22.7 24.0
Combined Ratio 101.1% 97.4%
16PAGE
<PAGE>
The 1995 first quarter growth in net written premiums of 13 percent
over the 1994 period was principally due to increased penetration within
the NSA Group's existing markets, supplemented by limited expansion into
new states. The NSA Group's underwriting loss for the first quarter of
1995 was mainly attributable to an increase in the frequency of claims, and
rate levels in certain markets which were not 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 higher rate levels and competitive
pressures in the non-standard automobile insurance industry have impacted
the written and earned premium growth rates during the 1995 first quarter
and there can be no assurance that such growth rates will be sustained in
the future.
The following table presents certain information with respect to
Republic Indemnity's insurance operations.
(Dollars in Millions)
Three Months Ended March 31, 1995 1994
Net Written Premiums $ 91.1 $120.0
Net Earned Premiums $ 89.4 $111.4
Loss and LAE 59.4 53.3
Underwriting Expenses 19.7 19.2
Policyholder Dividends 7.0 33.0
Underwriting Profit $ 3.3 $ 5.9
GAAP Ratios:
Loss and LAE Ratio 66.5% 47.9%
Underwriting Expense Ratio 22.0 17.2
Policyholder Dividend Ratio 7.8 29.6
Combined Ratio 96.3% 94.7%
The decrease in net written and earned premiums reflects the impact
of mandatory premium rate reductions of 12.7 percent and 16 percent which
took effect January 1, and October 1, 1994, respectively. The impact of
the January 1, 1994 rate reduction, which was applicable only to new and
renewal policies effective on and after January 1, 1994, was not fully
reflected in the 1994 first quarter results. Also, Republic Indemnity has
encountered extremely competitive pricing in the marketplace as a result
of the repeal of the workers' compensation minimum rate law effective
January 1, 1995. The increase in the combined ratio for the 1995 first
quarter was mainly attributable to an increase in the severity and
frequency of claims as well as less favorable loss development relating to
prior years' claim activity than that experienced during the 1994 period.
Also, the increase in the expense ratio for the 1995 first quarter was
primarily due to the decline in earned premiums coupled with higher
commission rates as compared to the 1994 period. These adverse effects
were partially offset by a decrease in policyholder dividends resulting
from a reduction in policies written that are eligible for policyholder
dividend consideration.
17<PAGE>
Interest and Dividend Income
Interest and dividend income of the Parent Company investments
increased $3.5 million in the first quarter of 1995, as compared with the
same period in 1994, due primarily to an increase in average yields and
higher average investment balances.
Other Operations
Net sales, cost of sales and other operating and general expenses
decreased in the first quarter of 1995 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 first quarter of 1995, the Company recorded income tax
expense of $9.9 million. Despite a pre-tax loss during the 1994 first
quarter, the Company recorded income tax expense of $8.9 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 March 31, 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.
18<PAGE>
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On March 23, 1995, the Company held a Special Meeting of Shareholders
to consider and act upon a proposal that the Company acquire all of the
outstanding common stock of American Financial Corporation pursuant to an
Agreement and Plan of Acquisition and Reorganization. Such proposal
received the following votes: 32,566,909 shares voted for, 1,094,746
shares voted against, 79,849 shares abstained and there were no broker non-
votes.
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 March 31, 1995:
Current Report on Form 8-K (Items 5 and 7) dated February 28,
1995.
Current Report on Form 8-K (Items 5 and 7) dated March 6, 1995.
19<PAGE>
<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: May 15, 1995 By /s/ R. F. Amory
R. F. Amory
Vice President and Corporate Controller
(Principal Accounting Officer)
20<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 689,800<F1>
<DEBT-CARRYING-VALUE> 1,605,100<F2>
<DEBT-MARKET-VALUE> 1,573,100<F3>
<EQUITIES> 11,800<F4>
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,657,900<F5>
<CASH> 40,900
<RECOVER-REINSURE> 53,400
<DEFERRED-ACQUISITION> 94,600
<TOTAL-ASSETS> 4,120,200
<POLICY-LOSSES> 1,143,400
<UNEARNED-PREMIUMS> 460,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 87,200
<NOTES-PAYABLE> 507,200
<COMMON> 43,000
0
0
<OTHER-SE> 1,447,700
<TOTAL-LIABILITY-AND-EQUITY> 4,120,200
381,900
<INVESTMENT-INCOME> 48,100<F6>
<INVESTMENT-GAINS> (200)<F7>
<OTHER-INCOME> 3,500<F8>
<BENEFITS> 287,000
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 89,800
<INCOME-PRETAX> 26,200<F9>
<INCOME-TAX> (9,900)
<INCOME-CONTINUING> 16,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,300
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
<RESERVE-OPEN> 1,130,900
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,143,400
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes Parent Company investments of $143.4 million
<F2>Includes Parent Company investments of $272.4 million
<F3>Includes Parent Company investments of $267.6 million
<F4>Included in Parent Company investments
<F5>Includes Parent Company investments of $724.8 million
<F6>Includes Parent Company interest and dividend income of $10.6 million
<F7>Includes Parent Company realized losses of $.7 million
<F8>Net sales from non-insurance operations
<F9>Includes policyholder dividends of $7.0 million, interest an debt
expense of $13.2 million and other non-insurance expenses of $10.1
million
</FN>
</TABLE>
