SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 1993 No. 1-11632
AMERICAN ANNUITY GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Delaware No. 06-1356481
250 East Fifth Street, Cincinnati, Ohio 45202
(513) 333-5300
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on which Registered
___________________ ___________________
<S> <C>
Common Stock, Par Value $1.00 Per Share New York
9-1/2% Senior Notes due August 15, 2001 New York
11-1/8% Senior Subordinated Notes due February 1, 2003New York
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
___ ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and need not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
As of March 1, 1994, there were 35,093,340 shares of the Registrant's
Common Stock outstanding. The aggregate market value of Common Stock held
by non-affiliates at that date was approximately $61.4 million based upon
non-affiliate holdings of 6,458,781 shares and a market price of $9.50 per
share.
Documents Incorporated by Reference:
Proxy Statement for the 1994 Annual Meeting of Shareholders (portions of
which are incorporated by reference into Part III hereof).
<PAGE>
AMERICAN ANNUITY GROUP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
<TABLE>
<CAPTION>
Part I
Page
____
<C> <S> <C>
Item 1. Business
Introduction 1
GALIC 1
Discontinued Manufacturing Operations 13
Employees 13
Item 2. Properties 13
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders *
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure *
Part III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and Management21
Item 13. Certain Relationships and Related Transactions 21
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K S-1
<FN>
* The response to this item is "none".
</TABLE>
<PAGE>
PART I
ITEM 1
Business
________
Introduction
____________
American Annuity Group, Inc. ("American Annuity", "AAG", or "the Company")
is a holding company whose only significant asset is the capital stock of
Great American Life Insurance Company ("GALIC"). American Annuity is the
successor to STI Group, Inc., formerly known as Sprague Technologies, Inc.
("STI"). STI was formed in May 1987 by The Penn Central Corporation ("Penn
Central") for the purpose of divesting its electronics components
businesses. STI subsequently sold substantially all of its assets and
retired its debt, netting approximately $100 million in cash and cash
equivalents.
In September 1992, STI reached an agreement with Great American Insurance
Company ("GAI") to purchase 100% of the capital stock of GALIC for $468
million. The acquisition was consummated on December 31, 1992. The
purchase of GALIC was financed with (a) $230 million of borrowings, (b) $156
million of new equity raised from the sale of common and preferred stock to
GAI, and (c) cash available at the Company. American Financial Corporation
("AFC"), the parent of GAI, beneficially owned approximately 80% of American
Annuity's Common Stock at March 1, 1994.
GALIC
_____
For definitions of many of the insurance terms used throughout this section,
please see the glossary beginning on page 11.
GALIC is an insurance company which was incorporated in New Jersey in 1959
and redomiciled as an Ohio corporation in 1982. GALIC was acquired by AFC
in 1973 through AFC's acquisition of GAI. GALIC entered the tax-deferred
annuity business in 1976; prior to that time it wrote primarily whole-life,
term-life, and accident and health insurance policies. GALIC is currently
rated "A" (Excellent) by A.M. Best.
Annuities are long-term retirement savings plans that benefit from interest
accruing on a tax-deferred basis. The issuer of the annuity collects
contributions, credits interest or investment income and pays out a benefit
upon surrender or annuitization.
Annuity contracts can be either variable rate or fixed rate. With a
variable rate annuity, the rate at which interest is credited to the
contract is tied to an underlying securities portfolio or other performance
index. With a fixed rate annuity, an interest crediting rate is set by the
issuer, periodically reviewed by the issuer, and changed from time to time
as determined to be appropriate.
GALIC is engaged in the sale of fixed rate annuities primarily to employees
of qualified not-for-profit organizations under Section 403(b) of the
Internal Revenue Code. These employees are eligible to save for retirement
through contributions made on a before-tax basis to purchase 403(b)
annuities. Contributions are made at the discretion of the participants
through payroll deductions. Federal income taxes are not payable on
contributions or earnings until amounts are withdrawn.
GALIC markets its annuities principally to employees of educational
institutions in the kindergarten through high school ("K-12") segment.
Management believes that the K-12 segment is attractive because of the
growth potential and persistency rate it has demonstrated. In 1993, written
<PAGE>
premiums from the K-12 segment represented approximately 90% of GALIC's
total tax-qualified premiums, with sales of annuities to other not-for-
profit groups accounting for the balance.
The following table (in millions) presents information concerning GALIC in
accordance with generally accepted accounting principles ("GAAP"), unless
otherwise noted.
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Total Assets (A) $4,883 $4,436 $4,686 $3,847 $3,285
Annuity Policyholders' Funds
Accumulated 4,257 3,974 3,727 3,398
2,913
Stockholders' Equity 520 418 358 355 277
Statutory Basis:
Capital and Surplus 251 216 219 192 103
Asset Valuation Reserve (B)(C) 70 71 112 10 124
Interest Maintenance Reserve (C) 36 17 - - -
Annuity Receipts:
Flexible Premium:
First Year $ 49 $ 48 $ 67 $ 73 $ 72
Renewal 223 232 240 220 204
______ ______ ______ ______ ______
272 280 307 293 276
Single Premium 128 80 153 238 91
______ ______ ______ ______ ______
Total Annuity Receipts $ 400 $ 360 $ 460 $ 531 $ 367
______ ______ ______ ______ ______
<FN>
(A) Includes the following amounts for securities purchased in December
and paid for in the subsequent year: 1993 - $68 million; 1992 - $0.2
million; 1991 - $557 million; 1990 - $46 million and 1989 - $50
million.
(B) For years prior to 1992, amounts reflect the Mandatory Securities
Valuation Reserve.
(C) Allocation of surplus for statutory reporting purposes.
</TABLE>
Sales of annuities are affected by many factors, including: (i) competitive
rates and products; (ii) the general level of interest rates; (iii) the
favorable tax treatment of annuities; (iv) commissions paid to agents; (v)
services offered; (vi) ratings from independent insurance rating agencies;
and (vii) general economic conditions.
Annuity receipts in 1993 increased primarily due to the introduction of new
single premium products in the second half of 1992. Receipts in 1992 were
lower than anticipated due to (i) a reduction in receipts relating to a new
product introduced in 1990 which encouraged rollovers of other retirement
funds and (ii) unfavorable economic and market conditions, including the
impact of the negative publicity associated with a number of highly
publicized insolvencies in the life insurance industry.
<PAGE>
GALIC's Corporate Strategy
GALIC's primary business objective is to maximize its long-term
profitability through the sale of 403(b) annuities. GALIC seeks to achieve
this objective through a strategy of: (i) offering annuity products that
are tailored to meet its policyholders' financial needs and designed to
encourage a high level of persistency; (ii) providing competitive commission
structures and high-quality service in order to foster long-term
relationships with its independent agents; (iii) maintaining a conservative
investment portfolio in order to demonstrate financial stability to its
policyholders; (iv) maintaining competitive crediting rates on annuity
policies to encourage new, as well as renewal, business while achieving the
desired spread between investment earnings and interest credited; (v)
developing complementary distribution channels; and (vi) maintaining high
ratings from independent insurance rating agencies.
Annuity Products
GALIC's principal products are Flexible Premium Deferred Annuities ("FPDAs")
and Single Premium Deferred Annuities ("SPDAs"). In 1993, FPDAs accounted
for approximately two-thirds of GALIC's total annuity receipts, with SPDAs
accounting for the remainder. GALIC's annuity products are designed to
discourage early terminations and withdrawals through the use of various
surrender charges. Over the past five years, the annual persistency rate of
GALIC's annuity products has averaged approximately 92%. The following
table summarizes GALIC's written premiums and policyholder benefit reserves
on a statutory basis by product line (dollars in millions).
Policyholder
1993 Premiums Written
Benefit Reserves at
_____________________
First % of
December 31, 1993
___________________
YearRenewal Total Amount %
____________ _____ ______ ___
Flexible Premium:
403(b) Single-tier $ 14 $ 14 7.0% $ 70 1.6%
403(b) Two-tier 31 202 58.0 2,739 63.5
Other Single-tier 2 1 0.7 39 0.9
Other Two-tier 2 6 2.0 187 4.4
____ ____ _____ ______ _____
Total 49 223 67.7 3,035 70.4
____ ____ _____ ______ _____
Single Premium:
Single-tier 13 - 3.2 27 0.6
Two-tier 115 - 28.6 1,012 23.5
____ ____ _____ ______ _____
Total 128 - 31.8 1,039 24.1
____ ____ _____ ______ _____
Annuities in Pay Out - - - 217 5.0
Life, Accident & Health - 2 0.5 23 0.5
____ ____ _____ ______ _____
Total $177 $225 100.0% $4,314 100.0%
____ ____ _____ ______ _____
GALIC's FPDAs are characterized by premium payments that are flexible in
amount and timing as determined by the policyholder. GALIC's SPDAs require
a one-time lump-sum premium payment. Since January 1, 1988, approximately
three-fourths of GALIC's SPDA receipts have resulted from rollovers of tax-
deferred funds previously maintained by policyholders with other insurers.
All of GALIC's annuity products are fixed rate annuities which provide
minimum interest rate guarantees of 3% to 4% per annum. At December 31,
1993, approximately 95% of GALIC's policyholder liabilities consisted of
annuities which offered a minimum interest rate guarantee of 4%. All of
GALIC's annuity
<PAGE>
policies permit GALIC to change the crediting rate at any time (subject to
the minimum guaranteed interest rate). In determining the frequency and
extent of changes in the crediting rate, GALIC takes into account the
profitability of its annuity business and the relative competitive position
of its products. The average rate being credited on funds held by GALIC was
approximately 5.3%, 6.2%, and 7.2% at December 31, 1993, 1992, and 1991,
respectively.
GALIC seeks to maintain a desired spread between the yield on its investment
portfolio and the rate it credits to its policies. GALIC accomplishes this
by (i) offering flexible crediting rates, (ii) designing annuity products
that encourage persistency and (iii) maintaining an appropriate matching of
assets and liabilities. Tax qualified annuity policyholders maintain access
to their funds without incurring penalties through a provision in the
contract which allows policy loans in accordance with the Internal Revenue
Code.
The persistency rates of GALIC's products are helped by the two-tier design
contained in most of GALIC's products. Two-tier annuities have a permanent
surrender charge for funds withdrawn in a lump sum in excess of the amount
permitted to be withdrawn pursuant to the contract. Two account values are
maintained for two-tier annuities -- the annuitization (or upper-tier) value
and the surrender (or lower-tier) value. The annuitization value is paid
only if the policyholder chooses to annuitize (withdraw funds in a series of
periodic payments for at least the minimum number of years specified in the
contract). If a lump sum payment is desired, the surrender value is paid.
After the initial surrender charges have been reduced to zero, single-tier
annuities have only one value which is available whether the policy is
surrendered or annuitized.
With some two-tier annuities, the annuitization value and the surrender
value are the same at inception of the policy, but since each value
accumulates interest at a different rate, over time, the annuitization value
will grow to an amount which is greater than the surrender value. Other
two-tier annuities credit the same interest rate to both the surrender and
the annuitization value but withhold a portion of the first-year premiums
when calculating the surrender value; no such amounts are withheld in
calculating the annuitization value.
GALIC's two-tier annuities are particularly attractive to policyholders who
intend to utilize funds accumulated to provide retirement income since the
annuitization value is accumulated at a competitive long-term interest rate.
Management believes that over time, as the policyholder population ages, the
percentage of policyholders annuitizing will increase.
In addition to its use of two-tier structures, GALIC imposes certain
surrender charges and front-end fees during the first five to ten years of a
new policy to discourage customers from withdrawing funds in the early years
of a policy. As a result of these features, GALIC's annuity products have
achieved high persistency. As the following table illustrates, GALIC's
annual persistency rates for its major products have averaged approximately
92% over the past five years.
Persistency Rates
___________________________________________
Product Group 1993 1992 1991 1990 1989
_____________ ____ ____ ____ ____ ____
Flexible Premium 92.0% 90.6% 89.3% 91.2% 94.4%
Single Premium 93.3 93.8 92.8 92.6 92.0
Annuity surrender payments represented 6.9%, 7.8% and 9.4% of average
statutory reserves in 1993, 1992 and 1991, respectively.
<PAGE>
At December 31, 1993, GALIC had approximately 230,000 annuity policies in
force, nearly all of which were individual contracts. GALIC's policyholders
are employees of over 8,300 institutions nationwide. Of the $4.3 billion in
total statutory reserves held by GALIC as of December 31, 1993,
approximately 95% were attributable to policies in the accumulation phase.
Marketing and Distribution
GALIC markets its annuity products through approximately 55 managing general
agents ("MGAs") who, in turn, direct more than 1,000 actively producing
independent agents. GALIC has developed its business since 1980 on the
basis of its relationships with MGAs and independent agents primarily
through a consistent marketing approach and responsive service.
GALIC seeks to attract and retain MGAs who are experienced and highly
motivated and who consistently place a high volume of the types of annuities
offered by GALIC. Toward this end, GALIC has established a "President's
Advisory Council" consisting of 10 of the top producers each year, all of
whom must market primarily GALIC products. The President's Advisory Council
serves as a major influence on new product design and marketing strategy.
To extend the distribution of GALIC annuities to a broader customer base,
the Company began to develop a Personal Producing General Agent ("PPGA")
distribution system. Over 85 PPGAs are contracted to sell GALIC annuities
to both qualified and non-qualified customers. These new appointments will
give the Company the opportunity to expand the premium writings in those
territories not served by an MGA.
GALIC's strategy is to offer its agents competitive commission rates and to
provide prompt processing of agent requests, with the objective of
attracting and retaining agents on the basis of service, as well as
compensation. Commissions paid on first year premiums are significantly
higher than those paid on renewal premiums. Commissions are generally lower
for sales of annuities to older policyholders, reflecting the lower profit
potential available from policyholders who maintain their funds with GALIC
for a shorter period.
GALIC is licensed to sell its products in all states (except Kansas and New
York) and in the District of Columbia. The geographical distribution of
GALIC's annuity premiums written in 1993 compared to 1989 was as follows
(dollars in millions):
<TABLE>
<CAPTION>
1993
1989
________________ ________________
State Premiums % Premiums %
_____ ______________ ______________
<S> <C> <C> <C> <C>
California $ 87 21.8% $ 98 26.7%
Florida 39 9.8 22 6.0
Michigan 34 8.5 39 10.6
Massachusetts 32 8.0 30 8.2
New Jersey 22 5.5 27 7.4
Ohio 22 5.5 * *
Connecticut 21 5.2 31 8.4
Illinois 13 3.3 10 2.7
North Carolina 13 3.3 * *
Texas 13 3.3 12 3.3
Washington 10 2.4 10 2.7
Rhode Island 9 2.2 12 3.3
All others, each less than 2%
85 21.2 76 20.7
____ _____ ____ _____
$400 100.0% $367 100.0%
____ _____ ____ _____
<FN>
* less than 2%
</TABLE>
<PAGE>
Investments
GALIC's annuity products are structured to generate a stable flow of
investable funds. GALIC earns a spread by investing these funds at an
investment earnings rate in excess of the crediting rate payable to its
policyholders.
The Ohio Insurance Code contains rules governing the types and amounts of
investments which are permissible for an Ohio life insurer, including GALIC.
These rules are designed to ensure the safety and liquidity of the insurer's
investment portfolio by placing restrictions on the quality, quantity and
diversification of permitted investments.
Investments comprise approximately 96% of American Annuity's assets and are
the principal source of its income. Fixed income securities (including
policy loans, mortgage loans and short-term investments) comprise over 98%
of AAG's investment portfolio.
Risks inherent in connection with fixed income securities include loss upon
default and market price volatility. Factors which can affect the market
price of these securities include: (i) creditworthiness of issuers; (ii)
changes in market interest rates; (iii) the number of market makers and
investors; and (iv) defaults by major issuers of securities.
In recent years, GALIC has reduced its holdings in non-investment grade
fixed maturity securities and equity securities of affiliates. This shift
in investment strategy has placed an emphasis on high quality fixed income
securities which management believes should produce a more consistent and
predictable level of investment income.
The National Association of Insurance Commissioners ("NAIC") assigns quality
ratings to publicly traded as well as privately placed securities. These
ratings range from Class 1 (highest quality) to Class 6 (lowest quality).
The following table shows GALIC's fixed maturity portfolio by NAIC
designation (and comparable
Standard & Poor's Corporation rating) at December 31:
<TABLE>
<CAPTION>
NAIC
Rating Comparable S&P Rating 1993 1992
______ _____________________ ____ ____
<C> <S> <C> <C>
1 AAA, AA, A 58% 67%
2 BBB 37 24
___ ___
Total investment grade 95 91
___ ___
3 BB 4 5
4 B 1 4
5 CCC, CC, C * *
6 D - *
___ ___
Total non-investment grade 5 9
___ ___
Total fixed maturities 100% 100%
___ ___
<FN>
* less than 1%
</TABLE>
GALIC's primary investment objective in selecting securities for its fixed
maturity portfolio is to optimize interest yields while maintaining an
appropriate relationship of maturities between GALIC's assets and expected
liabilities. GALIC invests in bonds that have primarily intermediate-term
maturities. This practice provides GALIC with additional flexibility to
respond to fluctuations in the marketplace.
<PAGE>
The table below sets forth the maturities of GALIC's fixed maturity
investments based on their carrying value. At December 31, 1993, the
average maturity of GALIC's fixed maturity investments was approximately 6
years (including CMOs, which had an estimated average life of approximately
4 years).
<TABLE>
<CAPTION>
Maturity 1993 1992
________ ____ ____
<S> <C> <C>
One year or less * 1%
After one year through five years 10% 11
After five years through ten years 43 34
After ten years 12 12
___ ___
65 58
Collateralized mortgage obligations 35 42
___ ___
100% 100%
___ ___
<FN>
* less than 1%
</TABLE>
The following table shows the performance of GALIC's investment portfolio,
excluding equity investments in affiliates (dollars in millions):
<TABLE>
<CAPTION>
1993 1992 1991
____ ____ ____
<S> <C> <C> <C>
Average cash and investments at cost
$4,455 $4,078 $3,828
Investment income 358 334 340
Realized gains 35 27 4
Percentage earned:
Excluding realized gains 8.0% 8.2% 8.9%
Including realized gains 8.8 8.9 9.0
</TABLE>
GALIC's investment portfolio is managed by American Money Management
("AMM"), a subsidiary of AFC. As part of the acquisition by STI, GALIC and
AMM executed an investment services agreement which established the
investment management fee paid to AMM at a maximum of one-tenth of one
percent of GALIC's invested assets.
Independent Ratings
GALIC is currently rated "A" (Excellent) by A.M. Best and "A+" (High claims
paying ability) by Duff & Phelps. Publications of A.M. Best indicate that
an "A" rating is assigned to those companies which in A.M. Best's opinion
have achieved excellent overall performance when compared to the standards
established by A.M. Best as norms of the life insurance industry and which
generally have demonstrated a strong ability to meet their obligations to
policyholders over a long period of time. In evaluating a company's
financial and operating performance, independent rating agencies review the
company's profitability, leverage and liquidity, as well as the company's
book of business, the quality and estimated market value of its assets, the
adequacy of its policy reserves and the experience and competency of its
management. Their ratings are based upon factors of concern to
policyholders and agents and are not directed toward the protection of
investors.
Management believes that the ratings assigned to GALIC by independent
insurance rating agencies are important because potential policyholders
often use a company's rating as an initial screening device in considering
annuity products. Management also believes that the majority of purchasers
of 403(b) annuities would not be willing to purchase annuities from an
issuer that had an A.M. Best rating below certain levels. In addition,
certain school districts, hospitals and banks do not allow insurers with an
A.M. Best rating below certain levels to sell annuity products through their
institutions.
<PAGE>
Policy Liabilities and Reserves
GALIC establishes and carries reserves to meet future obligations under its
annuity policies. GALIC's $4.3 billion liability for accumulated
policyholders' funds at December 31, 1993, is calculated based upon
assumptions of future interest rate spreads expected to be realized and
expected mortality, maturity and surrender rates to be experienced on the
annuity policies in force. Annuity premiums are generally recorded under
GAAP as increases to the liability for accumulated policyholders' funds
rather than as revenues. Accumulated interest also increases this
liability. Benefit payments are recorded as decreases to this liability
instead of as expenses.
Competition
GALIC operates in a highly competitive environment. More than 100 insurance
companies offer tax-deferred annuities. GALIC competes with other insurers
and financial institutions based on many factors, including ratings,
financial strength, reputation, service to policyholders, product design
(including interest rates credited), commissions and service to agents.
Since GALIC markets and distributes policies through independent agents, it
must also compete for agents. Management believes that consistently
targeting the same market and emphasizing service to agents and
policyholders give GALIC a competitive advantage.
No single insurer dominates the marketplace. Competitors include (i)
individual insurers and insurance groups, (ii) mutual funds and (iii) other
financial institutions of varying sizes, some of which are mutual insurance
companies possessing competitive advantages in that all of their profits
inure to their policyholders, and many of which possess financial resources
substantially in excess of those available to GALIC. In a broader sense,
GALIC competes for retirement savings with a variety of financial
institutions offering a full range of financial services.
Regulation
GALIC is subject to comprehensive regulation under the insurance laws of the
States of Ohio and California and the other states in which it operates.
These laws, in general, require approval of the particular insurance
regulators prior to certain actions such as the payment of dividends in
excess of statutory limitations, continuing service arrangements with
affiliates and certain other transactions. Regulation and supervision are
administered by a state insurance commissioner who has broad statutory
powers with respect to granting and revoking licenses, approving forms of
insurance contracts and determining types and amounts of business which may
be conducted in light of the financial strength and size of the particular
company. State insurance departments conduct periodic financial
examinations of insurance companies. GALIC's state of domicile, Ohio,
requires that examinations be conducted at least every three years and its
most recent examination was for the three-year period ended December 31,
1990. State insurance laws also regulate the character of each insurance
company's investments, reinsurance and security deposits.
GALIC may be required, under the solvency or guaranty laws of most states in
which it does business, to pay assessments (up to certain prescribed limits)
to fund policyholder losses or liabilities of insurance companies that
become insolvent. These assessments may be deferred or forgiven under most
guaranty laws if they would threaten an insurer's financial strength and, in
certain instances, may be offset against future premium taxes. The
incurrence and amount of such assessments have increased in recent years.
In connection with the GALIC purchase, GALIC's costs for state guarantee
<PAGE>
funds are set at $1 million per year for a five-year period with respect to
insurance companies in receivership, rehabilitation, liquidation or similar
situations at December 31, 1992. For any year in which GALIC pays more than
$1 million to the various states, GAI will reimburse GALIC for the excess
assessments. For any year in which GALIC pays less than $1 million, AAG
will pay GAI the difference between $1 million and the assessed amounts.
GALIC paid $2.2 million in assessments in 1993 and, accordingly, has
recorded a receivable from GAI at December 31, 1993 of $1.2 million.
The Ohio Department of Insurance is GALIC's principal regulatory agency.
GALIC is deemed to be "commercially domiciled" in California based on past
premium volume written in the state and, as a result, is subject to certain
provisions of the California Insurance Holding Company laws, particularly
those governing the payment of stockholder dividends, changes in control and
intercompany transactions. An insurer's status as "commercially domiciled"
is determined annually under a statutory formula. GALIC's status may change
in California in the future if its premium volume there decreases to below
20% of its overall premium volume over the most recent three years.
The NAIC is an organization comprised of the chief insurance regulator for
each of the 50 states and the District of Columbia. One of its major roles
is to develop model laws and regulations affecting insurance company
operations and encourage uniform regulation through the adoption of such
models in all states. As part of the overall insurance regulatory process,
the NAIC forms numerous task forces to review, analyze and recommend changes
to a variety of areas affecting both the operating and financial aspects of
insurance companies. Recently, increased scrutiny has been placed upon the
insurance regulatory framework, and a number of state legislatures have
considered or enacted legislative proposals that alter, and in many cases
increase, state authority to regulate insurance companies and their holding
company systems. In light of recent legislative developments, the NAIC and
state insurance regulators have also become involved in a process of re-
examining existing laws and regulations and their application to insurance
companies. Legislation has also been introduced in Congress which could
result in the federal government's assuming some role in the insurance
industry, although none has been enacted to date.
In 1990, the NAIC began an accreditation program to ensure that states have
adequate procedures in place for effective insurance regulation, especially
with respect to financial solvency. The accreditation program requires that
a state meet specific minimum standards in over 15 regulatory areas to be
considered for accreditation. The accreditation program is an ongoing
process and once accredited, a state must enact any new or modified
standards approved by the NAIC within two years following adoption. As of
December 31, 1993, 32 states, including Ohio and California, were
accredited.
In December 1992, the NAIC adopted a model law enacting risk-based capital
formulas which became effective in 1993. The model law sets thresholds for
regulatory action, and currently GALIC's capital significantly exceeds risk-
based capital requirements. If the NAIC elects to impose more stringent
risk-based capital rules in the future, GALIC's ability to pay dividends
could be adversely affected.
The current NAIC model for extraordinary dividends requires prior regulatory
approval of any dividend that exceeds the "lesser of" 10% of statutory
surplus or 100% of the prior year's net gain from operations. Prior to
1986, the model standard was the "greater of" such amounts. The NAIC has
approved eight alternative provisions which may be considered "substantially
similar" to the model. The NAIC model or one of the alternatives must be
adopted by a state in order to be accredited by the NAIC.
<PAGE>
In October 1993, Ohio revised its dividend law to adopt one of the eight
alternatives. The standard in Ohio requires 30 days prior notice of any
dividend which, together with all such amounts paid in the preceding twelve
months, exceeds the "greater of" 10% of statutory surplus or 100% of the
prior year's net income, but not exceeding earned surplus as of the prior
year-end. The maximum dividend permitted by law is not indicative of an
insurer's actual ability to pay dividends, which may be constrained by
business and regulatory considerations. These considerations include the
impact of dividends on surplus, which could affect (i) an insurer's ratings,
(ii) its competitive position and (iii) the amount of premiums that can be
written. Furthermore, the Ohio Insurance Department has broad discretion to
limit the payment of dividends by insurance companies domiciled in Ohio.
California amended its dividend law effective January 1, 1994, adopting one
of the alternative provisions approved by the NAIC. Under the new
California law, approval is required for dividends which exceed the "greater
of" 10% of statutory surplus or 100% of "net gain from operations", but not
exceeding earned surplus, in any twelve month period.
The NAIC has been considering the adoption of a model investment law for
several years. The current projection for adoption of a model law is the
end of 1994, at the earliest. A draft is not scheduled to be released until
the second quarter of 1994. In addition, it is not yet determined whether
the model law would be added to the NAIC accreditation standards so that
consideration of the model for adoption in states would be required for the
achievement or continuation of any state's accreditation. It is not
possible to predict the impact of these activities on GALIC.
In 1991, the NAIC adopted additional disclosure requirements relating to the
marketing and sale of two-tier annuities. Certain states have adopted
regulations or interpreted existing regulations to restrict the sale of two-
tier annuity products or impose limitations on the terms of such products
that make their sale less attractive to GALIC. To date, these additional
disclosure requirements and restrictions have not had a material impact on
GALIC's business. The NAIC is also considering the adoption of actuarial
guidelines with respect to two-tier annuity products. In connection with
the sale of GALIC, GAI is obligated to neutralize the financial effects of
implementing any such guidelines on GALIC's statutory earnings and capital,
except for the initial, one-time impact on GALIC's statutory earnings.
GAI's obligations will apply only to GALIC's annuity business at the date of
adoption and only if the guidelines are (i) adopted prior to January 1,
1996, or (ii) on the NAIC agenda for adoption as of December 31, 1995, and
actually adopted on or prior to December 31, 1996. Management cannot
predict whether or when the guidelines will be adopted nor can it predict
the form of the guidelines and, therefore, cannot predict the final impact
on GALIC.
There can be no assurance that existing insurance-related laws and
regulations will not become more restrictive in the future and thereby have
a material adverse effect on the operations of GALIC and on the ability of
GALIC to pay dividends.
<PAGE>
<TABLE>
<CAPTION>
GLOSSARY OF SELECTED INSURANCE TERMS
<S> <C>
Accumulation Phase Time period during which interest
accumulates on the premiums paid by a
policyholder to the annuity policy.
Admitted Assets Assets of an insurer permitted by insurance
regulatory authorities to be taken into
account in determining the insurer's
financial condition under statutory
accounting practices.
Annuitization Value Amount accumulated under an annuity policy
which is available when a policyholder
elects to annuitize.
Annuitize To withdraw funds from an annuity through a
series of periodic payments.
Annuity Contract which provides for a series of
fixed or variable periodic payments from
a stated or contingent date for a
specified period, such as for a number of
years or for life.
Annuity Receipts Premiums received from annuity
policyholders.
Carrying Value The amount reported for an asset or
liability in the financial statements in
conformity with generally accepted
accounting principles ("GAAP") or statutory
accounting practices, whichever is
applicable in the circumstances.
Crediting Rate Interest rate applied to funds accumulated
under annuity contracts, whether guaranteed
or currently declared by the insurer.
Fixed Rate Annuities Annuities whose crediting rates are
established periodically by the issuer.
The crediting rate is not tied to an index
but may vary from time to time as
determined by the issuer.
Flexible Premium Deferred Annuities that permit periodic premium
payments in
Annuities ("FPDAs") amounts and at such times as the holder
determines.
403(b) Annuities Flexible premium deferred annuities for
which Section 403(b) of the Internal
Revenue Code authorizes the deferral of
taxes on contributions and interest
credited on the contributions.
In Force Total amount of insurance coverage or
number of policies or annuity contracts
that have not terminated.
Independent Agents Independent contractors who represent one
or more insurers and are licensed to sell
the insurers' products.
Liability for Accumulated Reserve established under generally
accepted Policyholders' Funds accounting principles for the present value
of estimated future benefit payments to
policyholders under annuities issued by an
insurer.
Managing General Agents Independent agents who also have authority
to solicit and manage other independent
agents on behalf of an insurance company.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GLOSSARY OF SELECTED INSURANCE TERMS
<S> <C>
Persistency Rate Percentage of policyholder funds from
annuity contracts remaining with an insurer
from the beginning to the end of a given
year or other period. A high persistency
rate is generally desired by an insurer.
Policyholder Benefit Liabilities established on a statutory
basis whose Reserves minimum levels are determined by law and
which are established to adequately provide
for benefits ultimately payable to
policyholders.
Premiums Money paid by a policyholder to an
insurance company for an insurance policy
or annuity.
Single Premium Deferred Annuities that call for a policy to be
issued in Annuities ("SPDAs") exchange for payment of a single lump sum
premium payment.
Single-tier Annuities Annuities which have a single account value
regardless of whether the contract is
annuitized or surrendered and which have a
surrender charge that reduces to zero over
time.
Statutory Accounting Accounting practices prescribed or
permitted by the Practices ("SAP") National Association of
Insurance Commissioners
and the relevant state
insurance regulatory
authorities.
Statutory Capital and Surplus Statutory Capital is the amount received
from the sale of shares of stock in the
Company. Statutory Surplus is the excess
of assets over liabilities and capital, as
determined in accordance with statutory
accounting practices. The total of these
two amounts is a concept similar to
stockholders' equity on a GAAP basis.
Surrender Charge Amount deducted from the accumulated funds
of an annuity policy when a policyholder
withdraws funds in a lump sum payment.
Surrender Value Net amount a policyholder would be paid in
a lump sum.
Tax-deferred Annuities Annuities which are issued pursuant to a
tax-qualified retirement plan and which
permit premium payments on a before-tax
basis.
Tax-qualified Premiums Premiums paid to purchase tax-deferred
annuities.
Two-tier Annuities Annuities which have a permanent surrender
charge and which maintain two account
values -- an upper-tier value to be paid if
annuitized and a lower-tier value to be
paid if surrendered.
</TABLE>
<PAGE>
Discontinued Manufacturing Operations
_____________________________________
Prior to 1993, the Company sold most of its manufacturing operations. These
actions were taken in light of an ongoing strategic review process that led
management and the Board of Directors to conclude that such operations
either lacked a strong competitive position in the relevant product markets
or did not have strong growth prospects or provide sufficiently high returns
on investment.
In 1991, the Company sold its interest in a manufacturing operation for $18
million in cash. In 1992, the Company sold substantially all of its
remaining operations for $130 million in cash, notes and property.
In 1993, AAG recorded a $14.8 million pretax provision related to
discontinued operations. Approximately $9.7 million of the provision
represented employee related obligations resulting primarily from a decrease
in the discount rate used to calculate pension obligations; approximately
$3.3 million related to adjustments for certain property and inventory
associated with the Company's former manufacturing properties.
At December 31, 1993, the Company owned an electronic components
manufacturer with assets of approximately $8.6 million and 1993 revenues of
approximately $11.9 million.
Employees
_________
As of December 31, 1993, AAG employed approximately 15 persons and GALIC
employed approximately 425 persons. None of the employees are represented
by a labor union. AAG believes that its employee relations are excellent.
<TABLE>
ITEM 2
Properties
__________
Location
The material properties of American Annuity are listed below. Management
believes that its corporate offices are generally well maintained and
adequate for American Annuity's present needs.
<CAPTION>
Lease
Interior Expiration
Location Square Feet Use (if leased)
____________ ___________ ______________________________________
<S> <C> <C> <C>
Cincinnati, OH 58,300 AAG/GALIC corporate officesApril 1998
Cincinnati, OH 41,000 GALIC offices Monthly
Los Angeles, CA 60,000 GALIC former corporate officesDecember
1994
</TABLE>
<TABLE>
<CAPTION>
Discontinued Operations:
________________________
<S> <C> <C> <C>
North Adams, MA 154,000 Manufacturing facility Owned
Hudson, NH 121,400 Manufacturing facility March 2003
Concord, NH 113,000 Manufacturing facility Owned
Hillsville, VA 102,000 Manufacturing facility Owned
El Paso, TX 100,000 Manufacturing facility Owned
Ronse, Belgium 85,000 Manufacturing facility Owned
Longwood, FL 60,000 Manufacturing facility Owned
North Adams, MA 44,000 R & D facility Owned
North Adams, MA 22,000 Manufacturing facility January 1998
</TABLE>
In 1993, AAG and GALIC moved their offices to Cincinnati from Stamford,
Connecticut and Los Angeles, California, respectively.
<PAGE>
Most of the manufacturing facilities are currently being leased to companies
using them for manufacturing operations. The Company is attempting to sell
or extend leases on these facilities. In addition, the Company has agreed
to contribute a facility in North Adams, Massachusetts which has been vacant
for several years to a not-for-profit entity which intends to develop the
property into a multi-discipline art center.
Environmental Matters
Federal and state laws and regulations, including the federal Comprehensive
Environmental Response, Compensation, and Liability Act and similar state
laws, impose liability on the Company (as the successor to Sprague) for the
investigation and cleanup of hazardous substances disposed of or spilled by
its discontinued manufacturing operations, at facilities still owned by the
Company and facilities transferred in connection with the sales of certain
operations, as well as at disposal sites operated by third parties. In
addition, the Company has indemnified the purchasers of its former
operations for the cost of such activities. At several sites, the Company
is conducting cleanup activities of soil and ground water contamination in
accordance with consent agreements between the Company and state
environmental agencies. The Company has also conducted or is aware of
investigations at a number of other locations of its former operations that
have disclosed environmental contamination that could cause the Company to
incur additional costs of investigation and remediation. The Company has
also been identified by state and federal regulators as a potentially
responsible party at a number of other disposal sites.
Based on the costs incurred by the Company over the past several years and
discussions with its independent environmental consultants, management
believes that reserves recorded for such clean-up activities are sufficient
in all material respects to satisfy the known liabilities. However, the
regulatory standards for clean-up are continually evolving toward more
stringent
requirements. In addition, many of the environmental investigations at the
Company's former operating locations and third-party sites are still
preliminary, and where clean-up plans have been proposed, they have not yet
received full approval from the relevant regulatory agencies. Further, the
presence of the Company generated wastes at third-party disposal sites
exposes the Company to joint and several liability for the potential
additional costs of cleaning up wastes generated by others. Accordingly,
there can be no assurance that the costs of environmental clean-up for the
Company may not be significantly higher in future years, possibly
necessitating additional charges.
Except as set forth below, the Company considers any administrative or
judicial proceedings involving the Company which are related to
environmental matters to be ordinary routine litigation incidental to its
business.
The Maine Department of Environmental Protection has issued a proposed
Administrative Consent Agreement and Enforcement Order calling for a
$328,000 fine based on alleged 1991 violations of certain reporting
regulations. The Company is working with the Department of Environmental
Protection to resolve this matter and is negotiating the amount of the fine.
<PAGE>
ITEM 3
Legal Proceedings
_________________
American Annuity (as the successor to STI), its directors and AFC are
defendants in seven class and derivative actions which were filed in the
Court of Chancery of the State of Delaware. These actions were filed
following the public announcement on June 26, 1992 that STI was considering
a proposal from GAI relating to the purchase of GALIC. The actions are
captioned: (a) William Steiner v. STI Group, Inc., et al., Civil Action No.
___________________________________________
12614 filed June 29, 1992; (b) Frank Seinfeld v. STI Group, Inc., et al.,
__________________________________________
Civil Action No. 12616 filed June 29, 1992; (c) Frederick Rand v. STI Group,
____________________________
Inc., et al., Civil Action No. 12622 filed June 30, 1992; (d) Eli Ballan, et
_____________ ______________
al., v. Carl H. Lindner, et al., Civil Action No. 12619 filed June 30, 1992;
________________________________
(e) Seymour Arkin v. Carl H. Lindner, et al., Civil Action No. 12620 filed
_________________________________________
June 20, 1992; (f) Jeffrey Rubenstein v. Carl H. Lindner, et al., Civil
______________________________________________
Action No. 12532 filed July 7, 1992; and (g) Harry Lewis v. Carl H. Lindner,
_______________________________
et al., Civil Action No. 12633 filed July 7, 1992. On September 24, 1992,
_______
all of the foregoing actions were consolidated under the caption In re STI
_________
Group, Inc. Shareholders Litigation, Consolidated Civil Action No. 12619.
___________________________________
The consolidated action asserts both class and derivative claims against
American Annuity, its directors and AFC.
The consolidated action alleges that the acquisition of GALIC by the Company
was a self-dealing transaction designed to benefit AFC, was a waste of the
Company's assets and constituted a breach of fiduciary duties by AFC and the
Company's directors. Following the filing of the suits, the Company and AFC
engaged in active settlement discussions with the plaintiffs. These
discussions resulted in an agreement to settle the consolidated action on
the basis of the earlier increase in the per share consideration paid by AFC
for shares of the Company's common stock in connection with the acquisition
and the decrease in the price paid by the Company for GALIC. The
plaintiffs' counsel have applied to the Court of Chancery for an award of
fees and expenses in the amount of $550,000. The Company has not opposed
this application. The Court is scheduled to consider approval of the
settlement and an award of attorneys' fees in April 1994.
AAG and GALIC are subject to litigation and arbitration in the normal course
of its business. GALIC is not a party to any material pending litigation or
arbitration.
<PAGE>
PART II
ITEM 5
Market for Registrant's Common Equity
and Related Stockholder Matters
_______________________________
AAG's Common Stock is listed and traded principally on the New York Stock
Exchange ("NYSE") under the symbol AAG. On March 1, 1994, there were
approximately 10,000 holders of record of Common Stock. The following table
sets forth the range of high and low sales prices for the Common Stock on
the NYSE Composite Tape.
1993
1992
_________________ _________________
High Low High Low
____ ___ ____ ___
First Quarter $11.38 $5.63 $8.00 $6.13
Second Quarter 11.38 8.75 6.75 5.63
Third Quarter 11.00 7.88 6.75 5.63
Fourth Quarter 10.38 8.25 6.75 5.88
The Company paid annual dividends of $.05 per share in 1993, 1992 and 1991.
AAG has not determined a dividend paying policy for the future; the amount
of dividends available to be paid at December 31, 1993 is limited to $2.5
million by certain indenture covenants.
In December 1993, AAG announced an offer to purchase stock from holders of
ten or fewer shares of its Common Stock. In February 1994, AAG repurchased
4,107 shares at $11 per share from approximately 1,100 shareholders.
ITEM 6
Selected Financial Data
_______________________
The following financial data have been summarized from, and should be read
in conjunction with, the Company's consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The data reflects the purchase of GALIC as of December 31,
1992 (in millions, except per share amounts).
Operations Statement Data: 1993 1992 1991 1990 1989
__________________________ ____ ____ ____ ____ ____
Net investment income $353.3 $ 3.6 $ 1.9 $ 0.4 $ 1.2
Total revenues 387.2 3.6 1.9 0.4 1.2
Earnings (loss) from continuing
operations 53.0 (9.0) (4.7) (6.0) (6.9)
Loss from discontinued operations (9.6) (16.8) (47.8) (43.3) (89.9)
Extraordinary item (3.4) - - - -
Change in accounting principle - (3.1) - - -
______ _____ _____ _____ _____
Net earnings (loss) $ 40.0 ($28.9)
($52.5) ($49.3) ($96.8)
______ _____ _____ _____ _____
Earnings (loss) per common share:
Continuing operations $1.41 ($0.50)($0.26) ($0.33) ($0.37)
Discontinued operations (.27) (.94) (2.66) (2.37) (4.94)
Extraordinary item (.10) - - - -
Change in accounting principle - (.17) - - -
_____ _____ _____ _____ _____
Net earnings (loss) $1.04 ($1.61)
($2.92) ($2.70) ($5.31)
_____ _____ _____ _____ _____
Balance Sheet Data:
___________________
Total assets $4,913.8
$4,480.4 $170.1 $294.8 $382.6
Long-term debt 225.9 230.9 27.9 30.6 65.7
Total stockholders' equity 250.3 186.6 108.5 171.8 216.7
<PAGE>
ITEM 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations
________________________________________________
General
Following is a discussion and analysis of the financial statements and other
statistical data that management believes will enhance the understanding of
AAG's financial condition and results of operations. This discussion should
be read in conjunction with the financial statements beginning on page F-1.
AAG is organized as a holding company with nearly all of its operations
being conducted by Great American Life Insurance Company ("GALIC"), which
was acquired by AAG on December 31, 1992. The parent corporation, however,
has continuing expenditures for administrative expenses, corporate services,
liabilities in connection with discontinued operations and, most
importantly, for the payment of interest on borrowings and dividends on
preferred stock. Since its business is financial in nature, AAG does not
prepare its consolidated financial statements using a current-noncurrent
format. Consequently, certain traditional ratios and financial analysis
tests are not meaningful.
Liquidity and Capital Resources
Ratios The ratio of AAG's long-term debt to equity was .90 at December 31,
______
1993, compared to 1.24 at December 31, 1992. AAG's ratio of earnings to
fixed charges was 4.7 in 1993; the ratio of earnings to fixed charges and
preferred dividends was 3.8 for the same period.
Sources and Uses of Funds In connection with the GALIC acquisition, AAG
_________________________
sold common and preferred stock to GALIC's parent, Great American Insurance
Company, for $156 million in cash. The proceeds of those stock sales
together with $230 million in new borrowings and most of the accumulated
cash funds of the Company were used to purchase GALIC. The total cost to
acquire GALIC was approximately $486 million, including transaction costs
and fees of $17.4 million.
The borrowings used to fund the GALIC acquisition were repaid during 1993
from the sales of $125 million of 11-1/8% Senior Subordinated Notes due 2003
and $100 million of 9-1/2% Senior Notes due 2001. As a result of the
refinancings, AAG has no scheduled principal maturities until the year 2001.
Annual interest and dividend payments on AAG's debt and preferred stock are
approximately $26.6 million.
AAG's ability to make interest and principal payments on its debt, and pay
dividends on its preferred stock and other holding company costs is
dependent on cash payments from GALIC. In 1993, AAG received $53.6 million
in tax allocation payments (including $19 million for 1992) and $18.2
million in capital distributions from GALIC. In the second quarter of 1993,
AAG made a capital contribution of $13.0 million to GALIC.
Capital distributions by GALIC are subject to various laws and regulations
which limit the amount of dividends that can be paid without regulatory
approval. (See Note L to the financial statements.) The maximum amount of
dividends payable by GALIC in 1994 without approval is approximately $44.0
million.
In January 1994, AAG entered into a four-year $20 million revolving line of
credit agreement with a bank. AAG has not made any cash draws under this
agreement. Based upon the current level of GALIC's operations and
anticipated growth, AAG believes that it will have sufficient resources from
GALIC's dividends and tax allocation payments to meet its liquidity
requirements.
<PAGE>
Investments The National Association of Insurance Commissioners ("NAIC")
___________
assigns quality ratings to publicly traded as well as privately placed
securities. At December 31, 1993, 95% of GALIC's fixed maturity portfolio
was comprised of investment grade bonds (NAIC rating of "1" or "2") compared
to 91% at December 31, 1992. Management believes that the high credit
quality of GALIC's investment portfolio should generate a stable and
predictable investment return.
GALIC invests primarily in fixed income investments which approximated 98%
of its investment portfolio at December 31, 1993. GALIC generally invests
in securities with intermediate term maturities with an objective of
optimizing interest yields while maintaining an appropriate relationship of
maturities between GALIC's assets and expected liabilities. GALIC's fixed
maturity portfolio is classified into two categories: "held to maturity"
and "available for sale". (See Note A to the financial statements.) At
December 31, 1993, GALIC had approximately $206 million in net unrealized
gains on its fixed maturity portfolio compared to $117 million at December
31, 1992.
At December 31, 1993, none of the Company's fixed maturity investments were
non-performing. In addition, GALIC has little exposure to mortgage loans and
real estate. As of December 31, 1993, these investments represented only
1.6% of total assets. The majority of mortgage loans and real estate was
purchased in the latter half of 1993.
At December 31, 1993, collateralized mortgage obligations ("CMOs")
represented approximately 35% of fixed maturity investments compared to 42%
at December 31, 1992. As of December 31, 1993, interest only (I/O),
principal only (P/O) and other "high risk" CMOs represented approximately
0.2% of total CMOs. GALIC invests primarily in CMOs which are structured to
minimize prepayment risk. In addition, the majority of CMOs held by GALIC
were purchased at a discount to par value. Management believes that the
structure and discounted nature of the CMOs will minimize the effect of
prepayments on earnings over the anticipated life of the CMO portfolio.
Substantially all of GALIC's CMOs are AAA-rated by Standard & Poor's
Corporation and are collateralized by GNMA, FNMA and FHLMC single-family
residential pass-through certificates. The market in which these securities
trade is highly liquid. Aside from interest rate risk, AAG does not believe
a material risk (relative to earnings or liquidity) is inherent in holding
such investments.
The Ohio Insurance Code contains rules restricting the types and amounts of
investments which are permissible for an Ohio life insurer, including GALIC.
These rules are designed to ensure the safety and liquidity of the insurer's
investment portfolio. The NAIC is considering the formulation of a model
investment law which, if adopted, would have to be considered by Ohio for
adoption. The formulation is in the preliminary stages and management
believes its impact on GALIC's operations will not be material.
Results of Operations
Net Earnings and General Net earnings were $40.0 million or $1.04 per
________________________
common share in 1993. GALIC was acquired by AAG on December 31, 1992;
accordingly, its results are not included in the Company's statement of
operations prior to 1993. All of GALIC's products are fixed rate annuities
which permit GALIC to change the crediting rate at any time (subject to
minimum interest rate guarantees of 3% to 4% per annum). As a result,
management has been able to react to changes in interest rates and maintain
a desired interest rate "spread" with little or no effect on persistency.
<PAGE>
The following table provides a comparison of certain amounts for GALIC (in
millions):
<TABLE>
<CAPTION>
GALIC 1993
1992*
_____ ____ ____
<S> <C>
<C>
Annuity Receipts:
Flexible Premium Deferred Annuities:
First Year $ 49
$ 48
Renewal
223 232
____ ____
272 280
Single Premium Deferred Annuities 128
80
____ ____
TOTAL ANNUITY RECEIPTS $400
$360
____ ____
Net investment income $353
$329
Realized gains 35 25
Equity in net losses of affiliates (3) (16)
Interest on annuity policyholders' funds $229
$242
Earnings before income taxes $115
$ 49
<FN>
* Amounts for 1992 reflect GALIC's operations prior to being acquired by
AAG;
accordingly, these amounts are not reflected in AAG's results of
operations.
</TABLE>
Total annuity receipts increased primarily due to the introduction of new
single premium products in the second half of 1992.
Net Investment Income GALIC's net investment income increased 7% over the
_____________________
comparable 1992 period. An increase in average fixed maturity investments
more than offset a decrease in interest rates available in the marketplace.
Investment income is reflected in the Statement of Operations net of
investment expenses of $4.9 million in 1993.
Realized Gains Individual securities are sold from time to time as market
______________
opportunities appear to present optimal situations under AAG's investment
strategies.
Equity in Net Loss of Affiliate Equity in net loss of affiliate represents
_______________________________
AAG's proportionate share of Chiquita's losses in 1993. Chiquita reported a
net loss for 1993 of $51 million compared to a net loss of $284 million for
1992. The improvement in 1993 was attributed primarily to a multi-year
investment spending program and the ongoing impact of its restructuring and
cost reduction efforts.
Interest on Annuity Policyholders' Funds GALIC's interest on annuity
________________________________________
policyholders' funds decreased 5% from its comparable 1992 period. The
average crediting rate on funds held by GALIC has decreased from 7.2% at
December 31, 1991, to 6.2% at December 31, 1992 and to 5.3% at December 31,
1993. The rate at which GALIC credits interest on annuity policyholders'
funds is subject to change based on management's judgment of market
conditions.
Provision for Relocation Expenses In 1993, GALIC relocated its corporate
_________________________________
offices from Los Angeles to Cincinnati; the estimated cost of this move
($8.0 million) was included in 1993 continuing operations.
Also in 1993, AAG relocated its corporate offices from Stamford to
Cincinnati; the estimated cost of this relocation and related shutdown and
severance costs ($5.0 million) was provided for in discontinued operations
in 1992.
<PAGE>
Discontinued Operations The Company has sold virtually all of its former
_______________________
manufacturing businesses. A small Belgium based subsidiary continues to be
held for sale along with certain properties, most of which are currently
leased to companies using them for manufacturing operations.
The Company has certain obligations related to its former business
activities. Among these obligations is the funding of pension plans,
environmental remediation costs, lease payments for two former plant sites,
certain retiree medical benefits, and certain obligations associated with
the sales of the Company's manufacturing operations. In 1992, the Company
recorded pretax charges related to discontinued operations totalling $24.5
million. In the fourth quarter of 1993, AAG recorded pretax charges for
discontinued operations totalling $14.8 million. These charges included
employee related obligations of approximately $9.7 million resulting
primarily from a decrease (from 9.5% to 7.125%) in the discount rate used to
calculate pension obligations. The remaining charges reflected write-downs
and other estimated expenses associated with the Company's former
manufacturing properties. (See Note H to the financial statements.)
While it is difficult to estimate future environmental remediation costs
accurately, management believes the aggregate cost of remediation at all
sites for which it has responsibility will range from $10 million to $15
million. The reserve for environmental remediation work was $10.6 million
at December 31, 1993. Changes in regulatory standards and further
investigation of these sites could affect estimated costs in the future.
Management believes, based on the costs incurred by the Company over the
past several years and discussions with its independent environmental
consultants, that reserves recorded for such clean-up activities are
sufficient to satisfy the known liabilities and that the outcome of the
contingencies will not, individually or in the aggregate, have a material
adverse effect on the financial condition or results of operations of AAG.
Extraordinary Item In August 1993, AAG prepaid its Bank Term Loan and wrote
__________________
off $5.2 million ($3.4 million net of tax) of related unamortized debt
issuance costs.
Accounting Change Effective January 1, 1992, AAG implemented Statement of
_________________
Financial Accounting Standards ("SFAS") No. 106, "Accounting for
Postretirement Benefits Other Than Pensions", and recorded a provision of
$3.1 million for the projected future costs of providing postretirement
benefits to retirees in its discontinued manufacturing operations.
New Accounting Standard to be Implemented The FASB has issued SFAS No. 112,
_________________________________________
"Employers' Accounting for Postemployment Benefits", which became effective
in 1994. The FASB has also issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan", which is scheduled to become effective in 1995.
Implementation of these standards is not expected to have a material effect
on AAG.
<PAGE>
ITEM 8
Financial Statements and Supplementary Data
___________________________________________
PAGE
____
Reports of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1993 and 1992 F-3
Consolidated Statement of Operations:
Years Ended December 31, 1993, 1992 and 1991 F-4
Consolidated Statement of Changes in Stockholders' Equity:
Years Ended December 31, 1993, 1992 and 1991 F-5
Consolidated Statement of Cash Flows:
Years Ended December 31, 1993, 1992 and 1991 F-6
Notes to Consolidated Financial Statements F-7
"Selected Quarterly Financial Data" has been included in Note M to the
Consolidated Financial Statements.
PART III
The information required by the following Items will be included in American
Annuity's definitive Proxy Statement for the 1994 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission
within 120 days of the Company's fiscal year end and is herein incorporated
by reference:
ITEM 10 Directors and Executive Officers of the Registrant
__________________________________________________
ITEM 11 Executive Compensation
______________________
ITEM 12 Security Ownership of Certain Beneficial Owners and
___________________________________________________
Management
__________
ITEM 13 Certain Relationships and Related Transactions
______________________________________________
<PAGE>
REPORTS OF INDEPENDENT AUDITORS
American Annuity Group, Inc.:
We have audited the accompanying consolidated balance sheets of American
Annuity Group, Inc. and subsidiaries as of December 31, 1993 and 1992, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. Our audits also included
the financial statement schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits. The consolidated financial
statements of American Annuity Group, Inc. for the year ended December 31,
1991, were audited by other auditors whose report thereon dated March 24,
1992, expressed an unqualified opinion on those statements prior to
adjustment for reclassification of discontinued operations.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American Annuity Group, Inc. and subsidiaries at December 31,
1993 and 1992, and the consolidated results of their operations and their
cash flows for the years then ended, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
In 1992, the Company discontinued its manufacturing operations. As a
result, these operations were reclassified and reported as discontinued
operations. We also audited the adjustments that were applied to reclassify
the discontinued operations in the 1991 consolidated financial statements.
In our opinion such reclassifications were appropriate and properly applied.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting in 1993 for certain investments in debt and
equity securities and in 1992 for income taxes and postretirement benefits
other than pensions.
Ernst & Young
Cincinnati, Ohio
March 11, 1994
<PAGE>
American Annuity Group, Inc.:
We have audited the consolidated balance sheet of American Annuity Group,
Inc., formerly Sprague Technologies, Inc., and subsidiaries (not presented
separately herein) as of December 31, 1991, and the related consolidated
statements of operations, common stockholders' equity and cash flows for the
year then ended (before adjustments and reclassifications to conform with
the presentation for 1992). Our audit also included the 1991 financial
statement schedule listed in the Index at Item 14(a) for the year ended
December 31, 1993. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements (before adjustments
and reclassifications to conform with the presentation for 1992) present
fairly, in all material respects, the financial position of American Annuity
Group, Inc. and subsidiaries as of December 31, 1991, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles. Also, in our opinion, the
financial statement schedule for 1991, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Deloitte & Touche
Stamford, Connecticut
March 24, 1992
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
<TABLE>
<CAPTION>
December 31,
___________________
1993 1992
____ ____
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity - at amortized cost
(market - $2,751.9 and $2,739.5) $2,633.2 $2,662.8
Available for sale - at market
(amortized cost - $1,667.0 and $1,108.9) 1,754.5 1,149.8
Equity securities - at market (cost - $12.8 and $27.8) 25.9 30.0
Investment in affiliates 25.2 38.2
Mortgage loans on real estate 52.1 15.4
Real estate, net of accumulated
depreciation of $4.6 and $4.7 26.1 14.9
Policy loans 166.6 158.5
Short-term investments 57.0 232.9
________ ________
Total investments 4,740.6 4,302.5
Cash 15.0 23.6
Marketable securities, restricted in use 4.4 6.0
Receivables from affiliates, net - 14.0
Accrued investment income 66.9 53.0
Deferred policy acquisition costs, net 39.2 44.0
Other assets 47.7 37.3
________ ________
Total assets $4,913.8 $4,480.4
________ ________
LIABILITIES AND STOCKHOLDERS' EQUITY
Annuity policyholders' funds accumulated $4,256.7 $3,973.5
Long-term debt 225.9 230.9
Payable for securities purchased 68.0 0.2
Payable to affiliates, net 28.3 -
Accounts payable, accrued expenses and other
liabilities 84.6 89.2
________ ________
Total liabilities 4,663.5 4,293.8
Series A Preferred Stock (redemption value - $45.0)
29.9 29.4
Common Stock, $1 par value
-100,000,000 shares authorized
-35,097,447 shares outstanding 35.1 35.1
Capital surplus 301.0 306.3
Retained earnings (deficit) (172.6) (212.6)
Unrealized gains on marketable securities, net of
deferred income taxes and insurance adjustments
56.9 28.4
________ ________
Total stockholders' equity 250.3 186.6
________ ________
Total liabilities and stockholders' equity$4,913.8 $4,480.4
________ ________
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
____________________________
1993 1992 1991
____ ____ ____
<S> <C> <C> <C>
Revenues:
Net investment income $353.3 $ 3.6 $ 1.9
Realized gains on sales of investments 35.5 - -
Equity in net loss of affiliate (2.9) - -
Other income 1.3 - -
______ ______ ______
387.2 3.6 1.9
Costs and Expenses:
Interest on annuity policyholders' funds 228.6 - -
Interest on borrowings and other debt expenses
22.6 - -
Amortization of deferred policy acquisition costs 14.7 - -
Provision for GALIC relocation expenses 8.0 - -
Transaction fees on GALIC acquisition - 7.3 -
Other operating and general expenses 33.3 4.8 6.4
______ ______ ______
307.2 12.1 6.4
______ ______ ______
Earnings (loss) from continuing operations before
taxes, extraordinary item and cumulative effect
of accounting change 80.0 (8.5) (4.5)
Provision for income taxes 27.0 0.5 0.2
______ ______ ______
Earnings (loss) from continuing operations 53.0 (9.0) (4.7)
Discontinued operations, net of tax (9.6) (16.8) (47.8)
______ ______ ______
Earnings (loss) before extraordinary item and
cumulative effect of accounting change 43.4 (25.8) (52.5)
Extraordinary item, net of tax (3.4) - -
Cumulative effect of accounting change - (3.1) -
______ ______ ______
Net Earnings (Loss) $ 40.0 ($ 28.9) ($ 52.5)
______ ______ ______
Preferred Dividend Requirement 3.6 - -
Net earnings (loss) applicable to Common Stock
$ 36.4 ($ 28.9) ($ 52.5)
______ ______ ______
Average Common Shares outstanding 35.1 18.0 18.0
Earnings (loss) per share:
Continuing operations $ 1.41 ($ .50) ($ .26)
Discontinued operations (.27) (.94) (2.66)
Extraordinary item (.10) - -
Cumulative effect of accounting change - (.17) -
______ ______ ______
Net earnings (loss) $ 1.04 ($ 1.61) ($ 2.92)
______ ______ ______
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions)
<TABLE>
<CAPTION>
Year ended December 31,
____________________________
1993 1992 1991
____ ____ ____
<S> <C> <C>
<C>
Preferred Stock:
Balance at beginning of period $ 29.4 $ - $ -
Issued during the period - 29.4 -
Accretion of discount 0.5 - -
______ ______ ______
Balance at end of period $ 29.9 $ 29.4 $ -
______ ______ ______
Common Stock:
Balance at beginning of period $ 35.1 $ 20.5 $ 20.5
Issued during the period - 18.6 -
Retirement of treasury stock - (4.0) -
______ ______ ______
Balance at end of period $ 35.1 $ 35.1 $ 20.5
______ ______ ______
Capital Surplus:
Balance at beginning of period $306.3 $297.5 $298.3
Common dividends declared (1.7) - (0.9)
Preferred dividends declared (3.1) - -
Accretion of preferred stock discount (0.5) - -
Common stock issuance - 93.9 0.1
Proceeds in excess of fair value of
preferred stock - 15.6 -
Retirement of treasury stock - (20.6) -
Excess of purchase price over GALIC's net assets - (79.2) -
Other - (0.9) -
______ ______ ______
Balance at end of period $301.0 $306.3 $297.5
______ ______ ______
Retained Earnings (Deficit):
Balance at beginning of period ($212.6) ($183.7) ($131.2)
Net earnings (loss) 40.0 (28.9) (52.5)
______ ______ ______
Balance at end of period ($172.6) ($212.6) ($183.7)
______ ______ ______
Treasury Stock:
Balance at beginning of period $ - ($ 24.1) ($ 22.9)
Treasury stock acquired - (0.5) (1.2)
Retirement of treasury stock - 24.6 -
______ ______ ______
Balance at end of period $ - $ - ($ 24.1)
______ ______ ______
Unrealized Gains, Net:
Balance at beginning of period $ 28.4 $ - $ -
Change during period 28.5 28.4 -
______ ______ ______
Balance at end of period $ 56.9 $ 28.4 $ -
______ ______ ______
Pension Adjustment:
Balance at beginning of period $ - ($ 1.7) ($ 0.4)
Change during period - 1.7 (1.3)
______ ______ ______
Balance at end of period $ - $ - ($ 1.7)
______ ______ ______
Cumulative Translation Adjustments:
Balance at beginning of period $ - $ - $ 7.5
Translation adjustments and restructuring
- - (7.5)
______ ______ ______
Balance at end of period $ - $ - $ -
______ ______ ______
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Year ended December 31,
_____________________________
1993 1992 1991
____ ____ ____
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) $ 40.0 ($ 28.9) ($ 52.5)
Adjustments:
Discontinued operations 9.6 16.8 47.8
Loss on retirement of debt 3.4 - -
Cumulative effect of accounting change - 3.1 -
Interest on annuity policyholders' funds 228.6 - -
Amortization of deferred policy acquisition costs 14.7 - -
Depreciation and amortization 0.9 - 17.4
Realized gains on investing activities (35.5) - -
Increase in accrued investment income (13.9) - -
Increase in deferred policy acquisition costs
(13.2) - -
Change in balances with affiliates 32.6 - -
Increase in other assets (2.3) - -
Decrease in other liabilities (19.3) - -
Other, net (12.3) (39.3) (8.4)
______ ______ _____
233.3 (48.3) 4.3
______ ______ _____
Cash Flows from Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (2,015.1) - -
Equity securities (5.6) - -
Mortgage loans (50.3) - -
Real estate and other assets (9.0) - (22.7)
Subsidiaries and affiliates - (216.6) -
Maturities and redemptions of fixed maturity
investments 379.2 - -
Sales of:
Fixed maturity investments 1,202.0 - -
Equity securities 30.6 - -
Real estate and other assets 2.5 - 22.5
Discontinued operations - 130.8 4.9
Increase in policy loans (8.1) - -
Other, net 2.9 - -
_______ _______ _____
(470.9) (85.8) 4.7
_______ _______ _____
Cash Flows from Financing Activities:
Annuity receipts 400.1 - -
Annuity benefits and withdrawals (337.9) - -
Additional long-term borrowings 225.0 230.0 0.3
Reduction of long-term debt (230.0) (27.9) (0.3)
Net change in short-term borrowings - - (4.3)
Issuance of common stock - 111.3 -
Issuance of preferred stock - 45.0 -
Repurchase of common stock - (0.5) (1.2)
Cash dividends paid (4.1) (0.9) (0.9)
______ ______ ______
53.1 357.0 (6.4)
Effect of exchange rate changes on cash - - (1.6)
______ ______ ______
Net increase (decrease) in cash and
short-term investments (184.5) 222.9 1.0
Beginning cash and short-term investments 256.5 33.6 32.6
______ ______ ______
See Notes to Consolidated Financial Statements.
Ending cash and short-term investments $ 72.0 $256.5 $ 33.6
______ ______ ______
</TABLE>
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The accompanying consolidated financial statements
include the accounts of American Annuity Group, Inc. and its subsidiaries
("American Annuity", "AAG" or "the Company"). Intercompany transactions and
balances are eliminated in consolidation. Certain reclassifications have
been made to prior periods to conform to the current year's presentation.
American Financial Corporation and subsidiaries ("AFC") owned 28,081,467
shares (80%) of AAG's Common Stock at December 31, 1993.
The acquisition of Great American Life Insurance Company ("GALIC"), a
subsidiary of AFC, on December 31, 1992, was recorded as a transfer of net
assets between companies under common control. As a result, the net assets
of GALIC were recorded by AAG at AFC's historical basis and the excess
consideration paid over AFC's historical basis was treated as a reduction of
common stockholders' equity. The results of GALIC's operations have been
included in AAG's consolidated financial statements since its acquisition.
Investments When available, fair values for investments are based on prices
quoted in the most active market for each security. If quoted prices are
not available, fair value is estimated based on present values, fair values
of comparable securities, or similar methods.
AAG implemented Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
beginning December 31, 1993. This standard requires that (i) debt
securities be classified as "held to maturity" and reported at amortized
cost if AAG has the positive intent and ability to hold them to maturity,
(ii) debt and equity securities be classified as "trading" and reported at
fair value, with unrealized gains and losses included in earnings, if they
are bought and held principally for selling in the near term and (iii) debt
and equity securities not classified as held to maturity or trading be
classified as "available for sale" and reported at fair value, with
unrealized gains and losses reported as a separate component of
stockholders' equity. Only in certain limited circumstances, such as
significant issuer credit deterioration or if required by insurance or other
regulators, may a company change its intent to hold a certain security to
maturity without calling into question its intent to hold other debt
securities to maturity in the future.
Prior to the implementation of SFAS No. 115, AAG carried a portion of its
fixed maturity securities at fair value with unrealized gains and losses
carried as a separate component of stockholders' equity with the remainder
of such securities carried at amortized cost. In connection with
implementing SFAS No. 115, AAG reviewed its investment portfolio resulting
in a reclassification at December 31, 1993 of approximately $704 million of
its fixed maturity portfolio (including approximately $485 million in CMOs)
from "held to maturity" to "available for sale" which, in turn, resulted in
(i) an increase of $36 million in the carrying value of fixed maturity
investments and (ii) an increase of $23 million in stockholders' equity.
The reclassification reflects management's intention to reduce the
proportion of CMOs owned and more actively manage the duration of its fixed
maturity portfolio. The implementation of SFAS No. 115 had no effect on net
income.
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Short-term investments are carried at cost; mortgage loans on real estate
are generally carried at amortized cost; policy loans are stated at the
aggregate unpaid balance. Carrying amounts of these investments approximate
their fair value.
Gains or losses on sales of securities are recognized at the time of
disposition with the amount of gain or loss determined on the specific
identification basis. When a decline in the value of a specific investment
is considered to be other than temporary, a provision for impairment is
charged to earnings and the carrying value of that investment is reduced.
Premiums and discounts on CMOs are amortized over their expected average
lives using the interest method.
Investment in Affiliates AAG's investments in equity securities of
companies that are 20% to 50% owned by AFC and its subsidiaries are carried
at cost, adjusted for a proportionate share of their undistributed earnings
or losses.
Deferred Policy Acquisition Costs ("DPAC") DPAC (principally new
commissions, advertising, underwriting, policy issuance and sales expenses
that vary with and are primarily related to the production of new business)
is deferred and amortized, with interest, in relation to the present value
of expected gross profits on the policies. These gross profits consist
principally of net investment income and future surrender charges, less
interest on policyholders' funds and future policy administration expenses.
DPAC is reported net of unearned revenue relating to certain policy charges
that represent compensation for future services. These unearned revenues
are recognized as income using the same assumptions and factors used to
amortize DPAC.
Beginning with the implementation of SFAS No. 115 in 1993, to the extent
that unrealized gains from securities classified as "available for sale"
would result in adjustments to DPAC, unearned revenues and policyholder
liabilities had those gains actually been realized, such balance sheet
amounts are adjusted, net of deferred taxes.
Annuity Policyholders' Funds Accumulated Annuity premium deposits and
benefit payments are generally recorded as increases or decreases in
"annuity policyholders' funds accumulated" rather than as revenue and
expense. Increases in this liability for interest credited are charged to
expense and decreases for surrender charges are credited to other income.
The fair value of the liability for annuities in the payout phase is assumed
to be the present value of the anticipated cash flows, discounted at current
interest rates. Fair value of annuities in the accumulation phase is
assumed to be the policyholders' cash surrender amount. The aggregate fair
value of all annuity liabilities, net of DPAC, at December 31, 1993,
approximates the amounts recorded in the financial statements.
Income Taxes As of December 31, 1992, AAG and its 80%-owned U.S.
subsidiaries were consolidated with AFC for federal income tax purposes.
For periods prior to December 31, 1992, AAG filed consolidated tax returns
which included all of its 80%-owned U.S. subsidiaries.
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
AAG and GALIC have separate tax allocation agreements with AFC which
designate how tax payments are shared by members of the tax group. In
general, both companies compute taxes on a separate return basis. GALIC is
obligated to make payments to (or receive benefits from) AFC based on
taxable income without regard to temporary differences. In accordance with
terms of AAG's indentures, AAG receives GALIC's tax allocation payments for
the benefit of AAG's deductions arising from current operations. If GALIC's
taxable income (computed on a statutory accounting basis) exceeds a current
period net operating loss of AAG, the taxes payable by GALIC associated with
the excess are payable to AFC. If the AFC tax group utilizes any of AAG's
net operating losses or deductions that originated prior to 1993, AFC will
pay to AAG an amount equal to the benefit received.
Effective January 1, 1992, the Company implemented SFAS No. 109, "Accounting
for Income Taxes". As permitted under the Statement, AAG's prior year
financial statements have not been restated and no adjustment was necessary
for the cumulative effect of the change. Under SFAS No. 109, the liability
method used in accounting for income taxes is less restrictive than the
liability method under SFAS No. 96, previously used by the Company. The
provisions of SFAS No. 109 allow AAG to recognize deferred tax assets if it
is more likely than not that a benefit will be realized.
Under SFAS No. 109, deferred income tax assets and liabilities are
determined based on differences between financial reporting and tax bases
and are measured using enacted tax rates. Current and deferred tax assets
and liabilities are aggregated with other amounts receivable from or payable
to affiliates.
Debt Issuance Costs Debt expenses are amortized over the terms of the
respective borrowings on the interest method.
Statement of Cash Flows For cash flow purposes, "investing activities" are
defined as making and collecting loans and acquiring and disposing of debt
or equity instruments and property and equipment. "Financing activities"
include annuity receipts, surrenders and withdrawals and obtaining resources
from owners and providing them with a return on their investments. All
other activities are considered "operating". Short-term investments having
original maturities of three months or less when purchased are considered to
be cash equivalents for purposes of the financial statements.
Benefit Plans AAG participates in AFC's Employee Stock Ownership Retirement
Plan ("ESORP") covering all employees who are qualified as to age and length
of service. The ESORP is a trusteed, noncontributory plan which invests in
securities of AFC for the benefit of the employees of AFC and its
subsidiaries. Contributions are discretionary by the directors of AAG and
are charged against earnings in the year for which they are declared.
Qualified employees having vested rights in the plan are entitled to benefit
payments at age 60.
AAG and certain of its subsidiaries provide health care and life insurance
benefits to eligible retirees. Effective January 1, 1992, AAG implemented
SFAS No. 106, "Accounting for Postretirement Benefits Other Than Pensions".
Prior to 1992, the cost of these benefits had generally been recognized as
claims were incurred.
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
B. ACQUISITION OF GALIC
On December 31, 1992, AAG acquired GALIC from Great American Insurance
Company ("GAI"), a wholly owned subsidiary of AFC, for $468 million. In
connection with the acquisition, GAI purchased from AAG 17,076,923 shares of
AAG's Common Stock at $6.50 per share, and 450,000 shares of its Series A
Preferred Stock at $100 per share. Concurrent with the acquisition, GAI
purchased 5,140,973 shares of AAG's Common Stock pursuant to a cash tender
offer.
C. INVESTMENTS
Fixed maturity investments at December 31, consisted of the following (in
millions):
<TABLE>
<CAPTION>
1993
_____________________________________________
Held to Maturity
_____________________________________________
Amortized Market
Gross Unrealized
________________
Cost Value Gains Losses
_________ _______ _____ ______
<S> <C>
<C> <C> <C>
U. S. Government and government
agencies and authorities $ - $ - $ - $ -
Public utilities 412.4 425.5 16.8 (3.7)
Collateralized mortgage obligations 487.8 496.3 11.5 (3.0)
All other corporate 1,733.0 1,830.1 100.9 (3.8)
________ ________ ______ _____
$2,633.2 $2,751.9 $129.2 ($10.5)
________ ________ ______ _____
</TABLE>
<TABLE>
<CAPTION>
1993
_____________________________________________
Available for Sale
_____________________________________________
Amortized Market
Gross Unrealized
________________
Cost Value Gains Losses
_________ _______ _____ ______
<S> <C> <C> <C> <C>
U. S. Government and government
agencies and authorities $ 54.5 $ 56.0 $ 1.5 $-
Public utilities 123.9 128.8 4.9 -
Collateralized mortgage obligations 1,014.5 1,062.0 47.5 -
All other corporate 474.1 507.7 33.6 -
________ ________ _____ ___
$1,667.0 $1,754.5 $87.5 $-
________ ________ _____ ___
</TABLE>
<TABLE>
<CAPTION>
1992
_____________________________________________
Held to Maturity
_____________________________________________
Amortized Market
Gross Unrealized
________________
Cost Value Gains Losses
_________ _______ _____ ______
<S> <C> <C> <C> <C>
U. S. Government and government
agencies and authorities $ - $ - $ - $ -
Public utilities 417.0 429.4 12.7 (0.3)
Collateralized mortgage obligations 905.8 925.3 21.4 (1.9)
All other corporate 1,331.9 1,376.2 47.0 (2.7)
Redeemable preferred stocks 8.1 8.6 0.5 -
________ ________ _____ ____
$2,662.8 $2,739.5 $81.6 ($4.9)
________ ________ _____ ____
</TABLE>
<TABLE>
<CAPTION>
1992
_____________________________________________
Available for Sale
_____________________________________________
Amortized Market
Gross Unrealized
________________
Cost Value Gains Losses
_________ _______ _____ ______
<S> <C> <C> <C> <C>
U. S. Government and government
agencies and authorities $ 215.9 $ 217.3 $ 2.4 ($1.0)
Public utilities 3.2 3.2 - -
Collateralized mortgage obligations 678.3 699.9 24.5 (2.9)
All other corporate 211.5 229.4 23.0 (5.1)
Redeemable preferred stocks - - - -
________ ________ _____ ____
$1,108.9 $1,149.8 $49.9 ($9.0)
________ ________ _____ ____
</TABLE>
<TABLE>
The table below sets forth the scheduled maturities of AAG's fixed maturity
investments based on carrying value as of December 31:
<CAPTION>
1993
____________________________
Held to Available 1992
Maturity Maturity for Sale Total Total
______________ ________ _________ _____ _____
<S> <C> <C> <C> <C>
One year or less * * * 1%
After one year through five years 8% 2% 10% 11
After five years through ten years 35 8 43 34
After ten years 6 6 12 12
__ __ ___ ___
49 16 65 58
Collateralized mortgage obligations 11 24 35 42
__ __ ___ ___
60% 40% 100% 100%
__ __ ___ ___
<FN>
* less than 1%
</TABLE>
Distribution based on market value is generally the same. Collateralized
mortgage obligations had an expected average life of approximately 4 years
at December 31, 1993.
The carrying values of investments were determined after deducting
cumulative provisions for impairment aggregating $14.4 million and $20.0
million at December 31, 1993 and 1992, respectively.
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Gross gains of $45.3 million and gross losses of $11.0 million were realized
on sales of fixed maturity investments during 1993.
The carrying value of investments in any entity in excess of 10% of
stockholders' equity at December 31, 1993, other than investments in
affiliates and investments issued or guaranteed by the U.S. Government or
government agencies, were as follows (in millions):
<TABLE>
<CAPTION>
Short-Term
__________
Issuer Amount Issuer Amount
______ ______ ______ ______
<S> <C> <C> <C>
Conagra $20.0 Philip Morris $ 5.0
</TABLE>
<TABLE>
<CAPTION>
Fixed Maturities
________________
Issuer Amount Issuer Amount
______ ______ ______ ______
<S> <C> <C> <C>
Georgia Pacific $44.9 Harbor Court Associates* $30.7
Commonwealth Edison 43.8 Harcourt General 29.5
Houston Industries 37.6 Conagra 29.2
CNA Financial 37.4 Southern California Edison29.2
GTE 36.0 Coastal 29.0
Ashland Oil 32.4 Time Warner27.9
Anshutz Ranch East 32.4 Philip Morris 26.9
Hotel First Mortgage 31.4 Cargill 25.0
Federal Express 31.4 Philadelphia Electric 25.0
<FN>
* Included in mortgage loans on real estate.
</TABLE>
At December 31, 1993, gross unrealized gains on marketable equity securities
were $13.1 million and gross unrealized losses were zero. Realized gains
and changes in unrealized appreciation on fixed maturity and equity security
investments are summarized as follows (in millions):
<TABLE>
<CAPTION>
Fixed Equity Tax
1993 MaturitiesSecurities Effects Total
____ ____________________ _____________
<S> <C> <C> <C> <C>
Realized $34.3 $ 1.2 ($12.4) $23.1
Change in Unrealized 88.6 10.9 (34.8) 64.7
</TABLE>
<TABLE>
As of February 28, 1994, the pretax unrealized gains on AAG's available for
sale portfolio had decreased approximately $33 million since year end 1993,
due primarily to an increase in the general level of interest rates.
Major categories of net investment income were as follows (in millions):
<CAPTION>
1993
______
<S> <C>
Fixed maturities $354.8
Other* 3.4
______
Total investment income $358.2
Investment expenses (4.9)
______
Net investment income $353.3
______
<FN>
* Includes $1.0 million in payments from GAI for the rental of an office
building
owned by GALIC.
</TABLE>
GALIC's investment portfolio is managed by a subsidiary of AFC. Investment
expenses included investment management charges of $4.4 million, which
represented approximately one-tenth of one percent of GALIC's invested
assets during 1993.
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
D. INVESTMENT IN AFFILIATES
Investment in affiliates at December 31, 1993, reflects AAG's 5% ownership
(2.7 million shares) of the common stock of Chiquita Brands International
("Chiquita") which is accounted for under the equity method. At that same
date, AFC and its other subsidiaries owned an additional 41% interest in the
common stock of Chiquita. Chiquita is a leading international marketer,
processor and producer of quality food products. The carrying value of
AAG's investment in Chiquita at December 31, 1993 was $25.2 million. The
market value of AAG's investment in Chiquita was approximately $30.7 million
at December 31, 1993 and $46.1 million at March 1, 1994.
In addition to AAG's investment in Chiquita, investment in affiliates at
December 31, 1992, included a $9.0 million investment in the preferred stock
of Spelling Entertainment Group Inc. The Spelling preferred stock was
redeemed in November 1993.
Included in AAG's retained earnings (deficit) at December 31, 1993, was
approximately $2.6 million applicable to equity in undistributed net losses
of Chiquita.
E. DEFERRED POLICY ACQUISITION COSTS
The DPAC balances at December 31, 1993 and 1992 are shown net of unearned
revenues of $146.2 million and $152.8 million, respectively.
F. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, (in millions):
<TABLE>
<CAPTION>
1993 1992
____ ____
<S> <C> <C>
11-1/8% Senior Subordinated Notes due February 2003 $125.0$ -
9-1/2% Senior Notes due August 2001 100.0 -
Bank term loan due in installments to 1999 - 180.0
9-1/2% Bridge loan due in 1993 - 50.0
Other 0.9 0.9
______ ______
Total $225.9 $230.9
______ ______
</TABLE>
In connection with the GALIC acquisition, AAG borrowed $180 million under a
Bank Term Loan Agreement and $50 million under a Bridge Loan. In 1993, AAG
sold $225 million principal amount of Notes to the public and used the
proceeds to repay the Bank and Bridge Loans.
As a result, AAG has no scheduled principal maturities until the year 2001.
AAG recorded an extraordinary loss of $5.2 million ($3.4 million net of tax)
representing unamortized bank debt issue costs which were written off upon
retirement of the bank debt. The fair value of AAG's outstanding debt
exceeds the carrying value (net of unamortized debt issuance costs) by
approximately $19 million at December 31, 1993.
Interest payments were $11.7 million in 1993, $2.0 million in 1992 and $4.9
million in 1991.
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
G. STOCKHOLDERS' EQUITY
The Company is authorized to issue 25,000,000 shares of Preferred Stock, par
value $1.00 per share. On December 31, 1992, AAG issued 17,076,923 shares
of Common Stock and 450,000 shares of Series A Cumulative Preferred Stock,
$100 redemption value, in connection with the acquisition of GALIC. Holders
of the Series A Preferred Stock are entitled to receive dividends at the
rate of $7.00 per share per annum. The preferred shares issued were
recorded at $29.4 million (imputed dividend rate of 12% through 2007) with
the excess paid of $15.6 million credited to capital surplus and accreting
over 15 years. If the preferred shares are outstanding after January 1,
2008, substantial limitations on the ability of AAG and its subsidiaries to
borrow funds, issue stock or pay common stock dividends will become
effective. In 1993, 1992 and 1991, AAG paid annual dividends of $.05 per
common share. At December 31, 1993, AAG's cash dividends were limited to
$2.5 million under indenture covenants.
Under the Company's 1987 Stock Option Plan ("Option Plan"), stock options
were granted to officers and other key employees of the Company to purchase
shares of Common Stock. The Company also had a Spin-Off Stock Option Plan
("Spin-Off Plan") under which a one-time grant of options was made to
directors, officers and employees of the Company who had held options or
shares of STI's former parent on the STI distribution date.
As a result of the sales of subsidiaries and pursuant to the terms of the
plans, all options became fully vested and exercisable in January 1992. In
February 1992, 1.5 million options were exercised; a total of 93,550 shares
under the Option Plan and 377,804 shares under the Spin-Off Plan expired.
Also in February 1992, under the Company's Redemption Program, AAG purchased
from employees (i) 499,025 shares of Common Stock at a price of $6.725 per
share and (ii) 867,000 shares of Common Stock at a price of $6.8125 per
share. A charge to income of $2.8 million was recorded in 1991 to reflect
the exercise of stock options and the repurchase of Common Stock pursuant to
the Redemption Program.
H. DISCONTINUED OPERATIONS
The results of discontinued operations included in the Statement of
Operations were as follows (in millions):
Year ended December 31,
_______________________
1993 1992 1991
____ ____ ____
Net sales $ - $ 80.7 $294.1
Cost of sales - (80.7)(258.8)
Interest and debt expense - (1.2) (3.7)
Selling, general and administrative costs - - (37.3)
Loss on sales of businesses and restructuring
provisions (14.8) (24.5) (55.1)
Gain on sale of investment in affiliate -
- 8.5
_____ _____ _____
Loss from discontinued operations before tax (14.8) (25.7) (52.3)
Income tax benefit (5.2) (8.9) (4.5)
_____ ______ _____
Loss from discontinued operations ($ 9.6) ($16.8)($47.8)
_____ _____ _____
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
All of the Company's former manufacturing businesses are reported as
discontinued operations. At December 31, 1993, the Company's last
manufacturing unit, Electromag NV, was being held for sale and was carried
at estimated net realizable value.
The loss from discontinued operations in 1993 included charges for employee
related obligations of approximately $9.7 million resulting primarily from a
decrease (from 9.5% to 7.125%) in the discount rate used to calculate
pension obligations. The remaining charges reflected additional write-downs
and other estimated expenses associated with the Company's former
manufacturing properties.
During 1992, the Company recorded charges related to discontinued operations
as follows: employee related obligations -- $6.8 million; environmental
liabilities -- $5.0 million; corporate office shutdown and severance costs -
- $5.0 million; property valuation adjustments -- $3.6 million; potential
merchandise returns -- $2.0 million and other -- $2.1 million.
In 1992, AAG sold its capacitor and thick film network businesses for
approximately $130 million in cash, notes and property. The Company
recorded provisions of $42.6 million related to the anticipated sales of
these operations during 1991.
In 1991, the Company sold its 45.3% interest in a manufacturing operation
for a cash payment of $18.0 million, recognizing a pretax gain of $8.5
million on the sale.
The Company has a noncontributory defined benefit pension plan covering
former U.S. employees of its discontinued manufacturing operations. The
former employees in this plan generally receive pension benefits that are
based upon formulas that reflect all past service with the Company and the
employee's compensation during employment. Contributions are made on an
actuarial basis in amounts necessary to satisfy requirements of ERISA. At
December 31, 1993, the actuarial value of the benefit obligations, which are
being discounted at 7.125%, exceeded the plan assets by $15.1 million, which
has been included in accrued expenses in the financial statements.
Effective January 1, 1992, AAG implemented SFAS No. 106 and recorded a
provision of $3.1 million for the projected future costs of providing
postretirement medical benefits to retirees in its discontinued
manufacturing operations.
I. INCOME TAXES
Provision (benefit) for income taxes consisted of (in millions):
1993 1992 1991
____ ____ ____
Federal:
Current $27.4 $ - $2.6
Deferred (7.4) (8.9) (5.0)
Foreign:
Current - - 0.3
Deferred - - (2.6)
State - 0.5 0.4
_____ ____ ____
Total $20.0 ($8.4) ($4.3)
_____ ____ ____
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
<TABLE>
The principal items accounting for the difference in taxes on earnings
computed at the United States statutory rate (35% in 1993 and 34% in 1992
and 1991) and as recorded were as follows (in millions):
<CAPTION>
1993 1992 1991*
____ ____ ____
<S> <C> <C> <C>
Earnings (loss) before income taxes:
Continuing operations $80.0 ($ 8.5) ($ 4.5)
Discontinued operations (14.8) (25.7) (52.3)
Extraordinary item (5.2) - -
Cumulative effect of accounting change - (3.1) -
_____ _____ _____
Earnings (loss) before income taxes $60.0 ($37.3) ($56.8)
_____ _____ _____
Tax computed at statutory rate $21.0 ($12.7) ($19.3)
Effect of:
Net operating loss for which no
benefit has been recognized - 4.0 15.8
Other, net (1.0) 0.3 (0.8)
_____ _____ _____
Total $20.0 ($ 8.4) ($ 4.3)
_____ _____ _____
<FN>
* Includes pretax loss from foreign operations of $9.4 million.
</TABLE>
<TABLE>
The significant components of deferred tax assets and liabilities included
in the Balance Sheet were as follows (in millions):
<CAPTION>
December 31,
________________
1993 1992
____ ____
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards
$56.4 $57.1
Accrued expenses 16.7 14.6
Investment securities - 12.7
Valuation allowance for deferred
tax assets (61.3) (62.9)
Deferred tax liabilities:
Deferred policy acquisition costs
(13.1) (14.4)
Policyholder liabilities (12.3) (11.9)
Investment securities (6.1) -
</TABLE>
At December 31, 1993, AAG had net operating loss carryforwards for federal
income tax purposes of approximately $161 million which are scheduled to
expire as follows: $18.6 million in 1994, $24.1 million in 1995 through
2001 and $118.3 in 2002 through 2005. An income tax refund of $1.1 million
was received in 1991. Cash disbursements for income taxes were not
material.
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
J. LEASES
Leases relate principally to certain administrative facilities and
discontinued operations. Future minimum lease payments, net of sublease
revenues, under operating leases having initial or remaining noncancellable
lease terms in excess of one year at December 31, 1993 are payable as
follows: 1994 -- $700,000; 1995 -- $1.0 million; 1996 -- $1.1 million; 1997
-- $1.1 million; 1998 -- $800,000; 1999 and beyond -- $2.8 million.
Rental expense for operating leases was $900,000 in 1993, $1.5 million in
1992 and $6.7 million in 1991.
K. CONTINGENCIES
The Company is presently conducting investigations or clean-up activities in
accordance with consent agreements with state environmental agencies. Based
on the costs incurred over the past several years and discussions with
independent environmental consultants, the Company believes the aggregate
cost of environmental remediation work at all sites for which it has
responsibility will range from $10 million to $15 million. The reserve for
environmental remediation work was $10.6 million at December 31, 1993.
Management does not believe that these clean-up activities will have a
material effect upon the Company's financial position, results of operations
or cash flows.
"Marketable securities, restricted in use" consists primarily of amounts
held in escrow with respect to certain clean-up activities due to sales of
various discontinued operations.
In 1991, the Company identified possible deficiencies in procedures for
reporting quality assurance information to the Defense Electronics Supply
Center ("DESC") with respect to the manufacturing of capacitors utilized by,
among others, the United States Government. The Company has certain
indemnification obligations for losses, if any, which result from these
matters. Management believes an adequate accrual has been recorded at
December 31, 1993, and that any future impact on AAG's operations will not
be material.
L. STATUTORY INFORMATION; RESTRICTIONS ON TRANSFERS OF FUNDS AND ASSETS OF
SUBSIDIARIES
GALIC is required to file financial statements with state insurance
regulatory authorities prepared on an accounting basis prescribed or
permitted by such authorities (statutory basis). For the year ended
December 31, 1993, GALIC's statutory net earnings were $44.0 million.
Certain statutory balance sheet amounts at December 31, were as follows (in
millions):
1993 1992
____ ____
Policyholders' surplus $251.3 $216.2
Asset valuation reserve 70.3 70.9
Interest maintenance reserve 35.7 17.2
The amount of dividends which can be paid by GALIC without prior approval of
regulatory authorities is subject to restrictions relating to capital and
surplus and statutory net income. GALIC may pay approximately $44.0 million
in dividends in 1994, based on statutory net income, without prior approval.
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
<TABLE>
M. QUARTERLY FINANCIAL DATA (Unaudited)
The following table represents quarterly results of operations for the years
ended December 31, 1993 and 1992 (in millions, except per share data).
<CAPTION>
First Second Third Fourth Total
1993 Quarter Quarter Quarter Quarter Year
____ _______ _______ _______ _______ _____
<S> <C> <C> <C> <C> <C>
Realized gains $ 13.4 $ 12.8 $ 2.8 $ 6.5 $ 35.5
Total revenues 101.4 102.0 89.6 94.2 387.2
Earnings from continuing
operations 11.4* 16.9 10.3 14.4 53.0*
Discontinued operations - - - (9.6) (9.6)
Extraordinary item - - (3.4) - (3.4)
Net earnings 11.4 16.9 6.9 4.8 40.0
Earnings (loss) per share:
Continuing operations $0.30 $0.46 $0.27 $0.38 $1.41
Discontinued operations - - - (0.27) (0.27)
Extraordinary item - - (0.10) - (0.10)
_____ _____ _____ _____ _____
Net earnings $0.30 $0.46 $0.17 $0.11 $1.04
_____ _____ _____ _____ _____
Average shares outstanding 35.1 35.1 35.1 35.1 35.1
<FN>
* Includes GALIC relocation charge of $5.2 million, net of tax.
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth Total
1992 Quarter Quarter Quarter Quarter Year
____ _______ _______ _______ _______ _____
<S> <C> <C> <C> <C> <C>
Revenues $ 0.8 $ 1.1 $ 0.9 $ 0.8 $ 3.6
Earnings (loss) from continuing
operations 0.1 (0.2) (0.7) (8.2) (9.0)
Discontinued operations (1.2) (7.0) - (8.6) (16.8)
Cumulative effect of accounting
change (3.1) - - - (3.1)
Net loss (4.2) (7.2) (0.7) (16.8) (28.9)
Earnings (loss) per share:
Continuing operations $0.01 ($0.01) ($0.04) ($0.46) ($0.50)
Discontinued operations (0.07) (0.39) - (0.47) (0.94)
Cumulative effect of accounting
change (0.17) - - - (0.17)
_____ _____ _____ _____ _____
Net loss ($0.23) ($0.40) ($0.04) ($0.93) ($1.61)
_____ _____ _____ _____ _____
Average shares outstanding 18.0 18.0 18.0 18.0 18.0
</TABLE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements are Included in Part II, Item 8.
2. Financial Statement Schedules:
Selected Quarterly Financial Data is included in Note M to the
Consolidated Financial Statements.
Schedules filed herewith:
For 1993, 1992 and 1991 Page
_______________________ ____
II - Amounts Receivable from Related Parties and
Underwriters, Promoters, and Employees other
than Related Parties S-2
III - Condensed Financial Information of Registrant S-3
All other schedules for which provisions are made in the
applicable regulation of the Securities and Exchange
Commission have been omitted as they are not applicable, not
required, or the information required thereby is set forth in
the Financial Statements or the notes thereto.
3. Exhibits - See Exhibit Index on Page E-1.
(b) Reports on Form 8-K's: None
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES
AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
THREE YEARS ENDED DECEMBER 31, 1993
(In Thousands)
<TABLE>
<CAPTION>
BALANCE AT AMOUNTS
NAME OF BEGINNING AMOUNTS WRITTEN NOT
DEBTOR OF PERIOD ADDITIONSCOLLECTED OFF CURRENT CURRENT
_______ __________ __________________ _______ _______ _______
<S> <C> <C> <C> <C> <C> <C>
1991:
T. Fischer $267 $ - $153 $114(a)
$ - $ -
J. Winters 338 8 253 93(a)
- -
<FN>
(a) Amounts written off represent a portion of mortgage loans related to
residences sold at a loss in connection with subsequent relocations
by the employees. Amounts written off were reported as taxable
compensation to the employee.
</TABLE>
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
<TABLE>
<CAPTION>
Condensed Balance Sheet
_______________________
December 31,
_________________
1993 1992
____ ____
<S> <C> <C>
Assets:
Cash and short-term investments $ 10.4 $ 8.1
Investment in subsidiaries 519.6 418.6
Receivable from affiliates 11.8 8.9
Other assets 24.7 31.6
______ ______
$566.5 $467.2
______ ______
Liabilities and Capital:
Accounts payable, accrued expenses and
other liabilities $ 50.3 $ 46.2
Payables to affiliates 40.9 4.4
Long-term debt 225.0 230.0
Stockholders' equity 250.3 186.6
______ ______
$566.5 $467.2
______ ______
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Earnings
_______________________________
1993
______
<S> <C>
Revenues:
Equity in undistributed earnings of GALIC $ 97.2
Dividends from GALIC 18.2
Net investment income .5
______
115.9
Costs and Expenses:
Interest on borrowings and other debt expenses 22.5
Provision for GALIC relocation expenses 8.0
Other operating and general expenses 5.4
______
35.9
Earnings from continuing operations before
taxes and extraordinary item 80.0
Provision for income taxes 27.0
______
Earnings from continuing operations 53.0
Discontinued operations, net of tax (9.6)
______
Earnings before extraordinary item 43.4
Extraordinary item, net of tax (3.4)
______
Net Earnings $ 40.0
______
</TABLE>
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
Condensed Statement of Cash Flows
_________________________________
Year ended December 31
1993
_____
Operating Activities:
Net earnings $40.0
Adjustments:
Discontinued operations 9.6
Extraordinary item 3.4
Equity in net earnings of affiliates (77.6)
Increase in receivables from affiliates (2.8)
Amortization of debt expense 1.2
Decrease in other assets 0.4
Increase in payables to affiliates 42.8
Decrease in other liabilities (10.7)
Dividends from GALIC 18.2
Other, net (0.1)
_____
24.4
_____
Investing Activities:
Additional investment in GALIC (13.0)
_____
Financing Activities:
Additional long-term borrowings 225.0
Reductions of long-term debt (230.0)
Cash dividends paid (4.1)
_____
(9.1)
_____
Net Increase in Cash and Short-term Investments 2.3
Cash and short-term investments at beginning of period 8.1
_____
Cash and short-term investments at end of period $10.4
_____
<PAGE>
AMERICAN ANNUITY GROUP, INC.
INDEX TO EXHIBITS
Number Exhibit Description
______ ___________________
3.1 Certificate of Incorporation of Registrant
3.2 By-laws of Registrant
4.1 Indenture dated as of February 2, 1993, between the Registrant and
Star Bank, National Association, as Trustee, relating to the
Registrant's 11-1/8% Senior Subordinated Notes due 2003,
incorporated herein by reference to Exhibit 4.2 to the Registrant's
Current Report on Form 8-K, dated February 5, 1993.
4.2 Indenture dated as of August 18, 1993, between the Registrant and
NationsBank, National Association, as Trustee, relating to the
Registrant's 9-1/2% Senior Notes due 2001, incorporated herein by
reference to Exhibit 4.1 to the Registrant's Registration Statement
on Form S-2 dated August 11, 1993.
10.1 Agreement of Allocation of Payment of Federal Income Taxes ("American
Annuity Tax Allocation Agreement"), dated December 31, 1992, between
American Financial Corporation and the Registrant incorporated herein
by reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-2 dated January 7, 1993.
10.2 Assignment of Tax Allocation Payments dated December 31, 1992,
between American Financial Corporation and the Registrant
incorporated herein by reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form S-2 dated January 7, 1993.
10.3 Agreement for the Allocation of Federal Income Taxes dated May 13,
1974, between American Financial Corporation and Great American Life
Insurance Company, as supplemented on January 1, 1987 incorporated
herein by reference to Exhibit 10.16 to the Registrant's Registration
Statement on Form S-2 dated January 7, 1993.
10.4 Investment Services Agreement, dated December 31, 1992, between Great
American Life Insurance Company and American Money Management
Corporation incorporated herein by reference to Exhibit 10.17 to the
Registrant's Registration Statement on Form S-2 dated January 7,
1993.
10.5 Common Stock Registration Agreement, dated December 31, 1992, between
the Registrant and American Financial Corporation and its wholly
owned subsidiary Great American Insurance Company incorporated herein
by reference to Exhibit 10.22 to the Registrant's Registration
Statement on Form S-2 dated January 7, 1993.
10.6 Preferred Stock Registration Agreement, dated December 31, 1992,
between the Registrant and American Financial Corporation and its
wholly owned subsidiary Great American Insurance Company incorporated
herein by reference to Exhibit 10.23 to the Registrant's Registration
Statement on Form S-2 dated January 7, 1993.
<PAGE>
AMERICAN ANNUITY GROUP, INC.
INDEX TO EXHIBITS - Continued
Number Exhibit Description
______ ___________________
10.7 Common Stock Registration Agreement, dated December 31, 1992 between
Chiquita Brands International, Inc. and Great American Life Insurance
Company incorporated herein by reference to Exhibit 10.24 to the
Registrant's Registration Statement on Form S-2 dated January 7,
1993.
10.8 American Annuity Group's 1993 Stock Appreciation Rights Plan.
<PAGE>
Signatures
__________
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, American Annuity Group, Inc. has duly caused this
Report to be signed on its behalf by the undersigned, duly authorized.
American Annuity Group, Inc.
Signed: March 25, 1994 BY:s/CARL H. LINDNER
_______________________________
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
_________ ________ ____
s/CARL H. LINDNER Chairman of the Board March 25, 1994
_______________________
Carl H. Lindner of Directors
s/S. CRAIG LINDNER Director March 25, 1994
________________________
S. Craig Lindner
s/ROBERT A. ADAMS Director March 25, 1994
_______________________
Robert A. Adams
s/A. LEON FERGENSON Director March 25, 1994
_______________________
A. Leon Fergenson
s/RONALD F. WALKER Director March 25, 1994
_______________________
Ronald F. Walker
s/WILLIAM J. MANEY Senior Vice President, March 25, 1994
_______________________
William J. Maney Treasurer and Chief
Financial Officer
<PAGE>
