SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
September 30, 1994 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
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
As of November 1, 1994, there were 39,141,080 shares of the Registrant's
Common Stock outstanding.
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity - at amortized cost
(market - $3,061.7 and $2,751.9) $3,210.2 $2,633.2
Available for sale - at market
(amortized cost - $1,293.7 and $1,667.0) 1,252.9 1,754.5
Equity securities - at market (cost - $11.1
and $12.8) 23.0 25.9
Investment in affiliate 22.8 25.2
Mortgage loans on real estate 45.0 52.1
Real estate, net of accumulated depreciation 27.9 26.1
Policy loans 179.2 166.6
Short-term investments 25.9 57.0
Total investments 4,786.9 4,740.6
Cash 18.1 15.0
Marketable securities, restricted in use 3.5 4.4
Accrued investment income 79.5 66.9
Deferred policy acquisition costs, net 56.7 39.2
Other assets 35.9 47.7
Total assets $4,980.6 $4,913.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Annuity policyholders' funds accumulated $4,487.1 $4,256.7
Notes payable 182.4 225.9
Payable for securities purchased 22.0 68.0
Payable to affiliates, net 3.8 28.3
Accounts payable, accrued expenses and other
liabilities 73.2 84.6
Total liabilities 4,768.5 4,663.5
Series A Preferred Stock - 29.9
Common Stock, $1 par value
-100,000,000 shares authorized
- 39,141,080 and 35,097,447 shares outstanding 39.1 35.1
Capital surplus 333.1 301.0
Retained earnings (deficit) (146.2) (172.6)
Unrealized gain (loss) on marketable
securities, net of deferred income
taxes and insurance adjustments (13.9) 56.9
Total stockholders' equity 212.1 250.3
Total liabilities and
stockholders' equity $4,980.6 $4,913.8
</TABLE>
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Revenues:
Net investment income $ 94.9 $ 88.1 $277.4 $262.8
Realized gains on sales of investments 0.1 2.8 0.7 29.0
Equity in net earnings (losses)
of affiliate (3.8) (1.5) (0.9) 0.3
Other income 0.5 0.2 1.5 0.9
91.7 89.6 278.7 293.0
Costs and Expenses:
Benefits to annuity policyholders 61.3 57.0 180.7 173.7
Interest on borrowings and
other debt expenses 5.0 5.7 16.7 16.5
Amortization of deferred policy
acquisition costs 1.2 3.8 4.7 12.0
Provision for GALIC relocation expenses - - - 8.0
Other operating and general expenses 9.7 7.6 28.3 24.4
77.2 74.1 230.4 234.6
Income before taxes, extraordinary items
and accounting change 14.5 15.5 48.3 58.4
Provision for income taxes 5.1 5.2 17.0 19.8
Income from continuing operations 9.4 10.3 31.3 38.6
Discontinued operations, net of tax - - (2.6) -
Income before extraordinary items and
cumulative effect of accounting change 9.4 10.3 28.7 38.6
Extraordinary items, net of tax (0.4) (3.4) (1.8) (3.4)
Cumulative effect of accounting change - - (0.5) -
Net Income $ 9.0 $ 6.9 $ 26.4 $ 35.2
Preferred dividend requirement - 0.9 0.9 2.7
Net income applicable to Common Stock $ 9.0 $ 6.0 $ 25.5 $ 32.5
Average Common Shares outstanding 39.1 35.1 37.8 35.1
Earnings (loss) per share:
Continuing operations $0.24 $0.27 $0.80 $1.03
Discontinued operations - - (0.07) -
Extraordinary items (0.01) (0.10) (0.05) (0.10)
Cumulative effect of accounting change - - (0.01) -
Net income $0.23 $0.17 $0.67 $0.93
</TABLE>
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions)
Nine months ended
September 30,
1994 1993
Preferred Stock:
Balance at beginning of period $ 29.9 $ 29.4
Exchanged for Common Stock (30.0) -
Accretion of discount 0.1 0.3
Balance at end of period $ - $ 29.7
Common Stock:
Balance at beginning of period $ 35.1 $ 35.1
Issued during the period 4.0 -
Balance at end of period $ 39.1 $ 35.1
Capital Surplus:
Balance at beginning of period $301.0 $306.3
Common Stock issuance 33.0 -
Preferred dividends declared (0.8) (1.6)
Accretion of preferred stock discount (0.1) (0.3)
Balance at end of period $333.1 $304.4
Retained Earnings (Deficit):
Balance at beginning of period ($172.6) ($212.6)
Net Income 26.4 35.2
Balance at end of period ($146.2) ($177.4)
Unrealized Gains (Losses), Net:
Balance at beginning of period $ 56.9 $ 28.4
Change during period (70.8) 42.5
Balance at end of period ($ 13.9) $ 70.9
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1994 1993
<S> <C> <C>
Operating activities:
Net income $ 26.4 $ 35.2
Adjustments:
Extraordinary losses on retirement of debt 2.8 5.2
Cumulative effect of accounting change 0.7 -
Benefits to annuity policyholders 180.7 173.7
Amortization of deferred policy
acquisition costs 4.7 12.0
Equity in net losses (earnings) of affiliate 0.9 (0.3)
Depreciation and amortization 0.6 3.4
Realized gains on investing activities (0.7) (29.0)
Increase in accrued investment income (12.6) (18.2)
Increase in deferred policy acquisition costs (19.8) (10.1)
Increase in accounts payable, accrued
expenses and other liabilities 1.0 0.9
Other, net 0.6 3.2
185.3 176.0
Investing activities:
Purchases of:
Fixed maturity investments (914.5) (1,491.3)
Equity securities (0.5) -
Real estate, mortgage loans and other assets (19.0) (11.6)
Maturities and paydowns of fixed maturity
investments 180.7 266.3
Sales of:
Fixed maturity investments 495.1 790.3
Equity securities 3.8 16.0
Real estate, mortgage loans and other assets 21.4 1.8
Increase in policy loans (12.6) (6.3)
Other, net - (2.0)
(245.6) (436.8)
Financing activities:
Annuity receipts 313.1 295.0
Annuity benefits and withdrawals (244.2) (238.3)
Additions to notes payable 18.9 225.0
Reductions of notes payable (54.7) (230.0)
Cash dividends paid (0.8) (1.6)
32.3 50.1
Net decrease in cash and short-term investments (28.0) (210.7)
Cash and short-term investments at
beginning of period 72.0 256.5
Cash and short-term investments at end of period $ 44.0 $ 45.8
</TABLE>
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting Policies
Basis of Presentation The accompanying consolidated financial
statements for American Annuity Group, Inc. ("AAG" or the "Company") and
subsidiaries are unaudited, but management believes that all adjustments
(consisting only of normal recurring accruals unless otherwise disclosed
herein) necessary for fair presentation have been made. The results of
operations for interim periods are not necessarily indicative of results
to be expected for the year. The financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore
do not include all information and footnotes necessary to be in
conformity with generally accepted accounting principles. Certain
reclassifications have been made to prior periods to conform to the
current year's presentation.
American Financial Corporation and subsidiaries ("AFC") owned 31,319,629
shares (80%) of AAG's Common Stock at September 30, 1994.
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.
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.
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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) are 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 (losses) from securities classified as "available
for sale" would result in adjustments to DPAC, unearned revenues and
policyholder liabilities had those gains (losses) 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.
Income Taxes As of December 31, 1992, AAG and its 80%-owned
subsidiaries were consolidated with AFC for federal income tax
purposes.
AAG and Great American Life Insurance Company ("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.
The Company recognizes deferred tax assets if it is more likely than not
that a benefit will be realized. 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 or payable to affiliates.
Debt Issuance Costs Debt expenses are amortized over the terms of the
respective borrowings on the interest method.
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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".
For purposes of the Statement of Cash Flows, all unrestricted, highly
liquid investments with a maturity of three months or less at time of
purchase are classified as short-term investments.
Benefit Plans AAG and certain of its subsidiaries provide certain
benefits to former employees. Effective January 1, 1994, AAG
implemented SFAS No. 112, "Employers' Accounting for Postemployment
Benefits".
AAG participates in an 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 AAG for the benefit of the employees of AAG 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.
B. Investments
The carrying value of AAG's fixed maturity portfolio was comprised of
the following at September 30, 1994:
Held to Available
Maturity for Sale Total
U. S. Government and government
agencies and authorities 0% 2% 2%
Public utilities 10 1 11
Collateralized mortgage obligations 15 15 30
All other corporate 47 10 57
72% 28% 100%
The carrying values of investments were determined after deducting
cumulative provisions for impairment aggregating $12.6 million and
$14.4 million at September 30, 1994 and December 31, 1993,
respectively.
"Investing activities" related to fixed maturity investments during
1994 in AAG's Statement of Cash Flows consisted of the following:
Held to Available
Maturity for Sale Total
Purchases ($603.6) ($310.9)($914.5)
Maturities and paydowns 30.5 150.2 180.7
Sales 5.4 489.7 495.1
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
C. Investment in Affiliates
Investment in affiliates represents AAG's 5% ownership of the common
stock of Chiquita Brands International, which is accounted for under
the equity method. AFC and its other subsidiaries own an additional
41% interest in the common stock of Chiquita. Chiquita is a leading
international marketer, processor and producer of quality food
products. The market value of AAG's investment in Chiquita was
approximately $44 million at September 30, 1994 and $34 million at
November 1, 1994, compared to $31 million at December 31, 1993.
In the first quarter of 1994, AAG recorded a pretax extraordinary
charge of $1.1 million, representing its proportionate share of
Chiquita's loss on the retirement of debt. In the third quarter of
1994, AAG's equity in Chiquita's net losses included a pretax loss of
$2.9 million representing its proportionate share of Chiquita's charges
and losses related to the shutdown of non-productive banana farms in
Honduras and a scaling back of Chiquita's Japanese operations.
D. Deferred Policy Acquisition Costs
The DPAC balances at September 30, 1994 and December 31, 1993 are shown
net of unearned revenues of $152.6 million and $146.2 million,
respectively.
E. Notes Payable
<TABLE>
Notes payable consisted of the following (in millions):
<CAPTION>
September 30, December 31,
1994 1993
<S> <C> <C>
AAG 11-1/8% Senior Subordinated
Notes due 2003 $103.9 $125.0
AAG 9-1/2% Senior Notes due 2001 59.0 100.0
AAG Bank Credit Agreement due 1998 14.5 -
Miscellaneous debt of subsidiary 5.0 0.9
Total $182.4 $225.9
</TABLE>
In 1994, AAG entered into a $30 million revolving Credit Agreement with
two banks. Loans under the Credit Agreement bear interest at floating
rates based on prime or Eurodollar rates and are collateralized by 15%
of the Common Stock of GALIC.
In the first nine months of 1994, AAG repurchased $21.1 million
principal amount of its 11-1/8% Notes (including $3 million purchased by
GALIC) and $41.0 million principal amount of its 9-1/2% Notes (including
$11 million purchased by GALIC) in exchange for cash and 810,000 shares
of its Common Stock, realizing a pretax loss of $1.7 million.
AAG has no scheduled principal payments on its 9-1/2% Notes and 11-1/8%
Notes until the year 2001.
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
F. Stockholders' Equity
The Company is authorized to issue 25,000,000 shares of Preferred Stock,
par value $1.00 per share. In connection with the acquisition of GALIC,
AAG issued 450,000 shares of Series A Cumulative Preferred Stock to a
subsidiary of AFC. The Series A Preferred Stock had a redemption value
of $100 per share and paid 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 proceeds of
$15.6 million credited to capital surplus. On March 31, 1994, AAG issued
approximately 3.2 million shares of Common Stock in exchange for the
Series A Preferred shares.
G. Contingencies
The Company is presently conducting investigations or clean-up
activities relating to the discontinued operations 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, 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.
H. Statutory Information
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 nine months
ended September 30, 1994, GALIC's statutory net income was $41.8 million
compared to $33.5 million for the same period in 1993. Certain
statutory balance sheet amounts were as follows (in millions):
September 30, December 31,
1994 1993
Policyholders' surplus $255.5 $251.3
Asset valuation reserve 81.3 70.3
Interest maintenance reserve 29.9 35.7
Through November 1, 1994, AAG received $44.0 million in capital
distributions from GALIC. Any additional dividends or capital
distributions by GALIC in 1994 are subject to prior approval of
regulatory authorities.
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
AAG is organized as a holding company with nearly all of its operations
being conducted by its subsidiary, 100% owned Great American Life Insurance
Company ("GALIC"). 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. 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
Sources and Uses of Funds AAG has a $30 million revolving line of credit
agreement with two banks under which $14.5 million was outstanding at
September 30, 1994. Borrowings thereunder may be used for general corporate
purposes. Based upon the current level of GALIC's operations and
anticipated growth, AAG believes that it will have sufficient resources to
meet its liquidity requirements.
In 1994, AAG (i) issued 4.0 million shares of Common Stock in exchange for
all of its Preferred Stock and $7.1 million principal amount of its notes
payable and (ii) repurchased $55.0 million principal amount of its notes
payable (including $14 million purchased by GALIC) using $40.1 million in
available cash and $14.5 million in borrowings on its credit line. As a
result, AAG's annual preferred dividends and consolidated interest payments
have been reduced by over $8.5 million.
AAG's ability to make payments for interest and other holding company costs
is dependent primarily on cash payments from GALIC in the form of capital
distributions and income tax payments. Through November 1, 1994, $64.1
million in such payments had been received from GALIC. The amount of
dividends and capital distributions which can be paid by GALIC is subject to
restrictions relating to capital and surplus and statutory net income. In
addition, any dividend or distribution paid from other than earned surplus
is considered an extraordinary dividend and may be paid only after prior
approval. Any additional dividends or capital distributions by GALIC in
1994 are subject to prior approval of regulatory authorities. Management
does not believe this requirement will have an impact on AAG's liquidity for
the balance of 1994.
Ratios AAG's ratio of earnings to fixed charges was 3.9 for the first nine
months of 1994. The ratio of AAG's consolidated debt to equity was 0.86 at
September 30, 1994, compared to 0.90 at December 31, 1993 and 1.24 at
December 31, 1992.
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
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.
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) as of
September 30, 1994:
NAIC % of Total
Rating Comparable S&P Rating Market Value
1 AAA, AA, A 58%
2 BBB 36
Total investment grade 94
3 BB 4
4 B 2
5 CCC, CC, C *
6 D 0
Total non-investment grade 6
Total fixed maturities 100%
<F1>
* less than 1%
Management believes that GALIC's high quality investment portfolio should
generate a stable and predictable overall investment return.
GALIC invests primarily in fixed maturity investments which approximated 93%
of its investment portfolio at September 30, 1994. 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).
As of September 30, 1994, the unrealized gains on GALIC's fixed maturity
portfolio had decreased $396 million since year end 1993. This decrease,
representing approximately 9% of the carrying value of GALIC's bond
portfolio, resulted from an increase in the general level of interest rates.
At September 30, 1994, none of the Company's fixed maturity investments were
non-performing. In addition, AAG's mortgage loans and real estate
represented only 1.5% of total assets. The majority of mortgage loans and
real estate was purchased in the latter half of 1993.
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
At September 30, 1994, collateralized mortgage obligations ("CMOs")
represented approximately 30% of fixed maturity investments. As of
September 30, 1994, interest only (I/O), principal only (P/O) and other
"high risk" CMOs were less than one percent of total investments. 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 primarily 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.
RESULTS OF OPERATIONS
Pretax Earnings and General Pretax earnings from operations (before
realized gains and non-recurring charges) were $47.6 million in the first
nine months of 1994 compared to $37.4 million for the same period in 1993.
This improvement can be attributed primarily to the increased interest rate
spreads achieved thus far in 1994.
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.
<TABLE>
The following table summarizes GALIC's annuity receipts (in millions):
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Flexible Premium Deferred Annuities:
First Year $ 7 $ 9 $ 28 $ 33
Renewal 38 41 152 164
45 50 180 197
Single Premium Deferred
Annuities 57 31 133 98
Total Annuity Receipts $102 $ 81 $313 $295
</TABLE>
Annuity premiums increased 26% during the third quarter of 1994 compared to
the same period in 1993 due to strong growth in sales of single premium
products. For the nine months ended September 30, premiums increased by
approximately 6% in 1994 compared to 1993.
Net Investment Income Net investment income increased 6% over the
comparable nine month period in 1993 due primarily to an increase in the
Company's average fixed maturity investment base. Investment income is
reflected in the Income Statement net of investment expenses of $3.6 million
in 1994 and $3.3 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.
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Equity in Net Earnings of Chiquita Brands International Chiquita's
quarterly results are subject to significant seasonal variations and are not
necessarily indicative of its results of operations for a full fiscal year.
Seasonal pricing generally produces stronger earnings in the first six
months of the year. In the third quarter of 1994, Chiquita recorded charges
and losses from the shutdown of non-productive banana farms in Honduras and
a scaling back of its Japanese operations. AAG's proportionate share of
these losses was $2.9 million, pretax.
Benefits to Annuity Policyholders GALIC's benefits to annuity policyholders
increased 4% over the comparable nine month period in 1993. An increase in
average annuity policyholder funds accumulated has been partially offset by
a decrease in the average crediting rate on these funds. The average
crediting rate on funds held by GALIC has decreased from 6.2% at December
31, 1992 to 5.3% at December 31, 1993 and 5.4% at September 30, 1994. The
rate at which GALIC credits interest on annuity policyholders' funds is
subject to change based on management's judgment of market conditions.
Amortization of Deferred Policy Acquisition Costs (DPAC) DPAC amortization
in the first nine months of 1994 was $4.7 million compared to $12.0 million
during the same period in 1993. The decrease resulted primarily from a
year-end 1993 review of DPAC assumptions, which resulted in changes in
certain factors, including (i) estimated future profits on deferred
annuities that have suspended premium payments but have not lapsed, (ii) the
time frame over which DPAC is amortized, and (iii) estimated future spreads
on inforce annuity policies.
Provision for GALIC Relocation Expenses In 1993, GALIC relocated its
corporate offices from Los Angeles to Cincinnati. The estimated pretax cost
of this move ($8.0 million) was expensed in the first quarter of 1993.
Discontinued Operations During the second quarter of 1994, AAG recorded a
$4.0 million pretax charge related primarily to additional reserves for
potential environmental liabilities associated with the Company's former
manufacturing facilities.
Extraordinary Items In 1994, AAG repurchased $62.1 million principal amount
of its notes payable, realizing a pretax loss of $1.7 million.
In addition, AAG recorded a pretax charge of $1.1 million, representing
AAG's proportionate share of Chiquita's extraordinary loss on the retirement
of certain of its debt in the first quarter of 1994.
Accounting Change Effective January 1, 1994, AAG implemented SFAS No. 112,
"Employers' Accounting for Postemployment Benefits", and recorded a pretax
charge of $740,000 for the projected future costs of providing certain
benefits to former employees of GALIC.
<PAGE>
AMERICAN ANNUITY GROUP, INC. 10-Q
PART II
OTHER INFORMATION
Items pertaining to Part II of this form have been omitted since they are
either inapplicable or not required.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
American Annuity Group, Inc.
November 14, 1994 BY:/s/William J. Maney
William J. Maney
Senior Vice President, Treasurer
and Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 1,252,900
<DEBT-CARRYING-VALUE> 3,210,200
<DEBT-MARKET-VALUE> 3,061,700
<EQUITIES> 23,000
<MORTGAGE> 45,000
<REAL-ESTATE> 27,900
<TOTAL-INVEST> 4,786,900
<CASH> 18,100
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 56,700
<TOTAL-ASSETS> 4,980,600
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 4,487,100
<NOTES-PAYABLE> 182,400
<COMMON> 39,100
0
0
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<TOTAL-LIABILITY-AND-EQUITY> 4,980,600
0
<INVESTMENT-INCOME> 277,400
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<UNDERWRITING-AMORTIZATION> 4,700
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<INCOME-PRETAX> 48,300
<INCOME-TAX> 17,000
<INCOME-CONTINUING> 31,300
<DISCONTINUED> (2,600)
<EXTRAORDINARY> (1,800)
<CHANGES> (500)
<NET-INCOME> 26,400
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.67
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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<CUMULATIVE-DEFICIENCY> 0
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