SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
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, 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
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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
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 February 28, 1995, there were 39,141,080 shares of the
Registrant's Common Stock outstanding. The aggregate market value of Common
Stock held by non-affiliates at that date was approximately $75.4 million
based upon non-affiliate holdings of 7,268,359 shares and a market price of
$10.38 per share.
Documents Incorporated by Reference:
Proxy Statement for the 1995 Annual Meeting of Shareholders (portions of
which are incorporated by reference into Part III hereof).
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Discontinued Manufacturing Operations
Prior to 1993, the Company sold nearly all of its manufacturing operations.
At December 31, 1994, the Company owned a small foreign electronic
components manufacturer which is being held for sale.
Certain manufacturing facilities are still owned by the Company. See
"Properties" below.
Employees
As of December 31, 1994, AAG and its subsidiaries employed approximately 440
persons. None of the employees are represented by a labor union. AAG
believes that its employee relations are excellent.
ITEM 2
Properties
Location
In 1993, AAG and GALIC moved their offices to Cincinnati from Stamford,
Connecticut and Los Angeles, California, respectively.
AAG and GALIC rent office space in Cincinnati totaling approximately 90,000
square feet under leases expiring in 1996 through 1999. Management believes
that its corporate offices are generally well maintained and adequate for
the Company's present needs.
The material properties of the Company's former manufacturing operations are
listed below.
Lease
Interior Expiration
Location Square Feet Use (if leased)
Discontinued operations:
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
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
Most of the manufacturing facilities are still owned and 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 to the
facilities listed above, 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.
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Environmental Matters
See "Item 3: Legal Proceedings" for a discussion concerning certain
environmental claims and litigation against the Company.
ITEM 3
Legal Proceedings
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 investigative, remedial and legal costs. 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 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 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.
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.
There are certain other claims involving the Company, including claims
relating to the generation, disposal or release into the environment of
allegedly hazardous substances. In management's opinion, the outcome of
these claims will not, individually or in the aggregate, have a material
adverse effect on the Company's financial condition or results of
operations.
AAG and GALIC are subject to other litigation and arbitration in the normal
course of business. GALIC is not a party to any material pending litigation
or arbitration.
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ITEM 6
Selected Financial Data of AAG
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: 1994 1993 1992 1991 1990
Total revenues $371.2 $387.2 $3.6 $1.9 $0.4
Income (loss) from continuing
operations 40.9 53.0 (9.0) (4.7) (6.0)
Loss from discontinued operations (2.6) (9.6) (16.8) (47.8) (43.3)
Extraordinary items (1.7) (3.4) - - -
Changes in accounting principle (0.5) - (3.1) - -
Net income (loss) $ 36.1 $ 40.0 ($28.9) ($52.5) ($49.3)
Earnings (loss) per common share:
Continuing operations $1.05 $1.41 ($0.50) ($0.26) ($0.33)
Discontinued operations (.07) (.27) (.94) (2.66) (2.37)
Extraordinary items (.05) (.10) - - -
Changes in accounting principle (.01) - (.17) - -
Net income (loss) $0.92 $1.04 ($1.61) ($2.92) ($2.70)
Cash dividends per common share $0.06 $0.05 $0.05 $0.05 $0.05
Balance Sheet Data:
Total assets $5,089.9$4,913.8$4,480.4 $170.1 $294.8
Notes payable 183.3 225.9 230.9 27.9 30.6
Net unrealized gains (losses)
included in stockholders' equity (29.0) 56.9 28.4 - -
Total stockholders' equity 204.4 250.3 186.6 108.5 171.8
Selected Financial Data of GALIC Prior to its Acquisition by AAG
(in millions)
Operations Statement Data:
Total revenues * * $342.5 $402.6 $290.2
Income from continuing operations * * 49.2 103.0 8.9
Net income * * 42.5 64.3 3.8
Balance Sheet Data:
Total assets * * * 4,685.5 3,847.0
Net unrealized gains (losses)
included in stockholder's equity * * * (5.5) (20.2)
Total stockholder's equity * * * 358.2 355.3
[FN]
* Included in the AAG data above.
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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"). 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 and principal
on borrowings. Since its continuing 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 AAG's ratio of earnings to fixed charges was 4.0 in 1994 and 4.7 in
1993. The ratio of AAG's consolidated debt to equity excluding the effects
of unrealized gains and losses on stockholders' equity was .79, 1.17 and
1.46 at December 31, 1994, 1993 and 1992, respectively. These same ratios
including the effects of unrealized gains and losses were .90, .90 and 1.24,
respectively.
The National Association of Insurance Commissioners ("NAIC") has adopted a
model law enacting risk-based capital ("RBC") formulas and setting
thresholds for regulatory action. At December 31, 1994 and 1993, GALIC's
capital ratios significantly exceeded RBC requirements.
Sources and Uses of Funds AAG's ability to make payments of interest and
principal on its debt and other holding company costs is dependent on
payments from GALIC in the form of capital distributions and income tax
payments. In 1994, AAG received $26.6 million in tax allocation payments
and $44.0 million in capital distributions from GALIC.
The amount of 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
regulatory approval. (See Note K to the financial statements.) The maximum
amount of dividends payable by GALIC in 1995 without prior regulatory
approval is approximately $49.7 million. In January 1995, GALIC paid a
capital distribution of $16.8 million to AAG.
In connection with the acquisition of GALIC on December 31, 1992, AAG sold
Common and Preferred Stock to GALIC's parent 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.
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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
and (ii) repurchased $70.0 million principal amount of its notes (including
$14 million purchased by GALIC).
AAG has a $50 million revolving bank line under which $30.0 million was
outstanding at December 31, 1994 and $25.5 million at March 1, 1995.
Amounts outstanding under this agreement bear interest at variable rates
tied to either Prime or LIBOR, at the discretion of the Company. Borrowings
thereunder may be used for general corporate purposes. AAG has used the
amounts borrowed under the bank line primarily to repurchase its outstanding
debt.
AAG's revolving line of credit matures in 1998. The Company has no other
scheduled principal maturities until 2001. Assuming no further prepayments
of its debt, AAG's annual interest payments will be approximately $17.8
million in 1995, $17.7 million in 1996, 1997, 1998 and $15.5 million in
1999.
Based upon the current level of operations and anticipated growth, AAG
believes that it will have sufficient resources to meet its liquidity
requirements.
Investments The Ohio Insurance Code contains rules restricting the types
and amounts of investments which are permissible for Ohio life insurers.
These rules are designed to ensure the safety and liquidity of insurers'
investment portfolios. 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 AAG's operations will not be material.
The NAIC assigns quality ratings to publicly traded as well as privately
placed securities. At December 31, 1994, 94% of AAG's fixed maturity
portfolio was comprised of investment grade bonds (NAIC rating of "1" or
"2"). Management believes that the high credit quality of AAG's investment
portfolio should generate a stable and predictable investment return.
AAG invests primarily in fixed income investments which, including loans and
short-term investments, comprised over 98% of its investment portfolio at
December 31, 1994. AAG generally invests in securities with intermediate-
term maturities with an objective of optimizing interest yields while
maintaining an appropriate relationship of maturities between AAG's assets
and expected liabilities. AAG'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, 1994, AAG had approximately
$279 million in net unrealized losses on its fixed maturity portfolio
compared to net unrealized gains of $206 million at December 31, 1993. This
decrease, representing approximately 11% of the carrying value of AAG's bond
portfolio, resulted from an increase in the general level of interest rates.
During 1994, none of the Company's fixed maturity investments were non-
performing. In addition, AAG has little exposure to mortgage loans and real
estate, which represented only 1.5% of total assets at December 31, 1994.
The majority of mortgage loans and real estate was purchased within the last
two years.
At December 31, 1994, AAG's mortgage-backed securities portfolio consisted
primarily of collateralized mortgage obligations ("CMOs"), which represented
approximately 28% of fixed maturity investments compared to 35% at December
31, 1993. As of December 31, 1994, interest only (I/O), principal only
(P/O) and other "high risk" CMOs represented less than two-tenths of one
percent of total assets. AAG invests primarily in CMOs which are structured
to minimize prepayment risk. In addition,
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the majority of CMOs held by AAG 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 AAG'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
General 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. Following is a condensed statement of operating earnings, excluding
realized gains and losses and the 1993 provision for relocation expense (in
millions):
AAG (Consolidated): 1994 1993
Operating revenues $371.3 $351.7
Operating expenses:
Benefits to annuity policyholders (241.9) (228.6)
Interest and other debt expenses (21.4) (22.6)
Amortization of DPAC (7.1) (14.7)
Other expenses (37.6) (33.3)
(308.0) (299.2)
Operating earnings before taxes 63.3 52.5
Income tax expense 22.3 17.4
Net operating earnings $ 41.0 $ 35.1
Net operating earnings for 1994 were up 17% from 1993. Increases in
interest margins and growth in invested assets contributed to the
improvement. While net operating earnings is not considered an alternative
to net income as an indication of AAG's overall performance, management
believes that it is helpful in comparing the operating performance of AAG
and other similar companies.
The following table provides a comparison of certain amounts for GALIC (in
millions):
GALIC: 1994 1993 1992*
Annuity Receipts:
Flexible Premium Deferred Annuities:
First Year $ 39 $ 47 $ 48
Renewal 208 223 232
247 270 280
Single Premium Deferred Annuities 196 130 80
Total annuity receipts $443 $400 $360
Net investment income $372 $353 $329
Realized gains - 35 25
Benefits to annuity policyholders $242 $229 $242
Pretax income from continuing operations $ 92 $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.
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GALIC's annuity receipts in 1994 and 1993 increased on the strength of sales
of single premium products introduced in the second half of 1992.
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.
Net Investment Income GALIC's net investment income increased 5% in 1994
over 1993 due primarily to an increase in the Company's average invested
asset base. Investment income is reflected net of investment expenses of
$4.9 million in 1994 and 1993.
GALIC's net investment income increased 7% in 1993 over the comparable 1992
period. An increase in average fixed maturity investments more than offset
a decrease in interest rates available in the marketplace.
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. Chiquita reported a loss
before extraordinary item for 1994 of $49 million compared to a loss of $51
million for 1993. The loss in 1994 reflected higher costs and charges
related to (i) farm closings and write-downs of banana cultivations
following an unusually severe strike in Honduras, and (ii) a substantial
reduction of Chiquita's banana trading operations in Japan. These charges
were partially offset by improved results from Chiquita's meat operations as
well as a higher average worldwide price for bananas. Chiquita's loss in
1993 was attributed primarily to a multi-year investment spending program
and the ongoing impact of its restructuring and cost reduction efforts.
Benefits to Annuity Policyholders Benefits to annuity policyholders
increased 6% in 1994 over 1993 primarily due to an increase in average
annuity policyholder funds accumulated. The rate at which GALIC credits
interest on annuity policyholders' funds is subject to change based on
management's judgment of market conditions.
Benefits to policyholders decreased 5% in 1993 from 1992 reflecting a
decline in the average crediting rate on funds held by GALIC which more than
offset an increase in average annuity policyholders' funds.
Interest on Borrowings and Other Debt Expenses Interest on borrowings
decreased 5% in 1994 from 1993 due to repurchases of debt during 1994. (See
Note E to the financial statements.)
Amortization of Deferred Policy Acquisition Costs ("DPAC") DPAC
(principally commissions, advertising, underwriting, policy issuance and
sales expenses that vary with and are primarily related to the production of
new business) amortization in 1994 decreased 52% from 1993. This decrease
reflects evaluations during 1993 and 1994 of DPAC assumptions, which
resulted in updating certain factors, primarily the time frame over which
DPAC is amortized. The time frame was extended to more accurately reflect
the estimated lives of policies and the expected gross profits resulting
from these policies. The overall effect of the evaluations was to increase
the estimated effective lives of the policies from approximately five years
to approximately ten years. Estimates of lives and expected gross profits
were refined based on actual experience of the Company.
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Provision for 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 included in 1993 continuing operations.
Also in 1993, AAG relocated its corporate offices from Stamford, Connecticut
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.
Other Operating and General Expenses Other operating and general expenses
increased 13% in 1994 compared to 1993. Additional costs for information
systems, communications, rent and new distribution networks were partially
offset by lower employee costs. The 1993 employee costs were unusually high
due to the temporary staff required for the relocation of operations from
Los Angeles to Cincinnati.
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, many 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 are the funding of pension plans,
environmental costs, settlement of government claims, lease payments for two
former plant sites, certain retiree medical benefits, and certain
obligations associated with the sales of the Company's manufacturing
operations. (See Note G to the financial statements.)
18A
<PAGE>
While it is difficult to estimate future environmental investigative,
remedial and legal costs accurately, management believes the remaining
aggregate cost at all sites for which it has responsibility will range from
$8.6 million to $14.0 million at December 31, 1994. Management's estimate
of this range at year end 1993 was $10 million to $15 million. The reserve
for environmental related costs was $11.7 million at December 31, 1994 and
$10.6 million at December 31, 1993.
Regulatory standards for clean-up are continuously evolving toward more
stringent requirements. Changes in regulatory standards and further
investigations (many of which are still preliminary) at the Company's former
operating locations and third-party 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 are sufficient to satisfy
the known liabilities and that the ultimate cost will not, individually or
in the aggregate, have a material adverse effect on the financial condition
or results of operations of AAG.
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 Company's former manufacturing
operations. Over the last several years, the Company has been engaged in
negotiations with the United States Government with respect to the
settlement of claims the Government might have arising out of the reporting
deficiencies. Based on these negotiations, the Company believed it had
sufficient reserves to cover the estimated settlement amount. In March
1995, the Company received notification from the Government indicating
additional reporting deficiencies. The Company is in the process of
evaluating this information and is unable to ascertain the validity of these
new claims or the amounts involved. It is impossible to determine the
impact, if any, of these alleged claims on the Company and its financial
condition.
Extraordinary Items In 1994, AAG repurchased $77.1 million principal amount
of its notes, realizing a pretax loss of $1.5 million ($1.0 million net of
tax). In addition, AAG recorded a pretax charge of $1.1 million ($700,000
net of tax), representing AAG's proportionate share of Chiquita's
extraordinary loss on the retirement of certain of its debt in the first
quarter of 1994.
In 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 Changes Effective January 1, 1994, AAG implemented Statement of
Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits", and recorded a pretax charge of $740,000
($481,000, net of tax) for the projected future costs of providing certain
benefits to employees of GALIC.
Effective January 1, 1992, AAG implemented 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 Financial Accounting
Standards Board ("FASB") has issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan", which is scheduled to become effective in 1995.
Implementation of this standard is not expected to have a material effect on
AAG.
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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* 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.
10.7* American Annuity Group's 1993 Stock Appreciation Rights Plan,
incorporated herein by reference to Exhibit 10.8 to the Registrant's
Form 10-K for 1993.
24.1 Consents of Ernst & Young
27.0* Financial Data Schedule - included in Report filed electronically
with the Securities and Exchange Commission.
E-1
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AMERICAN ANNUITY GROUP, INC.
INDEX TO EXHIBITS - CONTINUED
Number Exhibit Description
99.1* Credit Agreement dated as of January 31, 1994 amended and restated as
of December 7, 1994.
99.2 Great American Life Insurance Company's Audited Financial Statements
for the Year Ended December 31, 1992.
__________________
* Previously filed
E-2
<PAGE>
AMERICAN ANNUITY GROUP, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Amendment to be signed on its behalf by
the undersigned, duly authorized.
AMERICAN ANNUITY GROUP, INC.
BY:________________________________
William J. Maney
Senior Vice President, Treasurer
and Chief Financial Officer
EXHIBIT 24 - CONSENTS OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-55189) pertaining to the Employee
Stock Purchase Plan of American Annuity Group, Inc. of our report
dated March 13, 1995, with respect to the consolidated financial
statements and schedules of American Annuity Group, Inc. and our
report dated June 15, 1993, with respect to the financial
statements of Great American Life Insurance Company included in
this Annual Report (Form 10-K) for the year ended December 31,
1994.
ERNST & YOUNG LLP
Cincinnati, Ohio
April 18, 1995
We consent to the use of our report dated June 15, 1993 with
respect to the financial statements of Great American Life
Insurance Company included as Exhibit 99.2 in the Annual Report
(Form 10-K), as amended, of American Annuity Group, Inc. for
the year ended December 31, 1994.
ERNST & YOUNG LLP
Cincinnati, Ohio
April 18, 1995
E-3
Exhibit 99.2
Audited Financial Statements
Great American Life Insurance Company
Years Ended December 31, 1992, 1991 and 1990
with Report of Independent Auditors
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Great American Life Insurance Company
We have audited the accompanying balance sheets of Great American Life
Insurance Company as of December 31, 1992 and 1991, and the related
statements of operations, changes in shareholder's equity and cash flows for
each of the three years in the period ended December 31, 1992. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
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 financial statements referred to above present fairly,
in all material respects, the financial position of Great American Life
Insurance Company at December 31, 1992 and 1991, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1992, in conformity with generally accepted accounting
principles.
June 15, 1993 ERNST & YOUNG
<PAGE>
GREAT AMERICAN LIFE INSURANCE COMPANY
BALANCE SHEET
(Dollars in Thousands)
December 31,
1992 1991
ASSETS
Investments:
Fixed maturities:
Held to maturity - at amortized cost
(market - $2,739,500 and $3,633,300) $2,662,739 $3,520,125
Available for sale - at market (amortized
cost - $1,115,100) 1,149,800 -
Equity securities - at market (cost -
$27,886 and $43,771) 30,086 35,471
Investment in affiliates 38,780 153,264
Mortgage loans on real estate 15,269 17,755
Real estate, net of accumulated depreciation
of $4,701 and $4,382 18,360 19,858
Policy loans 158,549 145,561
Other long-term investments - 19,157
Short-term investments 232,938 455,509
Total investments 4,306,521 4,366,700
Cash 15,455 25,428
Receivables from affiliates 8,124 26,434
Receivable for securities sold 1,611 147,052
Accrued investment income 52,972 54,345
Deferred policy acquisition costs 43,976 54,146
Other assets 10,205 11,439
$4,438,864 $4,685,544
LIABILITIES AND SHAREHOLDER'S EQUITY
Annuity policyholders' funds accumulated $3,973,524 $3,726,898
Payable for securities purchased 208 556,647
Accounts payable, accrued expenses and
other liabilities 43,841 43,776
4,017,573 4,327,321
Shareholder's Equity:
Common stock, $12.50 par value, including
paid-in capital
- 1,200,000 shares authorized
- 201,000 shares outstanding 255,419 244,619
Retained earnings 141,572 119,104
Net unrealized gain (loss) on marketable
securities, net of deferred income
taxes (credits) 24,300 (5,500)
Total Shareholder's Equity 421,291 358,223
$4,438,864 $4,685,544
See notes to financial statements.
<PAGE>
GREAT AMERICAN LIFE INSURANCE COMPANY
STATEMENT OF EARNINGS
(In Thousands)
Year ended December 31,
1992 1991 1990
Revenues:
Net investment income $329,263 $334,233 $291,789
Realized gains (losses) on sales of:
Investments in affiliates (2,155) 6,351 37,383
Fixed maturity and equity securities 27,966 (13,723) (34,615)
Other long-term investments (502) 18,189 2,879
Equity in net earnings (losses)
of affiliates (16,173) 1,872 11,545
Credit (provision) for change in reserve
on investments - 51,000 (23,000)
Other income 4,091 4,697 4,170
Total revenues 342,490 402,619 290,151
Costs and expenses:
Interest on annuity policyholders' funds 241,600 257,859 240,415
Amortization of deferred policy
acquisition costs 20,400 14,480 12,301
Other operating and general expenses 31,285 27,249 28,507
Total costs and expenses 293,285 299,588 281,223
Earnings before income taxes and
accounting change 49,205 103,031 8,928
Provision for income taxes 17,180 38,711 5,126
Earnings before cumulative effect of
affiliates' accounting change 32,025 64,320 3,802
Cumulative effect of affiliates' accounting
change, net of income taxes of $5,380 10,443 - -
Net earnings $ 42,468 $ 64,320 $ 3,802
See notes to financial statements.
<PAGE>
GREAT AMERICAN LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
(In Thousands)
Year ended December 31,
1992 1991 1990
Common stock, including paid-in capital:
Balance at beginning of period $244,619 $220,619 $117,619
Capital contributions 15,800 24,000 103,000
Return of capital (5,000) - -
Balance at end of period $255,419 $244,619 $220,619
Retained earnings:
Balance at beginning of period $119,104 $154,894 $161,292
Net earnings 42,468 64,320 3,802
Dividends paid (20,000) (57,890) (10,200)
Charge equal to excess of market value
over carrying values of assets acquired
from affiliates - (42,220) -
Balance at end of period $141,572 $119,104 $154,894
Net unrealized gain (loss) on marketable
securities, net of deferred income
tax credits:
Balance at beginning of period ($ 5,500)($ 20,200)($ 2,400)
Change during period 29,800 14,700 (17,800)
Balance at end of period $ 24,300 ($ 5,500)($ 20,200)
Total shareholder's equity $421,291 $358,223 $355,313
See notes to financial statements.
<PAGE>
GREAT AMERICAN LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(In Thousands)
Year ended December 31,
1992 1991 1990
Operating activities:
Net earnings $ 42,468 $ 64,320 $ 3,802
Cumulative effect of accounting change (15,823) - -
Adjustments:
Depreciation and amortization (403) (9,853) (12,838)
Interest on annuity policyholders'
funds 241,600 257,859 240,415
Fees charged to policyholders' funds
accumulated (16,270) (16,351) (14,677)
Amortization of deferred policy
acquisition costs 20,400 14,480 12,301
Equity in net earnings of affiliates 16,173 (1,872) (11,545)
Provision (credit) for change in
reserve on investments - (51,000) 23,000
Realized gains on investing
activities (25,309) (10,817) (5,647)
Decrease (increase) in receivables
from affiliates 2,910 (6,155) (19,208)
Decrease (increase) in accrued
investment income 1,373 2,140 (1,243)
Increase in deferred policy
acquisition costs (10,230) (15,698) (21,412)
Decrease (increase) in other assets 741 1,676 (738)
Increase (decrease) in other
liabilities 65 (4,602) 301
Dividends from affiliates 4,372 7,747 2,488
Other 1,866 (53) (75)
263,933 231,821 194,924
Investing activities:
Purchases of and additional
investments in:
Fixed maturity investments (2,249,657) (4,074,959) (2,373,170)
Equity securities (207) (4,887) (8,834)
Subsidiaries and affiliates - (42,650) -
Real estate and other assets (634) (1,123) (1,300)
Maturities and redemptions of fixed
maturity investments 380,120 400,065 334,647
Sales of:
Fixed maturity investments 1,238,727 3,681,934 1,555,248
Equity securities 3,383 8,062 33,014
Subsidiaries and affiliates 126,279 158 23,924
Real estate and other assets 1,151 7,574 2,573
Increase in policy loans (12,988) (14,372) (11,360)
Decrease (increase) in other
investments, net 16,042 98,295 (45,461)
(497,784) 58,097 (490,719)
Financing activities:
Annuity receipts 360,702 459,860 530,582
Annuity benefits and withdrawals (339,406) (372,235) (271,953)
Cash dividends paid and returns
of capital (20,015) (534) (10,150)
Capital contribution 26 - 21,280
1,307 87,091 269,759
Net increase (decrease) in cash and
short-term investments (232,544) 377,009 (26,036)
Cash and short-term investments at
beginning of period 480,937 103,928 129,964
Cash and short-term investments at
end of period $248,393 $480,937 $103,928
See notes to financial statements.
<PAGE>
GREAT AMERICAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES
BASIS OF PRESENTATION Great American Life Insurance Company ("GALIC") is an
indirect subsidiary of American Financial Corporation ("AFC"); in December
1992, American Annuity Group, Inc. ("AAG") purchased 100% of the common
stock of GALIC from Great American Insurance Company ("GAI"), a 100% owned
subsidiary of AFC. At December 31, 1992, AFC and its subsidiaries owned 82%
of AAG's common stock.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") which differ in certain
respects from the statutory basis of accounting followed in reporting to
insurance regulatory authorities.
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.
Effective September 30, 1992, GALIC reclassified its portfolio of fixed
maturity securities into two categories. Fixed maturity securities are
classified as "held to maturity" and carried at amortized cost when GALIC
has both the intent and ability to hold these investments to maturity. It
is expected that only in certain limited circumstances, such as issuer
credit deterioration or if required by insurance or other regulators, will
investments classified as "held to maturity" be sold. The remaining fixed
maturity securities, representing investments that may be sold prior to
maturity (in response to changes in market rates, as part of the company's
asset/liability management, to manage the company's tax position, to
increase regulatory capital, or to meet general liquidity needs), are
classified as "available for sale" and carried at market value with
unrealized gains and losses, net of applicable deferred income taxes,
credited or charged to shareholder's equity.
Marketable equity securities (principally common and non-redeemable
preferred stocks) are carried at fair value. The difference between cost
and carrying value, net of applicable deferred income taxes (credits) is
included in "net unrealized gain (loss) on marketable securities" and is
charged or credited directly to stockholder's equity without affecting
earnings.
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.
Provisions for asset impairment are charged to earnings when declines in
values of investments are considered to be other than temporary.
Sales and other dispositions of securities are generally recorded at market
value; gains and losses are recognized at the time of disposition with the
amount of gain or loss determined on the specific identification basis.
INVESTMENT IN AFFILIATES Investments in voting 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. Investments in more than 50%-owned companies are accounted for by
the equity method when control is deemed temporary.
DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs (principally the
excess of new commissions over renewal commissions and 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.
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; decreases for surrender charges are credited to other income and
decreases for fees assessed to recover costs associated with the policy
contract are credited to operating expenses.
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 at December 31, 1992 and 1991, approximates
carrying value.
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.
ISSUANCES OF STOCK BY AFFILIATES Changes in GALIC's equity in an affiliate
caused by issuances of the affiliate's stock are accounted for as realized
gains or losses where the sale of such shares by the affiliate is not part
of a broader reorganization.
INCOME TAXES GALIC files consolidated federal income tax returns with AFC.
Effective January 1, 1992, GALIC adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". GALIC's
affiliates also adopted SFAS No. 109 effective January 1, 1992. Excluding
the effects from affiliates adopting this standard, implementing SFAS No.
109 had no impact on GALIC's results of operations or financial position.
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
affiliates. In connection with an AAG bank agreement, 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 will be paid to AFC,
subject to certain bank restrictions.
BENEFIT PLANS GALIC participates in AFC's Employee Stock Ownership
Retirement Plan ("ESORP"), which covers all employees who are qualified as
to age and length of service. The ESORP is a noncontributory, trusteed plan
which invests in securities of AFC and its subsidiaries for the benefit of
the employees of GALIC. Contributions are discretionary by the directors of
GALIC and are charged against earnings in the year for which they are
declared. Qualified employees having vested rights are entitled to benefit
payments at age 60.
POSTRETIREMENT BENEFITS GALIC provides health care and life insurance
benefits to eligible retirees. Prior to 1992, the cost of these benefits
had generally been recognized as claims were paid. Effective January 1,
1992, GALIC adopted SFAS 106, "Accounting for Postretirement Benefits Other
Than Pensions". SFAS 106 requires that the projected "future cost" of
providing postretirement benefits be recognized as an expense as employees
render service. The effect of the implementation of this standard was not
material.
B. INVESTMENTS
Fixed maturity investments in GALIC's "held to maturity" portfolio at
December 31, 1992, consisted of the following (in millions):
1992
Carrying Market Gross Unrealized
Value Value Gains Losses
Bonds:
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 8.0 8.6 0.6 -
$2,662.7 $2,739.5 $81.7 $4.9
Fixed maturity investments in the Company's "available for sale" portfolio
at December 31, 1992, consisted of the following (in millions):
1992
Carrying Market Gross Unrealized
Value Value Gains Losses
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 217.7 229.4 16.8 5.1
$1,115.1 $1,149.8 $43.7 $9.0
<PAGE>
GREAT AMERICAN LIFE INSURANCE COMPANY
Fixed maturity investments at December 31, 1991, consisted of the following
(in millions):
1992
Carrying Market Gross Unrealized
Value Value Gains Losses
Bonds:
U.S. Government and
government agencies
and authorities $ 212.2 $ 215.6 $ 3.4 $ -
States, municipalities and
political subdivisions 1.3 1.3 - -
Foreign governments 2.6 2.6 - -
Public utilities 520.8 541.0 20.4 0.2
Collateralized mortgage
obligations 1,398.9 1,431.7 32.9 0.1
All other corporate 1,376.4 1,432.8 56.4 -
Redeemable preferred stocks 7.9 8.3 0.5 0.1
$3,520.1 $3,633.3 $113.6 $0.4
Carrying values of investments were determined after deducting valuation
reserves of $20 million at December 31, 1992 and 1991. When a decline in
value of a specific investment is considered to be other than temporary, a
provision for impairment is charged to earnings, reducing the carrying value
of that investment. Changes in aggregate reserves deducted from investments
are as follows (in thousands):
1992 1991 1990
Reserves at beginning of year $20,000 $103,000 $ 80,000
Provision for impairment - - 23,000
Credit for investments sold - (51,000) -
Investments charged off - (32,000) -
Reserves at end of year $20,000 $ 20,000 $103,000
The table below sets forth the scheduled maturities of GALIC's fixed
maturity investments based on carrying value as of December 31, 1992.
Distribution based on market value is generally the same. Collateralized
mortgage obligations had an average life approximately 6.0 years at
December 31, 1992.
Held to Available
Maturity Maturity for sale Total
One year or less *% 1% 1%
After one year through five years 9 2 11
After five years through ten years 27 7 34
After ten years 10 2 12
46 12 58
Collateralized mortgage obligations 24 18 42
70% 30% 100%
[FN]
* less than 1%
Gross gains of $36 million and $158 million and gross losses of $9 million
and $141 million were realized on sales of fixed maturity investments during
1992 and 1991, respectively.
The carrying value of investments in any entity in excess of 10% of
shareholder's equity at December 31, 1992, other than investments in
affiliates and investments issued or guaranteed by the U. S. Government,
were as follows (in thousands):
Fixed Short
Issuer Maturities Term Total
GTE Corporation $36,100 $48,300 $84,400
CMSC CMO Issues 43,800 - 43,800
Commonwealth Edison 43,300 - 43,300
Philadelphia Electric 42,400 - 42,400
Realized gains (losses) and changes in unrealized appreciation
(depreciation) on fixed maturity and equity security investments are
summarized as follows (in thousands):
Fixed Equity Tax
Maturities Securities Effects Total
1992
Realized $ 27,329 $ 637 ($ 9,508) $ 18,458
Change in Unrealized (1,714) 10,500 (2,987) 5,799
1991
Realized $ 17,338 ($ 31,061) $ 4,666 ($ 9,057)
Change in Unrealized 164,100 22,400 (63,400) 123,100
1990
Realized ($ 46,590) $ 11,975 $ 11,769 ($ 22,846)
Change in Unrealized (51,700) (27,100) 26,800 (52,000)
At December 31, 1992, gross unrealized gains on marketable equity securities
were $3.2 million and gross unrealized losses were $1.0 million. Major
categories of net investment income are as follows (in thousands):
1992 1991 1990
Fixed maturities (*) $329,046 $327,503 $288,536
Other 6,770 14,009 14,967
Total investment income 335,816 341,512 303,503
Investment expenses (6,553) (7,279) (11,714)
Net investment income $329,263 $334,233 $291,789
[FN]
(*) Includes interest on policy loans, mortgage loans, receivables from
affiliates and short-term investments.
<PAGE>
GREAT AMERICAN LIFE INSURANCE COMPANY
C. INVESTMENT IN AFFILIATES
Investment in affiliates represents GALIC's ownership of the equity
securities of certain companies accounted for under the equity method. All
of the companies named in the following table are subject to the rules and
regulations of the Securities and Exchange Commission. GALIC's investment
(and common stock ownership percentage) and equity in net earnings and
losses of affiliates are stated below (dollars in thousands):
Investment Equity in
(Ownership %) (a) Net Earnings (Losses)
12/31/92 12/31/91 1992 1991 1990
Chiquita $32,030 (5%) $ 32,824 (4%) ($14,921) $4,016 $ 7,471
Spelling 6,750 (b) 17,944 (7%) 124 399 37
Penn Central - 51,733 (4%) 3,175 1,239 4,107
American Financial
Enterprises("AFEI") - 25,254 (12%) (101) (683) 1,064
STI Group, Inc. - 2,367 (2%) (448) (910) 52
GACC - 933 - - (1,565) (1,090)
Other - 22,209 (4,002) (624) (96)
$38,780 $153,264 ($16,173) $1,872 $11,545
[FN]
(a) At December 31, 1992, AFC and its other subsidiaries owned an
additional 41% interest in the common stock of Chiquita. In
connection with AAG's purchase of GALIC in December 1992, GALIC sold
to GAI its investments in the common stock of all of its affiliates
except Chiquita.
(b) In December 1992, GALIC transferred its shares of Spelling common to
GAI; its remaining investment consisted of Spelling preferred stock.
In July 1991 and the fourth quarter of 1990, respectively, Chiquita issued
5 million shares and 6.6 million shares of its common stock. GALIC recorded
pretax gains of $3.7 million and $4.3 million for 1991 and 1990,
respectively, representing the excess of GALIC's equity in Chiquita
following the issuances of its common stock over its previously recorded
carrying value. During 1991, GACC issued 21.5 million shares of its common
stock in connection with debt restructurings. GALIC recorded a $775,000
pretax loss representing the difference between GALIC's equity in GACC
following the transactions and its previously recorded carrying value.
Taxes of $250,000 in 1991 and $292,000 in 1990 were provided on the net
gains from subsidiary stock issuances.
Included in GALIC's retained earnings at December 31, 1992, was
approximately $11 million applicable to equity in undistributed net losses
of affiliates.
During 1991, GALIC transferred its entire investment in Chiquita to GAI as
part of a dividend payment. Subsequently, GALIC acquired Chiquita shares
from various affiliates through cash purchases and a capital contribution,
and in repayment of advances under a line of credit. These transactions
have been recorded at the historical carrying values of the affiliated
entities. The $42.2 million in excess cost over carrying values of Chiquita
shares acquired was charged to retained earnings.
The market value of GALIC's investment in affiliates (excluding $6.8 million
and $29.9 million in non-public securities at December 31, 1992 and 1991,
respectively, for which market values were not available) was approximately
$46.1 million and $186 million at December 31, 1992 and 1991, respectively.
Chiquita is a leading international marketer, processor and producer of
quality fresh and prepared food products. Summarized financial information
for Chiquita at December 31, 1992, is as follows (in millions):
Chiquita Brands International, Inc.
1992 1991 1990
Current Assets $1,071 $1,509
Non-current Assets 1,810 1,428
Current Liabilities 588 548
Non-current Liabilities 1,618 1,421
Shareholders' Equity 675 968
Net Sales $2,723 $2,604 $2,186
Operating Income (Loss) (97) 198 166
Income (Loss) from Continuing
Operations (222) 111 96
Discontinued operations (62) 17 (2)
Net Income (Loss) (284) 128 94
D. INCOME TAXES
The following is a reconciliation of income taxes at the "normal" rate of
34% and income taxes as shown in the Statement of Earnings (in thousands):
1992 1991 1990
Earnings before income taxes and
accounting change $49,205 $103,031 $8,928
Cumulative effect of affiliates'
accounting change 15,823 - -
Earnings before income taxes $65,028 $103,031 $8,928
Income taxes at normal rate $22,110 $35,031 $3,036
Effect of:
Affiliate earnings 31 3,653 2,185
Dividends received deduction (199) (109) (162)
Other 618 136 67
Total provision 22,560 38,711 5,126
Less amount applied to cumulative
effect of affiliates' accounting
change (5,380) - -
Provision for income taxes as shown
on the Statement of Earnings $17,180 $ 38,711 $5,126
The cash portion of payments for income taxes, net of refunds, was $21.2
million, $2.2 million and $5.0 million for 1992, 1991 and 1990,
respectively.
GALIC's tax agreement with AFC calls for payments to (or benefits from) AFC
based on taxable income without regard to temporary differences; the effect
of tax rate changes on these temporary differences are borne by AFC. The
tax effects of GALIC's significant temporary differences at December 31,
1992, were as follows (in millions):
Taxable Deductible
Investments $ - $14.8
Deferred acquisition costs 15.0 -
Annuity policyholders' funds accumulated 11.9 -
E. PENDING LEGAL PROCEEDINGS
Counsel has advised GALIC that there is little likelihood of any substantial
liability resulting from any litigation pending against GALIC.
F. BENEFIT PLANS
Contributions to AFC's ESORP of $521,000, $539,000 and $389,000 were
expensed by GALIC in 1992, 1991 and 1990, respectively.
G. TRANSACTIONS WITH AFFILIATES
Various business has been transacted between GALIC and its parent and
affiliates over the past several years, including rentals, loans, insurance,
and sales of assets. Aggregate charges for these services between GALIC and
its affiliates have been insignificant in relation to revenues.
AFC maintains a line of credit agreement to borrow up to $50 million from
GALIC. The line bears interest at prime plus 1/4% and is collateralized by
marketable securities with a market value of at least 125% of amounts
borrowed. The highest balance during 1992, 1991 and 1990 was $50
million, $50 million, and $48 million, respectively. At December 31, 1992
and 1991, there were no amounts outstanding under the line. Currently,
AAG's bank loan covenants prohibit GALIC from lending money to AFC under the
line of credit.
GALIC's investment portfolio is managed by a subsidiary of AFC. Net
investment income includes investment management charges of $4.2 million in
1992, $4.0 million in 1991 and $7.2 million in 1990. GALIC has purchased
and sold securities at fair value in transactions with AFC and GAI; GALIC
has also transferred securities to GAI and AFC in the form of dividends and
tax payments and has received securities from GAI as capital contributions.
Such purchases, sales and transfers and related gains (losses) were as
follows (in millions):
Gains
Acquisitions Dispositions (Losses)
1992 $ 15.8 $172.6 $ 0.1
1991 95.0 120.5 (44.1)
1990 196.3 83.3 6.5
Included in receivables from affiliates at December 31, 1992 and 1991,
respectively, were receivables from (payables) to AFC for federal income
taxes of ($1.9) million and $14.9 million .
H. QUARTERLY OPERATING RESULTS (UNAUDITED)
The following are quarterly results of operations for the two years ended
December 31, 1992 (in millions). Quarterly results necessarily rely heavily
on estimates. These estimates and certain other factors, such as the nature
of certain portions of the insurance business and affiliates' operations and
discretionary sales of assets, cause the quarterly results not to be
necessarily indicative of results for longer periods of time.
1st 2nd 3rd 4th Total
Quarter QuarterQuarter Quarter Year
1992
Revenues $91.5 $91.4 $79.2 $80.4 $342.5
Earnings before accounting
change 12.0 12.4 4.7 2.9 32.0
Cumulative effect of accounting
change 10.5 - - - 10.5
Net earnings 22.5 12.4 4.7 2.9 42.5
The data above has been restated to reflect the cumulative effect from
adopting SFAS No. 109 as of January 1, 1992.
1991
Revenues $92.0 $68.8 $74.8 $167.0 $402.6
Net earnings (loss) 15.6 (4.6) (0.2) 53.5 64.3
Realized gains (losses) on sales of affiliates, fixed maturity and equity
securities and other long-term investments and changes in reserves on
investments for the respective quarters amounted to (in millions):
1st 2nd 3rd 4th Total
Quarter Quarter QuarterQuarter Year
Realized
Gains (Losses)
1992 $7.5 $ 10.7 $ 1.3 $ 5.8 $25.3
1991 3.6 (19.3) (8.9) 35.4 10.8
Valuation Reserves
Credit (Provision)
1992 $ - $ - $ - $ - $ -
1991 3.0 - - 48.0 51.0
I. DIVIDEND RESTRICTIONS
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 net gains from operations. GALIC may pay approximately $33
million in dividends in 1993, based on net gains from operations, without
prior approval.
In addition, in connection with obtaining approval of AAG's acquisition of
GALIC from the California Department of Insurance, AAG agreed that, during
the period that any amount remains outstanding under an AAG Bank Credit
Agreement and while GALIC remains commercially domiciled in California, it
will cause GALIC (i) to give the California Department of Insurance ten days
prior written notice of all dividends to be paid by GALIC, and (ii) to
refrain from paying any dividends which would result in the ratio of GALIC's
statutory capital and surplus plus asset valuation reserve ("AVR") to
statutory liabilities (excluding AVR) being less than 5.5% immediately after
the payment thereof, unless the Commissioner of the California Department of
Insurance has received 30 days prior written notice of the dividend
declaration and has not within such period disapproved such payment or the
Commissioner of the California Department of Insurance has approved such
payment within such 30-day period. At March 31, 1993, the ratio of GALIC's
statutory capital and surplus (plus AVR) to statutory liabilities (excluding
AVR) was 6.8%.
J. 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). Net earnings (loss) for
the year and policyholders' surplus at year end on a statutory basis for
GALIC were as follows (in millions):
1992 1991 1990
Net earnings (loss) $ 59.2 $ 93.2 ($ 1.0)
Policyholders' surplus 216.2 218.9 191.7
