SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 1996 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
American Annuity Group, Inc.:
Common Stock, Par Value $1.00 Per Share New York
AAG Holding Company, Inc. (Guaranteed by Registrant):
9-1/2% Senior Notes due August 15, 2001 New York
11-1/8% Senior Subordinated Notes due February 1, 2003New York
American Annuity Group Capital Trust I (Guaranteed by Registrant):
9-1/4% Trust Originated Preferred Securities New 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. [ ]
As of February 28, 1997, there were 43,201,574 shares of the
Registrant's Common Stock outstanding. The aggregate market value of Common
Stock held by non-affiliates at that date was approximately $124.2 million
based upon non-affiliate holdings of 8,141,579 shares and a market price of
$15.25 per share.
Documents Incorporated by Reference:
Proxy Statement for the 1997 Annual Meeting of Shareholders (portions of
which are incorporated by reference into Part III hereof).
<PAGE>
AMERICAN ANNUITY GROUP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I
Page
Item 1. Business
Introduction 1
Great American Life Insurance Company 1
American Memorial Life Insurance Company and
Loyal American Life Insurance Company 5
Other Subsidiaries 7
Investments 8
Independent Ratings 10
Competition 10
Regulation 11
Discontinued Manufacturing Operations 13
Employees 13
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders *
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure *
Part III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management 22
Item 13. Certain Relationships and Related Transactions 22
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K S-1
* The response to this item is "none".
<PAGE>
PART I
ITEM 1
Business
Introduction
American Annuity Group, Inc. ("AAG" or "the Company") was incorporated as a
Delaware corporation in 1987. AAG is a holding company which operates
through wholly-owned subsidiaries. AAG's primary subsidiary, Great American
Life Insurance Company ("GALIC"), sells (i) flexible premium and single
premium annuities in the qualified (not-for-profit) market and (ii) single
premium annuities in the non-qualified market. AAG acquired GALIC in
December 1992.
In November 1995, AAG acquired Laurentian Capital Corporation ("LCC"). As a
result, the Company's subsidiaries now include (i) American Memorial Life
Insurance Company, which markets individual life insurance and annuity
policies with the sponsorship of state associations of funeral directors as
well as individual funeral directors and corporate-owned funeral homes
across the country and (ii) Loyal American Life Insurance Company, which
specializes in supplemental life and health insurance sold through payroll
deduction plans and credit unions.
AAG is an 81% owned subsidiary of American Financial Group, Inc. ("AFG").
Great American Life Insurance Company
GALIC, located in Cincinnati, was incorporated in New Jersey in 1959 and
redomiciled as an Ohio corporation in 1982. GALIC entered the tax-deferred
annuity business in 1976; prior to that time it wrote primarily whole-life,
term-life, and accident and health insurance policies. GALIC is currently
rated "A" (Excellent) by A.M. Best and "AA-" (Very high claims paying
ability) by Duff & Phelps.
Annuities are long-term retirement savings plans that benefit from interest
accruing on a tax-deferred basis. The issuer of the annuity collects
premiums, credits interest on the policy and pays out a benefit upon death,
surrender or annuitization.
Annuity contracts are generally classified as either fixed rate or variable.
With a fixed rate annuity, the interest crediting rate is initially set by
the issuer and thereafter may be changed from time to time by the issuer
based on market conditions, subject to any guaranteed minimum interest
crediting rates in the policy. With a variable annuity, the value of the
policy is tied to an underlying securities portfolio or underlying mutual
funds. The majority of annuities issued by GALIC have been fixed rate
annuities.
Employees of qualified not-for-profit organizations are eligible to save for
retirement through contributions made on a before-tax basis. Contributions
are made at the discretion of the participants through payroll deductions or
through tax-free "rollovers" of funds. Federal income taxes are not payable
on contributions or earnings until amounts are withdrawn.
1
<PAGE>
The following table (in millions) presents financial information concerning
GALIC.
Statutory Accounting Principles Basis
1996 1995 1994 1993 1992
Total Assets $5,752 $5,414 $5,057 $4,758 $4,377
Insurance Reserves:
Annuities $5,298 $4,974 $4,655 $4,299 $4,011
Life 22 22 21 22 23
Accident and Health - - 1 1 1
$5,320 $4,996 $4,677 $4,322 $4,035
Capital and Surplus $ 285 $ 273 $ 256 $ 251 $ 216
Asset Valuation Reserve(a) 91 90 80 70 71
Interest Maintenance Reserve(a) 25 32 28 36 17
Annuity Receipts:
Flexible Premium:
First Year $ 35 $ 42 $ 39 $ 47 $ 48
Renewal 182 196 208 223 232
217 238 247 270 280
Single Premium 319 219 196 130 80
Total Annuity Receipts $ 536 $ 457 $ 443 $ 400 $ 360
(a) Allocation of surplus.
Generally Accepted Accounting Principles ("GAAP") Basis
1996 1995 1994 1993 1992
Total Assets $5,934 $5,608 $5,044 $4,883 $4,436
Annuity Benefits Accumulated 5,205 4,917 4,596 4,257 3,974
Stockholder's Equity 658 623 449 520 418
Single premium annuity receipts have increased each year since 1992 due
primarily to sales of newly introduced products and, in 1995, the
development of new distribution channels. This increase has more than
offset the decline in flexible premium receipts.
Annuity Products
GALIC's principal products are Flexible Premium Deferred Annuities ("FPDAs")
and Single Premium Deferred Annuities ("SPDAs"). FPDAs are characterized by
premium payments that are flexible in both amount and timing as determined
by the policyholder. SPDAs are issued in exchange for a one-time lump-sum
premium
payment.
2
<PAGE>
GALIC's FPDAs are sold primarily to employees of qualified not-for-profit
organizations under Section 403(b) of the Internal Revenue Code. Over the
last several years, sales of non-qualified annuities have represented an
increasing percentage of premiums as GALIC has developed products and
distribution channels targeted to the non-qualified markets. The following
table summarizes GALIC's written premiums and insurance reserves on a
statutory basis by product line (dollars in millions).
1996 Premiums Written Insurance Reserves
First % of December 31, 1996
YearRenewal Total Amount %
Flexible Premium:
Qualified $ 35 $181 40.1% $3,268 61.5%
Non-qualified - 1 0.2 12 0.2
Total 35 182 40.3 3,280 61.7
Single Premium:
Qualified 153 - 28.4 1,067 20.1
Non-qualified 166 - 30.9 550 10.3
Total 319 - 59.3 1,617 30.4
Annuities in Payout - - - 401 7.5
Life, Accident & Health - 2 0.4 22 0.4
Total $354 $184 100.0% $5,320 100.0%
At December 31, 1996, substantially all of GALIC's annuity policyholder
benefit reserves consisted of fixed rate annuities which offered a minimum
interest rate guarantee of 3% or 4%. The majority of GALIC's fixed rate
annuity policies permit GALIC to change the crediting rate at any time
(subject to the minimum guaranteed interest rate). In determining the
frequency and extent of changes in the crediting rate, GALIC takes into
account the economic environment and the relative competitive position of
its products.
GALIC seeks to maintain a desired spread between the yield on its investment
portfolio and the rate it credits to its policies. GALIC accomplishes this
by (i) offering crediting rates which it has the option to change, (ii)
designing annuity products that encourage persistency and (iii) maintaining
an appropriate matching of assets and liabilities. Qualified annuity
policyholders maintain access to their funds without incurring policy or IRS
penalties through provisions in the contracts which allow policy loans.
GALIC designs its products with certain surrender charges and front-end fees
to discourage policyholders from surrendering or withdrawing funds during
the first five to ten years after issuance of a policy. Partly due to these
features, GALIC's annuity surrenders have averaged approximately 7% of
statutory reserves over the past five years.
Persistency rates reflect the proportion of reserves maintained by the
Company and not paid out in the form of surrenders, annuitizations or death
benefits. The following table illustrates GALIC's annual persistency rates
for its major products over the past five years.
Persistency Rates
Product Group 1996 1995 1994 1993 1992
Flexible Premium 90.0% 91.0% 92.5% 92.0% 90.6%
Single Premium 91.6 93.6 93.5 93.3 93.8
Management believes that this favorable persistency rate has been enhanced
by the high level of service offered to agents and policyholders and
GALIC's interest crediting policy. GALIC has been able to offer higher
accumulation values and
3
<PAGE>
benefit levels as well as increase its persistency with the two-tier design
of certain GALIC products. Two account values are maintained for two-tier
annuities -- the annuitization (or upper-tier) value and the surrender (or
lower-tier) value. The annuitization value is paid upon a policyholder's
death or election to annuitize (withdraw funds in a series of periodic
payments for at least the minimum number of years specified in the policy).
If a lump sum payment is chosen by the policyholder, the surrender benefit
is paid. GALIC's two-tier annuities are particularly attractive to
policyholders who intend to accumulate funds to provide retirement income
since the annuitization value is accumulated at a competitive long-term
interest rate.
GALIC also offers single-tier products. After the initial surrender charges
have been reduced to zero, single-tier annuities carry one value whether the
policy is surrendered or annuitized. In 1996, approximately three-fourths
of first year FPDA premiums and SPDA premiums received were on single-tier
policies compared to approximately one-sixth in 1992.
In the third quarter of 1996, GALIC began marketing a new type of annuity
that offers the traditional features of a fixed annuity (guaranteed minimum
annual interest rate on a portion of the premium received and a guaranteed
minimum surrender value) with the opportunity to participate, in part, in
increases in the S&P 500 Index over a selected term (generally a minimum of
six years).
Marketing and Distribution
Sales of annuities are affected by many factors, including: (i) competitive
annuity products and rates; (ii) the general level of interest rates; (iii)
the favorable tax treatment of annuities; (iv) commissions paid to agents;
(v) services offered; (vi) ratings from independent insurance rating
agencies; (vii) other alternative investments and (viii) general economic
conditions.
GALIC markets its FPDAs principally to employees of educational institutions
in the kindergarten through high school ("K-12") segment. Written premiums
from the K-12 segment represented the majority of GALIC's total tax-
qualified premiums in 1996.
GALIC distributes its annuity products through over 75 managing general
agents ("MGAs") who, in turn, direct approximately 1,000 actively producing
independent agents. GALIC has developed its business on the basis of its
relationships with MGAs and independent agents primarily through a
consistent marketing approach and responsive service. GALIC's top MGA wrote
approximately one-fifth of GALIC's premiums in 1996.
GALIC seeks to attract and retain agents who are experienced and highly
motivated and who consistently sell a high volume of the types of annuities
offered by GALIC. Toward this end, GALIC has established a "President's
Advisory Council" consisting of leading producers who market primarily GALIC
products. The President's Advisory Council serves as a major influence on
new product design and marketing strategy.
To extend the distribution of GALIC annuities to a broader customer base,
GALIC has developed a Personal Producing General Agent ("PPGA")
distribution system. Approximately 70 PPGAs are contracted to sell GALIC
annuities in those territories not served by an MGA. AAG has also developed
two agency organizations to expand premium writings through banks, hospitals
and certain not-for-profit organizations. (See "Other Subsidiaries.")
4
<PAGE>
GALIC is licensed to sell its products in all states (except New York) and
in the District of Columbia. The following table reflects the geographical
distribution of GALIC's annuity premiums in 1996 compared to 1992.
1996 1992 1996 1992
California 29.8% 20.2% North Carolina 3.0% 3.2%
Washington 7.0 * Minnesota 2.8 *
Texas 6.6 2.8 Connecticut 2.7 6.3
Florida 5.1 10.2 Indiana 2.3 *
Massachusetts 4.8 8.1 Arizona 2.1 *
Ohio 4.8 5.1 Illinois * 3.8
Michigan 3.5 9.9 Rhode Island * 2.6
Iowa 3.4 * New Hampshire * 2.3
New Jersey 3.1 6.2 All others, each
less than 2% 19.0 19.3
100.0%100.0%
* less than 2%
At December 31, 1996, GALIC had approximately 250,000 annuity policies in
force, nearly all of which were individual contracts.
American Memorial Life Insurance Company and Loyal American Life Insurance
Company
American Memorial (formerly Prairie States Life Insurance Company) is
located in Rapid City, South Dakota. Loyal is located in Mobile, Alabama.
The following table (in millions) presents financial information concerning
these two companies for 1996.
American
STATUTORY BASIS Memorial Loyal
Total Assets $412 $ 255
Insurance Reserves:
Life $276 $ 167
Annuities 95 6
Accident and Health - 29
$371 $ 202
Capital and Surplus $ 27 $ 37
Asset Valuation Reserve 4 3
Interest Maintenance Reserve 2 1
Premiums Written:
Life $ 57 $ 20
Annuities 37 -
Accident and Health - 21
Other 3 -
Total Premiums $ 97 $ 41
Life Insurance In Force $800 $2,100
GAAP BASIS
Total Assets $738 $312
Annuity Benefits Accumulated 96 3
Stockholder's Equity 89 81
5
<PAGE>
Products
American Memorial offers a variety of life insurance and annuity products to
finance pre-arranged funerals. In a typical arrangement, a consumer pays in
advance for certain goods and services to be provided by a funeral director.
These payments may be used by the funeral director to purchase a life
insurance or annuity contract or to invest in a trust fund. Approximately
half of the premiums received by American Memorial are from single payment
funding and half are from payment plans of three to ten years. The policy
values increase at a rate geared to offset effects of inflation and thus
provide for funeral costs at time of death.
Loyal offers a variety of supplemental life and health insurance products
that are normally sold on a fixed dollar amount per pay period program. For
products sold through payroll deduction plans, the premiums are deducted
from the individual's paycheck and remitted to Loyal on a periodic basis.
For products sold through credit unions, the premiums are paid on a periodic
basis through deductions from the member's credit union account. The
products currently being offered include traditional whole life, universal
life, term life, hospital indemnity, cancer and short-term disability.
Marketing and Distribution
American Memorial markets its products through funeral home operators in
addition to a captive general agency force. American Memorial has
approximately 1,000 actively producing agents and relationships with
approximately 2,200 funeral homes nationwide. Rapid consolidation is making
large chains the fastest growing segment of the funeral home industry.
American Memorial is a leader in this segment, working with several of the
major corporations. In 1996, about two-thirds of first-year sales were
generated by the largest owner of funeral homes in the world. The remaining
one-third was split between other funeral homes and the captive agency. As
the funeral home industry continues to consolidate, increased reliance on
large funeral home operators will likely be required.
Loyal's marketing strategy emphasizes third party sponsorship to assist in
its selling process. In the payroll deduction market, with the approval of
the employer, Loyal's products are presented by marketing companies who
provide job-site presentation to the employees; premium billings are sent
directly to the employer for processing and remittance. With credit unions,
the products are offered with the endorsement of the credit union
management. The products are presented to the membership by independent
agents and marketing companies through in-home sales, job-site or lobby
enrollments and direct mail solicitation.
6
<PAGE>
The following table reflects the geographical distribution of American
Memorial's and Loyal's premiums in 1996.
Florida 10.5%
California 8.8
North Carolina 8.6
Tennessee 8.4
Washington 7.5
Minnesota 6.9
Alabama 4.8
Missouri 4.6
Louisiana 4.1
All others,
each less than 4% 35.8
100.0%
Other Subsidiaries
The Company owns several other insurance subsidiaries. Annuity Investors
Life Insurance Company ("AILIC") was acquired by the Company in 1994 to
facilitate its entrance into the variable annuity market. Industry sales of
variable annuities have increased substantially over the last ten years as
investors have sought to obtain the returns available in the equity markets
while enjoying the tax-deferred status of annuities. With a variable
annuity, the earnings credited to the policy vary based on the investment
results of the underlying investment options chosen by the policyholder.
Policyholders may also choose to direct all or a portion of their premiums
to various fixed rate options. Premiums directed to the variable options in
policies issued by AILIC are invested in funds managed by various
independent investment managers. Variable annuities can be either tax-
qualified or non-qualified and may be funded with either a single premium
payment or flexible premiums.
Under federal law and the laws of many states, variable annuities are
considered securities. As a result, variable annuities can be sold only by
agents who possess the requisite securities licenses and are affiliated with
a broker-dealer. Accordingly, not all agents who market fixed annuities
also market variable annuities. AILIC intends to market its products
through those members of the GALIC agency force who possess the requisite
licenses as well as through additional agents not currently licensed with
GALIC. AILIC also intends to market its products through other distribution
channels including broker-dealers, financial institutions and subsidiaries
of AAG.
AAG may utilize one or more of its other life insurance subsidiaries in the
future to take advantage of specific product or distribution channel
opportunities. Collectively, these insurance subsidiaries (including AILIC)
had statutory assets of approximately $160 million at December 31, 1996.
Several non-insurance subsidiaries market additional funeral products as
well as administrative and co-operative purchasing services. One of these
subsidiaries, International Funeral Associates ("IFA"), is a co-operative
buying service organization with approximately 1,750 independent members at
year-end 1996. Including corporate members, total membership is
approximately 3,000 funeral homes nationwide. IFA negotiates discounts with
organizations that service the funeral industry; members of IFA are able to
take advantage of these discounts, thereby enhancing their profitability
through lower cost of goods and services.
7
<PAGE>
In addition to annuity and life insurance contracts, funeral contract funds
may also be held in trust. American DataSource, Inc. ("ADS," formerly
Laurentian Investment Services, Inc.) provides administrative and financial
services to funeral directors in managing funds held in trust. ADS also
provides other administrative services to funeral homes, cemeteries,
financial institutions and funeral home consolidators.
AAG Securities, Inc. is a broker-dealer licensed to sell stocks, bonds,
mutual funds and variable annuities through independent agents and financial
institutions.
In the last three years, AAG has developed two organizations to market its
subsidiaries' products in markets not previously served by GALIC's
distribution system. Lifestyle Financial Investments, Inc. ("LFI") and its
subsidiaries focus on the sale of single premium, non-qualified annuities
through financial institutions. These companies concentrate their efforts
on community banks primarily in the Midwest and Southeast. Retirement
Resource Group, Inc. ("RRG") was formed in 1995 to market annuities and
investment products to employees of hospitals and not-for-profit
organizations.
Collectively, these non-insurance subsidiaries had assets of $8 million at
December 31, 1996.
Investments
Investments comprise approximately 90% of the Company's assets and are the
principal source of income. Fixed income securities (including policy
loans, mortgage loans and short-term investments) comprise over 98% of its
investment portfolio. Risks inherent in connection with fixed income
securities include loss upon default and market price volatility. Factors
which can affect the market price of these securities include: (i)
creditworthiness of issuers; (ii) changes in market interest rates; (iii)
the number of market makers and investors and (iv) defaults by major issuers
of securities.
The Company's investment strategy emphasizes high quality fixed income
securities which management believes should produce a relatively consistent
and predictable level of investment income.
The insurance laws of each of AAG's life insurance subsidiaries' domiciliary
states govern the types and amounts of investments which are permissible.
These rules are designed to ensure the safety and liquidity of the insurers'
investment portfolios by placing restrictions on the quality, quantity and
diversification of permitted investments.
8
<PAGE>
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 the Company's fixed maturity portfolio at market
value by NAIC designation (and comparable Standard & Poor's Corporation
rating) at December 31.
NAIC
Rating Comparable S&P Rating 1996 1995
1 AAA, AA, A 67% 64%
2 BBB 27 31
Total investment grade 94 95
3 BB 3 3
4 B 3 2
5 CCC, CC, C * *
6 D - *
Total non-investment grade 6 5
Total fixed maturities 100% 100%
* less than 1%
AAG's primary investment objective in selecting securities for its fixed
maturity portfolio is to optimize interest yields while maintaining an
appropriate relationship of maturities between assets and expected
liabilities. The Company invests in bonds that have primarily intermediate-
term maturities. This practice provides flexibility to respond to
fluctuations in the marketplace.
At December 31, 1996, the average maturity of AAG's fixed maturity
investments was approximately 7 years (including mortgage-backed securities,
which had an estimated average life of approximately 8 years). The table
below sets forth the maturities of the Company's fixed maturity investments
based on their carrying value.
Maturity 1996 1995
One year or less 3% 1%
After one year through five years 18 18
After five years through ten years 36 40
After ten years 10 9
67 68
Mortgage-backed securities 33 32
100% 100%
The following table shows the performance of AAG's investment portfolio,
excluding equity investments in affiliates (dollars in millions).
1996 1995 1994
Average cash and investments at cost $6,014 $5,220 $4,750
Gross investment income 474 411 377
Realized gains 1 16 -
Percentage earned:
Excluding realized gains 7.9% 7.9% 7.9%
Including realized gains 7.9% 8.2% 7.9%
9
<PAGE>
Independent Ratings
The Company's principal insurance subsidiaries ("Insurance Companies") are
currently rated by A.M. Best and Duff & Phelps as follows:
A.M. Best Duff & Phelps
GALIC A (Excellent) AA- (Very high claims paying ability)
American Memorial B+ (Very Good) AA- (Very high claims paying ability)
Loyal A- (Excellent) AA- (Very high claims paying ability)
AILIC A (Excellent) Not currently rated
In evaluating a company's financial and operating performance, independent
rating agencies review the company's: (i) profitability; (ii) leverage and
liquidity; (iii) book of business; (iv) quality and estimated market value
of assets; (v) adequacy of policy reserves; (vi) experience and competency
of management and (vii) operating profile. Such ratings are generally based
on factors of concern to policyholders and agents and are not directed
toward the protection of investors.
Management believes that the ratings assigned by independent insurance
rating agencies are important because potential policyholders often use a
company's rating as an initial screening device in considering annuity
products. Management also believes that the majority of purchasers of
403(b) annuities would not be willing to purchase annuities from an issuer
that had a rating below certain levels. In addition, some school districts,
hospitals and banks do not allow insurers with a rating below certain levels
to sell annuity products through their institutions.
Management believes that a rating in the "A" category by at least one rating
agency is necessary for GALIC to successfully market tax-deferred annuities
to public education employees and other not-for-profit groups.
American Memorial and Loyal compete in markets other than the sale of tax-
deferred annuities. While ratings are an important competitive factor in
their markets, management believes that American Memorial and Loyal can
successfully compete in these markets with their respective ratings.
Ratings are less of a competitive factor in the variable annuity market in
which AILIC competes, in part because a substantial portion of the insurers'
assets are invested in the mutual funds which underlie the variable
annuities rather than in the insurers' general accounts.
Although management of AAG believes that its Insurance Companies' ratings
are very stable, those companies' operations could be materially adversely
affected by a downgrade in ratings.
Competition
The Insurance Companies operate in highly competitive markets. They compete
with other insurers and financial institutions based on many factors,
including: (i) ratings; (ii) financial strength; (iii) reputation; (iv)
service to policyholders; (v) product design (including interest rates
credited); (vi) commissions and (vii) service to agents. Since policies are
marketed and distributed primarily through independent agents, the Insurance
Companies must also compete for agents. Management believes that
consistently targeting the same market and emphasizing service to agents and
policyholders provides a competitive advantage.
10
<PAGE>
More than 150 insurance companies offer tax-deferred annuities. No single
insurer dominates the marketplace. Competitors include (i) individual
insurers and insurance groups, (ii) mutual funds and (iii) other financial
institutions of varying sizes. In a broader sense, AAG's Insurance
Companies compete for retirement savings with a variety of financial
institutions offering a full range of financial services. Financial
institutions have demonstrated a growing interest in marketing investment
and savings products other than traditional deposit accounts. In addition,
recent judicial and regulatory decisions have expanded powers of financial
institutions in this regard. It is too early to predict what impact, if
any, these developments will have on the Insurance Companies.
In recent years, several proposals have been made to change the federal
income tax system. These proposals have included a flat tax rate and
various types of consumption taxes. Many of these proposals include changes
in the method of treating investment income and tax-deferred income. It is
impossible to predict the effect on the Company's business of the adoption
of one of these new tax systems. To the extent that a new system reduces or
eliminates the tax-deferred status of annuities, the Company's business
could be adversely affected.
Regulation
The Insurance Companies are subject to comprehensive regulation under the
insurance laws of their states of domicile and the other states in which
they operate. These laws, in general, require approval of the particular
insurance regulators prior to certain actions such as the payment of
dividends in excess of statutory limitations, continuing service
arrangements with affiliates and certain other transactions. Regulation and
supervision are administered by a state insurance commissioner who has broad
statutory powers with respect to granting and revoking licenses, approving
forms of insurance contracts and determining types and amounts of business
which may be conducted in light of the financial strength and size of the
particular company.
State insurance departments periodically examine the business and accounts
of the Insurance Companies and require such companies to submit detailed
annual financial statements prepared in accordance with statutory
requirements. State insurance laws also regulate the character of each
insurance company's investments, reinsurance and security deposits.
The Insurance Companies may be required, under the solvency or guaranty laws
of most states in which they do business, to pay assessments (up to certain
prescribed limits) to fund policyholder losses or liabilities of insurance
companies that become insolvent. These assessments may be deferred or
forgiven under most guaranty laws if they would threaten an insurer's
financial strength and, in certain instances, may be offset against future
premium taxes. GALIC paid $2.5 million and $2.8 million in assessments in
1996 and 1995, respectively. In connection with the Company's 1992 purchase
of GALIC from Great American Insurance Company ("GAI"), a subsidiary of AFG,
GAI reimbursed GALIC $1.2 million in 1996 for certain of the assessments.
11
<PAGE>
The NAIC is an organization comprised of the chief insurance regulator for
each of the 50 states and the District of Columbia. One of its major roles
is to develop model laws and regulations affecting insurance company
operations and encourage uniform regulation through the adoption of such
model laws in all states. As part of the overall insurance regulatory
process, the NAIC forms numerous task forces to review, analyze and
recommend changes to a variety of areas affecting both the operating and
financial aspects of insurance companies. Recently, increased scrutiny has
been placed upon the insurance regulatory framework, and a number of state
legislatures have considered or enacted legislative proposals that alter,
and in many cases increase, state authority to regulate insurance companies
and their holding company systems. In light of recent legislative
developments, the NAIC and state insurance regulators have also become
involved in a process of re-examining existing laws and regulations and
their application to insurance companies. Legislation has also been
introduced in Congress which could result in the federal government's
assuming some role in the insurance industry, although none has been enacted
to date.
The maximum amount of dividends which can be paid in any 12 month period to
stockholders by life insurance companies domiciled in the State of Ohio
without prior approval of the Ohio Insurance Commissioner is the greater of
10% of policyholder surplus or prior year's "net income", but only to the
extent of earned surplus as of the preceding December 31.
Since 1991, the NAIC and some states have adopted additional requirements
relating to the marketing and sale of non-traditional life insurance and
annuities. To date, these additional requirements have not had a material
impact on GALIC's business. In December 1994, the NAIC adopted Actuarial
Guideline 33 (formerly called GGG), which clarifies the minimum statutory
reserving requirements for some annuity products. The impact of this new
reserving requirement is the addition of $49 million to GALIC's statutory
reserves as of December 31, 1996 ($32 million in 1996 and $17 million in
1995), as part of a three year phase-in allowed by this guideline and
approved by the Ohio Department of Insurance. Management believes that
these additional reserves are redundant, resulting in additional
conservatism in GALIC's statutory reserves. In connection with AAG's
purchase of GALIC, GAI is obligated to neutralize the financial effects
of any such guidelines on GALIC's statutory earnings and capital. In
satisfaction of its obligation, (i) GAI agreed to purchase up to $57
million of AAG Preferred Stock and (ii) terms of GALIC's
investment management services contract with AFG were modified to reduce the
fees owed under certain circumstances. In December 1996 and 1995, GAI
purchased $21.7 million and $17.0 million, respectively, of newly issued
Series B Preferred Stock from AAG. On December 31, 1996, American Financial
Corporation ("AFC") bought an additional $10.3 million of Series B Preferred
Stock from AAG in connection with this obligation. A portion of the
proceeds from these sales were contributed to GALIC to offset the additional
statutory reserves.
The NAIC has under consideration numerous proposals related to the marketing
and sale of annuity products. In September 1996, the NAIC adopted a model
investment law. The law will not be a requirement of the NAIC accreditation
standards. However, each state may adopt all, any part, or none of the
model investment law to regulate the investment policies of their insurance
companies. At this time it is not possible to determine the impact, if any,
this will have on AAG's insurance subsidiaries.
Many of the Company's other subsidiaries are subject to regulation by
various state and federal regulatory authorities. LFI and RRG are licensed
as insurance agencies in various states, which subject them to licensing,
record keeping and similar requirements. AAG Securities is subject to the
rules of the National Association of Securities Dealers, Inc. and the laws
of the states in which it transacts business.
12
<PAGE>
Discontinued Manufacturing Operations
AAG is the successor to STI Group, Inc., formerly known as Sprague
Technologies, Inc. ("STI"). STI was formed in May 1987 by an affiliate,
American Premier Underwriters, Inc., formerly known as The Penn Central
Corporation, for the purpose of divesting its electronics components
businesses. STI subsequently sold substantially all of its operating assets
and retired its debt, netting approximately $100 million in cash and cash
equivalents.
Employees
As of December 31, 1996, AAG and its subsidiaries employed approximately
1,000 persons. None of the employees is represented by a labor union. AAG
believes that its employee relations are satisfactory.
ITEM 2
Properties
Location
AAG and GALIC rent office space in Cincinnati totaling approximately 146,000
square feet under leases expiring primarily in 2006. Several of the
Company's non-insurance subsidiaries lease marketing and administrative
offices in locations throughout the United States.
Loyal's home office building in Mobile, Alabama, contains approximately
82,000 square feet, of which approximately two-thirds is utilized for
Company purposes. The remainder of the building is leased to unaffiliated
tenants.
American Memorial's home office building in Rapid City, South Dakota,
contains approximately 44,000 square feet, of which approximately four-
fifths is utilized for Company purposes. The remainder of the building is
leased to unaffiliated tenants. American Memorial also leases marketing and
administrative space in several locations throughout the United States.
Management believes that its corporate offices are generally well maintained
and adequate for the Company's present needs.
The remaining material properties of the Company's former manufacturing
operations are listed below.
Lease
Interior Expiration
Location Square Feet Use (if leased)
North Adams, MA 154,000 Manufacturing facility Owned
Hudson, NH 121,400 Manufacturing facility March 2003
Longwood, FL 60,000 Manufacturing facility Owned
North Adams, MA 44,000 R&D Facility Owned
These facilities are currently being leased to companies using them for
manufacturing and other operations.
Environmental Matters
See "Item 3: Legal Proceedings" for a discussion concerning certain
environmental claims and litigation against the Company.
13
<PAGE>
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 estimated liabilities. However, the regulatory standards for
clean-up are continually evolving and may impose 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.
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.
In 1991, the Company identified possible deficiencies in procedures for
reporting quality assurance information to the Defense Electronics Supply
Center with respect to AAG's former manufacturing operations. Over the last
several years, AAG has been engaged in negotiations with the United States
Government with respect to settlement of claims the Government might have
arising out of these reporting deficiencies. AAG believes it has sufficient
reserves to cover the estimated settlement amount of these claims. (See
Notes J and M.)
A managing general agency which produced approximately one-fifth of GALIC's
premiums in 1996 was named defendant in a lawsuit filed in July 1996 by the
California Attorney General, the California Bar Association and the
California Department of Insurance. The suit alleges that the agency and
affiliated persons (i) engaged in the unauthorized practice of law in
connection with the sale of living trusts, (ii) violated various California
consumer protection statutes in connection with the sale of living trusts
and annuities and (iii) violated California insurance statutes by making
14
<PAGE>
misstatements about annuity products and their safety. In November 1996,
GALIC was contacted by the California Attorney General's office which
indicated that it was the position of the plaintiffs in the pending
litigation that GALIC may be responsible under California law for the acts
of its insurance agents in connection with the sale of GALIC annuities.
GALIC is engaged in discussions with representatives of the California
Attorney General in an effort to resolve this matter. The ultimate outcome
of this matter is not expected to have a material adverse impact on the
financial condition of the Company.
AAG is subject to other litigation and arbitration in the normal course of
business. AAG is not a party to any material pending litigation or
arbitration.
PART II
ITEM 5
Market for Registrant's Common Equity
and Related Stockholder Matters
AAG's Common Stock is listed and traded principally on the New York Stock
Exchange ("NYSE") under the symbol AAG. On February 28, 1997, there were
approximately 8,300 holders of record of Common Stock. The following table
sets forth the range of high and low sales prices for the Common Stock on
the NYSE Composite Tape.
1996 1995
High Low High Low
First Quarter $12.75 $11.63 $10.38 $ 9.38
Second Quarter 13.25 11.50 10.25 9.13
Third Quarter 13.63 11.88 11.13 9.50
Fourth Quarter 14.50 12.13 12.00 10.63
AAG's dividend paying capability is limited by certain customary debt
covenants to amounts based on cumulative earnings and losses, debt
repurchases, capital transactions and other items.
The Company paid annual common dividends of $.08 per share in 1996 and $.07
per share in 1995. Although no future dividend policy has been determined,
management believes the Company will continue to have the capability to pay
similar dividend amounts.
15
<PAGE>
ITEM 6
Selected Financial Data
The following financial data have been summarized from, and should be read
in conjunction with, the Company's consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The data reflects the purchase of GALIC as of December 31,
1992 (as indicated by the vertical line) and the acquisition of American
Memorial and Loyal in November 1995 (in millions, except per share amounts).
Income Statement Data: 1996 1995 1994 1993 1992
Total revenues $577.3 $439.6 $372.7 $388.9 $ 3.6
Income (loss) from continuing
operations 61.1 58.7 40.9 53.0 (9.0)
Loss from discontinued operations - (3.2) (2.6) (9.6) (16.8)
Extraordinary items (6.0) (0.2) (1.7) (3.4) -
Changes in accounting principles - - (0.5) - (3.1)
Net income (loss) $ 55.1 $ 55.3 $ 36.1 $ 40.0 ($28.9)
Earnings (loss) per common share:
Continuing operations $1.39 $1.45 $1.05 $1.41 ($0.50)
Discontinued operations - (0.08) (0.07) (0.27) (0.94)
Extraordinary items (0.14) - (0.05) (0.10) -
Changes in accounting principles - - (0.01) - (0.17)
Net income (loss) $1.25 $1.37 $0.92 $1.04 ($1.61)
Cash dividends per common share $0.08 $0.07 $0.06 $0.05 $0.05
Balance Sheet Data at year end:
Total assets $7,024.1 $6,611.0 $5,089.9 $4,913.8 $4,480.4
Notes payable 114.9 167.7 183.3 225.9 230.9
Mandatorily redeemable preferred
securities of subsidiary trust 75.0 - - - -
Net unrealized gains (losses)
included in stockholders' equity 61.8 89.3 (29.0) 56.9 28.4
Total stockholders' equity 486.5 429.3 204.4 250.3 186.6
On December 31, 1992, the Company purchased 100% of the capital stock of
GALIC from GAI for $468 million. The purchase was financed with (a) $230
million of borrowings, (b) $156 million of new equity raised from the sale
of common and preferred stock to GAI and (c) available cash. In 1992, GALIC
had total revenues, income from continuing operations and net income of
$342.5 million, $49.2 million and $42.5 million, respectively. AFG, the
parent of GAI, beneficially owned approximately 81% of AAG's Common Stock at
February 28, 1997.
16
<PAGE>
ITEM 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
Following is a discussion and analysis of the financial statements and other
statistical data that management believes will enhance the understanding of
the financial condition and results of operations of American Annuity Group,
Inc. ("AAG" or "the Company"). This discussion should be read in
conjunction with the financial statements beginning on page F-1.
AAG and its subsidiary, AAG Holding Company, Inc., are organized as holding
companies with nearly all of their operations being conducted by their
subsidiaries. These companies, however, have continuing expenditures for
administrative expenses, corporate services, satisfaction of liabilities in
connection with discontinued operations and for the payment of interest and
principal on borrowings and shareholder dividends.
In the second half of 1996, three nationally recognized rating agencies
upgraded their ratings on AAG public debentures. The senior debt is now
rated investment grade by all three agencies and the subordinated debt is
rated investment grade by two of the agencies. Additionally, two of the
agencies gave an investment grade rating to the Trust Originated Preferred
Securities ("TOPrS") issued by an AAG subsidiary in November 1996.
Liquidity and Capital Resources
Ratios The following ratios may be considered relevant indicators of AAG's
liquidity and are typically presented by AAG in its prospectuses and similar
documents.
1996 1995 1994
Earnings to fixed charges 6.0 6.0 4.0
Earnings to fixed charges plus
preferred dividends 5.4 6.0 3.8
Consolidated debt to capital,
excluding unrealized gains (losses) 19% 33% 44%
Consolidated debt to capital,
including unrealized gains (losses) 17% 28% 47%
The National Association of Insurance Commissioners' ("NAIC") risk-based
capital ("RBC") formulas determine the amount of capital that an insurance
company needs to ensure that it has an acceptable expectation of not
becoming financially impaired. At December 31, 1996, the capital ratios of
each of AAG's insurance subsidiaries exceeded the RBC requirements by
substantial amounts.
Sources and Uses of Funds The ability of AAG and AAG Holding to pay
interest and principal on debt, dividends on preferred stock, obligations
related to the Company's discontinued manufacturing operations and other
holding company costs is largely dependent upon payments from its primary
subsidiary, Great American Life Insurance Company ("GALIC"), in the form of
capital distributions. The amount of capital distributions which can be
paid by GALIC is subject to restrictions relating to statutory surplus and
earnings. The maximum amount of dividends payable by GALIC in 1997 without
prior regulatory approval is $66 million. In 1996, GALIC made approximately
$39 million in such payments.
17
<PAGE>
In November 1996, a wholly-owned subsidiary trust raised $75 million in cash
from the issuance of TOPrS. The Company used $50 million of the proceeds to
retire bank debt; the remainder is being used for general corporate
purposes. In March 1997, AAG raised an additional $75 million from a
private offering of preferred securities similar to the TOPrS.
In 1996 and 1995, AAG raised $49 million in cash from the issuance of its
Series B Preferred Stock to affiliates (see Note O); $39 million of the
proceeds were contributed to GALIC. AAG may sell additional Preferred Stock
in December 1997.
The November 1995 acquisition of Laurentian Capital Corporation was funded
primarily with internal funds supplemented by bank borrowings and the
proceeds of a common stock offering in August 1995.
Since year-end 1993, AAG has retired $160 million principal amount of its
public debentures (including $14 million repurchased and held by GALIC),
using cash on hand and borrowings under its bank lines. At year end 1996,
AAG Holding had approximately $70 million available under its bank lines of
credit. AAG Holding expects to expand and extend its credit lines in the
near future.
Based upon the current level of operations and anticipated growth, AAG
believes that it will have sufficient resources to meet its liquidity
requirements.
Investments Insurance laws restrict the types and amounts of investments
which are permissible for life insurers. These restrictions are designed to
ensure the safety and liquidity of insurers' investment portfolios. The
NAIC has developed a model investment law which management believes will not
have a material impact on AAG's operations.
The NAIC assigns quality ratings to publicly traded as well as privately
placed securities. At December 31, 1996, 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, 1996. 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.
At December 31, 1996, AAG had approximately $100 million in net unrealized
gains on its fixed maturity portfolio compared to net unrealized gains of
$242 million at December 31, 1995. This decrease, representing
approximately 2% of the carrying value of AAG's fixed maturity portfolio,
resulted from an increase in the general level of interest rates.
At December 31, 1996, AAG had approximately 1.5% of total assets invested in
mortgage loans and real estate. The majority of mortgage loans and real
estate were purchased within the last four years.
At December 31, 1996, AAG's mortgage-backed securities ("MBSs") portfolio
represented approximately one-third of fixed maturity investments. As of
December 31, 1996, interest only (I/O), principal only (P/O) and other "high
risk" MBSs represented less than nine-tenths of one percent of total assets.
AAG invests primarily in MBSs which have a lower risk of prepayment. In
addition, the majority of MBSs held by AAG were purchased at a discount.
18
<PAGE>
Management believes that the structure and discounted nature of the MBSs
will minimize the effect of prepayments on earnings over the anticipated
life of the MBS portfolio.
Approximately 90% of AAG's MBSs are rated "AAA" with substantially all being
investment grade quality. The majority are collateralized by GNMA, FNMA and
FHLMC single-family residential pass-through certificates. The market in
which these securities trade is highly liquid. Aside from interest rate
risk, AAG does not believe a material risk (relative to earnings or
liquidity) is inherent in holding such investments.
Contingencies A managing general agency which produced approximately one-
fifth of GALIC's premiums in 1996 was named defendant in a lawsuit filed in
July 1996 by two regulatory agencies in California. The regulatory
agencies' position is that GALIC may be responsible for the acts of its
insurance agents in connection with the sale of GALIC's annuities. The
ultimate outcome of this matter is not expected to have a material adverse
impact on the financial condition of the Company.
Results of Operations
General The operations of American Memorial Life Insurance Company and
Loyal American Life Insurance Company are included in AAG's financial
statements from the date of their acquisition in November 1995.
Accordingly, the 1996 income statement components are not comparable to 1995
and 1994.
Management believes the concept of net operating earnings (or "core"
earnings) is helpful in comparing the operating performance of AAG with that
of similar companies. Net operating earnings for 1996 and 1995 were up 27%
and 13%, respectively, over the comparable prior years. However, net
operating earnings should not be considered a substitute for net income as
an indication of AAG's overall performance. The following table (in
millions) compares the Company's net operating earnings over the past three
years.
AAG (Consolidated): 1996 1995 1994
Revenues per income statement $577.3 $439.6 $372.7
Less realized (gains) losses (1.2) (15.7) 0.1
Less equity in net (earnings) loss
of affiliate 2.2 (0.1) 2.8
Operating revenues 578.3 423.8 375.6
Operating expenses (498.8) (348.9) (309.5)
Operating earnings before taxes 79.5 74.9 66.1
Income tax expense 17.8 26.5 23.3
Net operating earnings $ 61.7 $ 48.4 $ 42.8
GALIC's principal products are Flexible Premium Deferred Annuities ("FPDAs")
and Single Premium Deferred Annuities ("SPDAs"). The following table
summarizes GALIC's annuity premiums (in millions).
1996 1995 1994
FPDAs - first year $ 35 $ 42 $ 39
FPDAs - renewal 182 196 208
SPDAs 319 219 196
$536 $457 $443
The increase in GALIC's sales of SPDAs in 1996 reflects a new relationship
with a managing general agency that wrote approximately one-fifth of GALIC's
total annuity premiums in 1996.
Life, Accident and Health Premiums and Benefits The increase in life,
accident and health revenues and expenses in 1996 and 1995 reflects the
acquisition of American Memorial and Loyal.
19
<PAGE>
Net Investment Income Net investment income increased 15% in 1996 and 9% in
1995 due to an increase in the Company's average fixed maturity investment
base. Investment income is reflected net of investment expenses of $6.5
million in 1996, $5.4 million in 1995 and $4.9 million in 1994.
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 Earnings (Loss) of Affiliate Equity in net earnings (loss) of
affiliate represents AAG's proportionate share of the results of Chiquita
Brands International. Chiquita's income from continuing operations before
unusual items was $42.6 million and $8.7 million in 1996 and 1995,
respectively, and a loss of $16.8 million in 1994. Chiquita reported a loss
before extraordinary items for 1996 of $28 million compared to income before
extraordinary items of $17 million for 1995 and a loss before extraordinary
items of $49 million in 1994. The loss in 1996 reflected higher costs and
charges related to; (i) widespread flooding in Guatemala Honduras and Costa
Rica and (ii) certain strategic undertakings designed to achieve further
long-term reductions in the delivered product cost of Chiquita bananas. 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 former meat operations as well as a higher average
worldwide price for bananas.
Other Income Other income increased in 1996 reflecting (i) policy fees,
primarily at American Memorial and Loyal, and (ii) higher revenues at AAG's
agency subsidiaries.
Annuity Benefits Annuity benefits reflect interest credited to annuity
policyholders' funds accumulated. The majority of GALIC's fixed rate
annuity products 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 market interest
rates and maintain a desired interest rate spread without a substantial
effect on persistency. Annuity benefits increased 7% in 1996 and 5% in 1995
due primarily to an increase in average annuity benefits accumulated.
Amortization of Insurance Acquisition Costs Amortization of insurance
acquisition costs reflect the effect of the acquisition of American Memorial
and Loyal. These increased costs in 1996 reflect (i) certain commission
expenses on the life insurance business written by American Memorial and
Loyal and (ii) $8.7 million of amortization of the present value of future
profits of the acquired business in force of those two companies.
Interest and Other Debt Expenses Interest expense on borrowings decreased
19% in 1996 and 18% in 1995 due to repurchases of debt during 1996 and 1995
as well as the use of lower cost bank borrowings to finance purchases of
higher cost debt.(See Note G.)
Other Expenses Other expenses increased 68% in 1996, reflecting (i) a full
year of operating expenses of American Memorial and Loyal, (ii) pretax
charges of $15.7 million related to pension and other liabilities of the
Company's former manufacturing operations and (iii) operating expenses of
AAG's agency subsidiaries. In 1995, other expenses increased 35%,
reflecting (i) additional costs for Guaranty Association fees, (ii) expanded
distribution networks and (iii) the operating and general expenses of
American Memorial and Loyal.
Income Taxes Included in 1996 is a tax benefit of $10 million in the
fourth quarter attributable to the reduction of the valuation allowance
associated with certain deferred tax assets.
20
<PAGE>
Discontinued Operations The Company has sold all of its former
manufacturing operations. Certain properties utilized in the former
manufacturing operations continue to be held for sale, 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 a
former plant site, certain retiree medical benefits and certain obligations
associated with the sales of the Company's manufacturing operations. (See
Notes J and M.)
Extraordinary Items Extraordinary items reflect AAG's losses, net of tax,
on retirements of its debt as well as AAG's proportionate share of
Chiquita's extraordinary loss on the retirement of certain of its debt.
Accounting Change 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 for the
projected future costs of providing certain benefits to employees of GALIC.
21
<PAGE>
ITEM 8
Financial Statements and Supplementary Data
PAGE
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1996 and 1995 F-2
Consolidated Income Statement:
Years Ended December 31, 1996, 1995 and 1994 F-3
Consolidated Statement of Changes in Stockholders' Equity:
Years Ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statement of Cash Flows:
Years Ended December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
"Selected Quarterly Financial Data" has been included in Note P to the
Consolidated Financial Statements.
PART III
The information required by the following Items will be included in AAG's
definitive Proxy Statement for the 1997 Annual Meeting of Stockholders which
will be filed with the Securities and Exchange Commission within 120 days of
the Company's fiscal year end and is herein incorporated by reference:
ITEM 10 Directors and Executive Officers of the Registrant
ITEM 11 Executive Compensation
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management
ITEM 13 Certain Relationships and Related Transactions
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Annuity Group, Inc.
We have audited the accompanying consolidated balance sheets of American
Annuity Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1996. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American Annuity Group, Inc. and subsidiaries at December 31,
1996 and 1995, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in Note B to the consolidated financial statements, the Company
made an accounting change in 1994.
Ernst & Young LLP
Cincinnati, Ohio
February 28, 1997
F-1
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
December 31,
1996 1995
Assets
Investments:
Fixed maturities:
Held to maturity - at amortized cost
(market - $2,524.6 and $2,600.0) $2,495.7 $2,497.2
Available for sale - at market
(amortized cost - $3,254.9 and $2,787.6) 3,325.6 2,926.6
Equity securities - at market (cost - $16.1
and $14.1) 51.0 32.6
Investment in affiliate 16.5 20.3
Mortgage loans on real estate 68.1 70.4
Real estate 37.6 39.9
Policy loans 236.0 241.4
Short-term investments 41.4 140.7
Total investments 6,271.9 5,969.1
Cash 42.7 28.7
Accrued investment income 94.8 87.4
Unamortized insurance acquisition costs, net 194.7 149.8
Other assets 172.4 137.5
Assets held in separate accounts 247.6 238.5
$7,024.1 $6,611.0
Liabilities and Stockholders' Equity
Annuity benefits accumulated $5,365.6 $5,052.0
Life, accident and health reserves 575.4 538.3
Notes payable 114.9 167.7
Payable to affiliates, net 14.5 29.1
Deferred taxes on unrealized gains 33.3 48.0
Accounts payable, accrued expenses and other
liabilities 111.3 108.1
Liabilities related to separate accounts 247.6 238.5
Total liabilities 6,462.6 6,181.7
Mandatorily redeemable preferred securities
of subsidiary trust 75.0 -
Series B Preferred Stock (at redemption value) 49.0 17.0
Common Stock, $1 par value
-100,000,000 shares authorized
- 43,255,705 and 43,071,882 shares
outstanding 43.3 43.1
Capital surplus 358.5 361.1
Accumulated deficit at December 31, 1992 (212.6) (212.6)
Retained earnings since January 1, 1993 186.5 131.4
Unrealized gains on marketable securities, net 61.8 89.3
Total stockholders' equity 486.5 429.3
$7,024.1 $6,611.0
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(In millions, except per share amounts)
Year ended December 31,
1996 1995 1994
Revenues:
Net investment income $467.7 $405.5 $371.8
Realized gains (losses) on sales of
investments 1.2 15.7 (0.1)
Life, accident and health premiums 103.6 15.7 2.2
Equity in net earnings (loss) of
affiliate (2.2) 0.1 (2.8)
Other income 7.0 2.6 1.6
577.3 439.6 372.7
Costs and Expenses:
Annuity benefits 271.8 254.7 241.9
Life, accident and health benefits 92.3 13.2 1.5
Amortization of insurance acquisition
costs 34.1 12.7 7.1
Interest and other debt expenses 14.3 17.6 21.4
Preferred dividend requirement of
subsidiary trust 1.0 - -
Other expenses 85.3 50.7 37.6
498.8 348.9 309.5
Income from continuing operations before
income taxes 78.5 90.7 63.2
Provision for income taxes 17.4 32.0 22.3
Income from continuing operations 61.1 58.7 40.9
Discontinued operations, net of tax - (3.2) (2.6)
Income before extraordinary items and
cumulative effect of accounting change 61.1 55.5 38.3
Extraordinary items, net of tax (6.0) (0.2) (1.7)
Cumulative effect of accounting change,
net of tax - - (0.5)
Net Income $ 55.1 $ 55.3 $ 36.1
Preferred dividend requirement 1.4 - 0.9
Net income applicable to Common Stock $ 53.7 $ 55.3 $ 35.2
Average common shares outstanding 43.1 40.5 38.1
Earnings (loss) per common share:
Continuing operations $1.39 $1.45 $1.05
Discontinued operations - (0.08) (0.07)
Extraordinary items (0.14) - (0.05)
Cumulative effect of accounting change - - (0.01)
Net income $1.25 $1.37 $0.92
Cash dividends per common share $0.08 $0.07 $0.06
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions)
Year ended December 31,
1996 1995 1994
Preferred Stock:
Balance at beginning of year $ 17.0 $ - $ 29.9
Exchanged for Common Stock - - (30.0)
Issued during the year 32.0 17.0 -
Accretion of discount - - 0.1
Balance at end of year $ 49.0 $ 17.0 $ -
Common Stock:
Balance at beginning of year $ 43.1 $ 39.1 $ 35.1
Issued during the year 0.2 4.0 4.0
Balance at end of year $ 43.3 $ 43.1 $ 39.1
Capital Surplus:
Balance at beginning of year $361.1 $330.8 $301.0
Common Stock issued during the year 2.2 33.3 33.0
Common dividends declared (3.4) (3.0) (2.3)
Preferred dividends declared (1.4) - (0.8)
Accretion of Preferred Stock discount - - (0.1)
Balance at end of year $358.5 $361.1 $330.8
Accumulated Deficit at December 31, 1992 ($212.6) ($212.6) ($212.6)
Retained Earnings Since January 1, 1993:
Retained earnings from January 1, 1993
to beginning of year $131.4 $ 76.1 $ 40.0
Net income 55.1 55.3 36.1
Balance at end of year $186.5 $131.4 $ 76.1
Unrealized Gains (Losses), Net:
Balance at beginning of year $ 89.3 ($ 29.0) $ 56.9
Change during year (27.5) 118.3 (85.9)
Balance at end of year $ 61.8 $ 89.3 ($ 29.0)
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Year ended December 31,
1996 1995 1994
Cash Flows from Operating Activities:
Net income $ 55.1 $ 55.3 $ 36.1
Adjustments:
Discontinued operations - 3.2 2.6
Extraordinary losses on retirement
of debt 6.0 0.2 1.7
Cumulative effect of accounting change - - 0.5
Increase (decrease) in life, accident
and health reserves 28.4 17.5 (1.4)
Benefits to annuity policyholders 271.8 254.7 241.9
Amortization of insurance acquisition
costs 34.1 12.7 7.1
Equity in net (earnings) loss of affiliate 2.2 (0.1) 2.8
Realized (gains) losses on investing
activities (1.2) (15.7) 0.1
Increase in insurance acquisition costs (68.5) (34.9) (30.5)
Increase in accrued investment income (7.4) (3.0) (10.1)
Decrease (increase) in other assets (10.4) (12.4) 0.8
Increase (decrease) in other liabilities (6.3) 17.9 8.2
Other, net 1.7 (3.5) 2.6
305.5 291.9 262.4
Cash Flows from Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,010.1)(1,107.5)(1,189.2)
Equity securities - - (0.7)
Real estate, mortgage loans and other assets (26.7) (22.6) (27.9)
Purchase of subsidiaries, net of cash acquired - (55.2) (14.0)
Maturities and redemptions of fixed maturity
investments 255.2 147.1 238.2
Sales of:
Fixed maturity investments 261.0 768.5 621.9
Equity securities 1.3 2.0 4.8
Real estate, mortgage loans and other assets 27.8 8.2 27.2
Decrease (increase) in policy loans 5.4 (6.1) (16.1)
(486.1) (265.6) (355.8)
Cash Flows from Financing Activities:
Annuity receipts 573.8 457.5 442.7
Annuity surrenders, benefits and withdrawals (517.9) (412.8) (321.0)
Additions to notes payable 92.7 33.5 34.7
Reductions of notes payable (153.2) (49.1) (69.2)
Issuance of Trust Originated Preferred
Securities 72.4 - -
Issuance of Common Stock - 37.3 -
Issuance of Preferred Stock 32.0 17.0 -
Cash dividends paid (4.5) (3.0) (3.1)
95.3 80.4 84.1
Net increase (decrease) in cash and
short-term investments (85.3) 106.7 (9.3)
Beginning cash and short-term investments 169.4 62.7 72.0
Ending cash and short-term investments $ 84.1 $ 169.4 $ 62.7
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. DESCRIPTION OF THE COMPANY
American Annuity Group, Inc. ("AAG" or "the Company") markets (i) individual
and group annuities nationwide to the savings and retirement markets, (ii)
individual life insurance and annuity policies with the sponsorship of state
associations of funeral directors as well as individual and large operators
of funeral homes across the country and (iii) various forms of supplemental
life and health insurance through payroll deduction plans and financial
institutions.
AAG's parent, American Financial Corporation ("AFC"), was acquired by
American Financial Group, Inc. ("AFG") in April 1995. AFG and its
subsidiaries owned 35,059,995 shares (81%) of AAG's Common Stock at December
31, 1996.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The accompanying consolidated financial statements
include the accounts of AAG and its subsidiaries. Intercompany transactions
and balances are eliminated in consolidation.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Changes in circumstances could cause actual results to
differ materially from those estimates.
AAG's acquisition of Laurentian Capital Corporation ("LCC") in November 1995
was recorded as a purchase. The results of LCC's operations have been
included in AAG's consolidated financial statements since its acquisition.
Investments Debt securities are classified as "held to maturity" and
reported at amortized cost if AAG has the positive intent and ability to
hold them to maturity. Debt and equity securities are classified as
"available for sale" and reported at fair value with unrealized gains and
losses reported as a separate component of stockholders' equity if the
securities are not classified as held to maturity or bought and held
principally for selling in the near term. 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.
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 mortgage-backed securities are amortized over
their expected average lives using the interest method.
F-6
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Investment in Affiliate AAG's investments in equity securities of companies
that are 20% to 50% owned by AFG and its subsidiaries are carried at cost,
adjusted for a proportionate share of their undistributed earnings or
losses.
Insurance Acquisition Costs Unamortized insurance acquisition costs consist
primarily of deferred policy acquisition costs and the present value of
future profits of acquired companies. Amortization of life insurance
acquisition costs includes commissions on sales of single-pay life insurance
and renewal commissions on sales of multi-pay life insurance.
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) is deferred to
the extent that such costs are deemed recoverable.
DPAC related to annuities and universal life insurance products is
amortized, with interest, in relation to the present value of expected gross
profits on the policies. These expected gross profits consist principally
of estimated future net investment income and surrender, mortality and other
policy charges, less estimated future interest on policyholders' funds,
policy administration expenses and death benefits in excess of account
values. 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.
DPAC related to traditional life and health insurance is amortized over the
expected premium paying period of the related policies, in proportion to the
ratio of annual premium revenues to total anticipated premium revenues.
Such anticipated premium revenues were estimated using the same assumptions
used for computing liabilities for future policy benefits.
To the extent that realized gains and losses result in adjustments to the
amortization of DPAC, such adjustments are reflected as components of
realized gains.
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.
Present Value of Future Profits Included in insurance acquisition costs are
amounts representing the present value of future profits on business in
force of the acquired insurance companies, which represent the portion of
the costs to acquire such companies that is allocated to the value of the
right to receive future cash flows from insurance contracts existing at
the date of acquisition.
These amounts are amortized with interest over the estimated remaining life
of the acquired policies for annuities and universal life products and over
the expected premium paying period for traditional life and health insurance
products.
Annuity Benefits Accumulated Annuity receipts and benefit payments are
recorded as increases or decreases in "annuity benefits 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.
F-7
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Life, Accident and Health Reserves Liabilities for future policy benefits
under traditional ordinary life, accident and health policies are computed
using the net level premium method. Computations are based on anticipated
investment yields (primarily 7%), mortality, morbidity and surrenders and
include provisions for unfavorable deviations. Reserves are modified as
necessary to reflect actual experience and developing trends.
The liability for future policy benefits for interest sensitive life
policies is equal to the sum of the accumulated fund balances under such
policies.
Assets Held In and Liabilities Related To Separate Accounts Investment
annuity deposits and related liabilities primarily represent deposits
maintained by several banks under a previously offered tax-deferred annuity
program. The Company receives an annual fee from each bank for sponsoring
the program; if depositors elect to purchase an annuity from the Company,
funds are transferred to the Company.
Life, Accident and Health Premiums and Benefits For traditional life,
accident and health products, premiums are recognized as revenue when
legally collectible from policyholders. Policy reserves have been
established in a manner which allocates policy benefits and expenses on a
basis consistent with the recognition of related premiums and generally
results in the recognition of profits over the premium-paying period of the
policies.
For interest-sensitive life and universal life products, premiums are
recorded in a policyholder account which is reflected as a liability.
Revenue is recognized as amounts are assessed against the policyholder
account for mortality coverage and contract expenses. Surrender benefits
reduce the account value. Death benefits are expensed when incurred, net of
the account value.
Income Taxes AAG, Great American Life Insurance Company ("GALIC") and all
other material 80%-owned U.S. non-life subsidiaries are consolidated with
AFC for federal income tax purposes. AAG's other life insurance
subsidiaries will likely be required to file separate federal income tax
returns through the sixth year from their acquisition or formation.
AAG and GALIC have separate tax allocation agreements with AFC which
designate how tax payments are shared by members of the tax group. In
general, both companies compute taxes on a separate return basis. GALIC is
obligated to make payments to (or receive benefits from) AFC based on
taxable income without regard to temporary differences. In accordance with
terms of AAG's indentures, AAG receives GALIC's tax allocation payments for
the benefit of AAG's deductions arising from current operations. If GALIC's
taxable income (computed on a statutory accounting basis) exceeds a current
period net operating loss of AAG, the taxes payable by GALIC associated with
the excess are payable to AFC. If the AFC tax group utilizes any of AAG's
net operating losses or deductions that originated prior to AAG's entering
AFC's consolidated tax group, AFC will pay to AAG an amount equal to the
benefit received.
Deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax basis and are measured using
enacted tax rates. The Company recognizes deferred tax assets if it is more
likely than not that a benefit will be realized. Current and deferred tax
assets and liabilities of companies in AFC's consolidated tax group are
aggregated with other amounts receivable from or payable to affiliates.
F-8
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Stock-Based Compensation As permitted under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", AAG accounts for stock options and other stock-based
compensation plans using the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."
Earnings Per Share Earnings per share are calculated on the basis of the
weighted average number of shares of common stock outstanding during the
period. The effect of assumed exercise of common stock options in 1996 was
not deemed dilutive and is therefore not reflected in the earnings per share
presentation for that period. AAG had no stock options outstanding prior to
1996.
Benefit Plans AAG sponsors an Employee Stock Ownership Retirement Plan
("ESORP") covering all employees who are qualified as to age and length of
service. The ESORP, which invests primarily in securities of AAG, is a
trusteed, noncontributory plan 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.
AAG and certain of its subsidiaries provide certain benefits to eligible
retirees. Effective January 1, 1994, AAG implemented SFAS No. 112,
"Employers' Accounting for Postemployment Benefits" which covers benefits to
former or inactive employees (primarily those on disability) who were not
deemed retired under other Company plans. The projected future cost of
providing these benefits is expensed over the period the employees earn such
benefits.
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, benefits 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.
F-9
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
C. 1995 ACQUISITION
In November 1995, AAG acquired all of the outstanding shares of LCC. Its
principal insurance subsidiaries were American Memorial Life Insurance
Company (formerly known as Prairie States Life Insurance Company) and Loyal
American Life Insurance Company.
AAG paid approximately $106 million for the outstanding common stock of LCC
and repaid $45 million of LCC indebtedness concurrently with the
acquisition. GALIC provided approximately $90 million of the purchase price
in exchange for American Memorial and Loyal. AAG funded the balance of the
cost of acquiring LCC with the proceeds from a Common Stock rights offering
completed in August 1995, borrowings under its line of credit and cash on
hand.
D. INVESTMENTS
Fixed maturity investments at December 31, consisted of the following (in
millions):
1996
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ - $ - $ - $ -
Public utilities 383.9 383.5 5.2 (5.6)
Mortgage-backed securities 679.6 688.9 14.8 (5.5)
All other corporate 1,432.2 1,452.2 27.6 (7.6)
$2,495.7 $2,524.6 $47.6 ($18.7)
1996
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ 184.6 $ 186.1 $ 3.4 ($ 1.9)
Public utilities 175.2 180.0 5.9 (1.1)
Mortgage-backed securities 1,222.0 1,234.7 24.1 (11.4)
All other corporate 1,673.1 1,724.8 62.7 (11.0)
$3,254.9 $3,325.6 $96.1 ($25.4)
1995
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ - $ - $ - $ -
Public utilities 393.1 405.5 13.4 (1.0)
Mortgage-backed securities 659.6 686.0 27.0 (0.6)
All other corporate 1,444.5 1,508.5 64.1 (0.1)
$2,497.2 $2,600.0 $104.5 ($1.7)
<PAGE>
1995
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ 162.5 $ 169.9 $ 7.5 ($ 0.1)
Public utilities 227.7 239.1 12.1 (0.7)
Mortgage-backed securities 1,045.2 1,073.8 32.2 (3.6)
All other corporate 1,352.2 1,443.8 97.9 (6.3)
$2,787.6 $2,926.6 $149.7 ($10.7)
"Investing activities" related to fixed maturity investments included in
AAG's Consolidated Statement of Cash Flows consisted of the following (in
millions):
1996
Held to Available
Maturity for sale Total
Purchases ($116.3) ($893.8) ($1,010.1)
Maturities and paydowns 106.6 148.6 255.2
Sales 9.3 251.7 261.0
Gross gains 1.1 8.3 9.4
Gross losses (0.3) (8.3) (8.6)
1995
Held to Available
Maturity for sale Total
Purchases ($280.7) ($826.8) ($1,107.5)
Maturities and paydowns 50.5 96.6 147.1
Sales 1.4 767.1 768.5
Gross gains 0.8 23.2 24.0
Gross losses (0.6) (8.3) (8.9)
1994
Held to Available
Maturity for sale Total
Purchases ($713.6) ($475.6) ($1,189.2)
Maturities and paydowns 54.8 183.4 238.2
Sales 5.6 616.3 621.9
Gross gains 0.8 7.9 8.7
Gross losses (1.0) (9.8) (10.8)
Certain securities classified as "held to maturity" were sold for losses of
$0.2 million in both 1996 and 1995 and $0.6 million in 1994, due to
significant deterioration in the issuers' creditworthiness.
F-10
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The table below sets forth the scheduled maturities of AAG's fixed maturity
investments based on carrying value as of December 31.
1996
Held to Available 1995
Maturity Maturity for Sale Total Total
One year or less 3% * 3% 1%
After one year through five years 10 8% 18 18
After five years through ten years 16 20 36 40
After ten years 2 8 10 9
31 36 67 68
Mortgage-backed securities 12 21 33 32
43% 57% 100% 100%
* less than 1%
The distribution of maturities based on market value is generally the same.
Mortgage-backed securities had an estimated average life of approximately 8
years at December 31, 1996.
Certain risks are inherent in connection with fixed maturity securities,
including loss upon default, price volatility in reaction to changes in
interest rates and general market factors and risks associated with
reinvestment of proceeds due to prepayments or redemptions in a period of
declining interest rates.
The carrying values of investments in any entity or mortgage-backed security
("MBS") issuer in excess of 10% of stockholders' equity at December 31,
1996, other than investments issued or guaranteed by the U.S. Government or
government agencies, consisted of the following fixed maturity investments
(in millions):
Issuer Amount
Residential Funding MBS (21 different issues) $169.9
Prudential Home MBS (17 different issues) 112.3
General Electric Capital MBS (14 different issues) 100.9
Countrywide MBS (16 different issues) 78.0
Securitized Asset Sales, Inc. MBS (5 different issues) 55.0
Resolution Trust Corporation MBS (13 different issues) 53.3
Georgia-Pacific Corporation 52.0
At December 31, 1996 and 1995, AAG had no unrealized losses on its
marketable equity securities. Realized gains and changes in unrealized
appreciation on fixed maturity and equity security investments are
summarized as follows (in millions):
Fixed Equity Tax
Maturities Securities Other Effects Total
1996
Realized $ 0.8 $ - $0.4 ($ 0.4)$ 0.8
Change in unrealized (142.2) 16.4 - 44.0 (81.8)
1995
Realized $ 15.1 $ 0.6 - ($ 5.5)$ 10.2
Change in unrealized 520.9 7.5 - (184.9) 343.5
1994
Realized ($ 2.1) $ 2.0 - $ - ($ 0.1)
Change in unrealized (485.3) (2.1) - 170.6 (316.8)
F-11
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Major categories of net investment income were as follows (in millions):
1996 1995 1994
Fixed maturities $463.4 $405.2 $372.7
Other 10.8 5.7 4.0
Total investment income 474.2 410.9 376.7
Investment expenses (6.5) (5.4) (4.9)
Net investment income $467.7 $405.5 $371.8
AAG's investment portfolio is managed by a subsidiary of AFG. Investment
expenses included investment management charges representing approximately
one-tenth of one percent of AAG's invested assets in all three years and
amounting to $4.7 million in 1996 and 1995, and $4.4 million in 1994.
E. INVESTMENT IN AFFILIATE
Investment in affiliate (carrying value of $16.5 million at December 31,
1996) reflects AAG's 5% ownership (2.7 million shares) of the common stock
of Chiquita Brands International which is accounted for under the equity
method. AFG and its other subsidiaries own an additional 38% interest in
the common stock of Chiquita. Chiquita is a leading international marketer,
producer and distributor of bananas and other quality fresh and processed
food products. The market value of AAG's investment in Chiquita was
approximately $34.1 million and $36.7 million at December 31, 1996 and 1995,
respectively.
Included in AAG's retained earnings at December 31, 1996, was approximately
$8.3 million applicable to equity in undistributed net losses of Chiquita.
In 1996 and 1994, AAG recorded pretax extraordinary charges of $1.1 million
representing its proportionate share of Chiquita's loss on the retirement of
debt.
F. UNAMORTIZED INSURANCE ACQUISITION COSTS
Unamortized insurance acquisition costs consisted of the following at
December 31, (in millions):
1996 1995
Deferred policy acquisition costs $272.2 $228.2
Present value of future profits acquired 72.5 73.4
Unearned revenues (150.0) (151.8)
$194.7 $149.8
At December 31, 1996, the expected rate of amortization of the present value
of future profits acquired for the next five years was as follows: 11% in
1997; 10% in 1998; 9% in 1999; 8% in 2000; and 7% in 2001.
F-12
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
G. NOTES PAYABLE
Notes payable consisted of the following at December 31, (in millions):
1996 1995
Direct obligations of AAG $ 1.3 $ -
Obligations of AAG Holding:
Bank Credit Line due September 1999 44.7 20.5*
9-1/2% Senior Notes due August 2001 40.8 41.5*
11-1/8% Senior Subordinated Notes
due February 2003 24.1 101.4*
Other subsidiary debt 4.0 4.3
Total $114.9 $167.7
* Direct obligation of AAG on December 31, 1995.
In connection with the anticipated establishment of a new unsecured line of
credit, the Company transferred all the outstanding stock of GALIC to AAG
Holding Company, Inc., a wholly-owned subsidiary of the Company, on November
1, 1996. In connection with that transaction, AAG Holding assumed all of
the Company's obligations under the 9-1/2% Senior Notes, 11-1/8% Senior
Subordinated Notes and the bank lines of credit. The Company has guaranteed
the obligations of AAG Holding under this indebtedness.
AAG Holding has a $75 million revolving credit agreement with four banks.
Loans under the credit agreement mature in 1999 and bear interest at
floating rates based on prime or Eurodollar rates and are collateralized by
25% of the Common Stock of GALIC. At December 31, 1996 and 1995, the
weighted average interest rate on amounts borrowed under the bank credit
line was 6.68% and 6.83%, respectively. In 1996, the Company obtained a
short-term $40 million unsecured bank line of credit under terms similar to
the $75 million credit agreement. There were no amounts outstanding under
this line at December 31, 1996.
During 1996, a pretax extraordinary loss of $8.2 million was realized on the
repurchase of $78.0 million principal amount of Notes.
During 1995, AAG repurchased $4.9 million principal amount of its Notes
realizing a pretax extraordinary loss of $231,000.
During 1994, AAG repurchased $77.1 million principal amount of its Notes in
exchange for approximately $69 million in cash and 810,000 shares of its
Common Stock. As a result of the repurchases, AAG realized a pretax
extraordinary loss of $1.5 million.
F-13
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Scheduled principal payments on debt for the subsequent five years are shown
below (in millions). The scheduled principal payments assume that Notes
purchased are applied to the earliest scheduled retirements.
AAG
AAG Holding Other Total
1997 $0.1 $ - $0.6 $ 0.7
1998 0.1 - 0.6 0.7
1999 0.1 44.7 0.7 45.5
2000 0.1 - 0.7 0.8
2001 0.1 40.8 0.5 41.4
Cash interest payments were $17.4 million in 1996, $17.2 million in 1995 and
$23.2 million in 1994.
H. MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST
In November 1996, a wholly-owned subsidiary trust issued three million units
of 9-1/4% Trust Originated Preferred Securities ("TOPrS") for $75 million in
cash. The Trust then purchased $75 million of newly issued AAG Holding 9-
1/4% Subordinated Debentures due 2026, which, along with related interest
and principal payments received, will be the only assets of the Trust.
Holders of the TOPrS are entitled to receive quarterly cash distributions of
$0.58 per unit. Payment dates and amounts for the TOPrS correspond to those
on the Subordinated Debentures. The TOPrS are mandatorily redeemable upon
maturity or redemption of the Subordinated Debentures. The Subordinated
Debentures are redeemable by AAG Holding on or after November 7, 2001. AAG
and AAG Holding effectively provide an unconditional guarantee of the
Trust's obligations under its TOPrS.
I. STOCKHOLDERS' EQUITY
The Company is authorized to issue 25,000,000 shares of Preferred Stock, par
value $1.00 per share.
In December 1996 and December 1995, AAG sold 320,000 shares and 170,000
shares, respectively, of newly issued Series B Preferred Stock for $32
million and $17 million, respectively. (See Note O.) The Series B
Preferred Stock has a redemption value of $100 per share and is redeemable
at AAG's option. Dividends are cumulative and payable quarterly at an
annual rate of $8.50 per share.
In August 1995, AAG sold 3.92 million shares of common stock at $9.50 per
share under a rights offering to existing shareholders.
AAG's dividend paying capability is limited by certain customary debt
covenants to amounts based on cumulative earnings and losses, debt
repurchases, capital transactions and other items.
"Retained earnings since January 1, 1993", reflects AAG's results since the
acquisition of GALIC.
AAG may grant up to 2 million options under its 1994 Stock Option Plan. In
the fourth quarter of 1996, AAG issued to employees 174,241 shares of Common
Stock and options to purchase 1.2 million shares of Common Stock at $13.25
F-14
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
per share in connection with the termination of their Stock Appreciation
Rights. Also in the fourth quarter of 1996, AAG issued options for
386,000 additional shares at $13.75 per share. The options vest at a rate
of 20% per year and expire ten years from the date of grant.
If AAG had expensed the fair value of these options, the effect on net
earnings and earnings per share in 1996 would not have been material.
J. DISCONTINUED OPERATIONS
All of the Company's former manufacturing businesses are reported as
discontinued operations. During 1995, the Company's last manufacturing
unit, Electromag NV, was sold and no gain or loss was recognized on the
sale.
In 1995, AAG recorded a $5.0 million pretax charge for discontinued
operations. This charge represents primarily additional reserves related to
possible deficiencies by AAG's predecessor in reporting quality assurance
information in connection with certain military related sales prior to 1991.
In 1994, AAG recorded a $4.0 million pretax charge for discontinued
operations, primarily related to environmental liabilities.
K. INCOME TAXES
The following is a reconciliation of income taxes at the statutory rate of
35% and income taxes as shown in the Consolidated Income Statement (in
millions).
1996 1995 1994
Income (loss) before income taxes:
Continuing operations $78.5 $90.7 $63.2
Discontinued operations - (4.9) (4.0)
Extraordinary items (9.2) (0.3) (2.6)
Accounting change - - (0.7)
Income before income taxes $69.3 $85.5 $55.9
Tax computed at statutory rate $24.3 $29.9 $19.6
Effect of:
Reduction of valuation allowance (10.0) - -
Other, net (0.1) 0.3 0.2
Total provision 14.2 30.2 19.8
Amounts applicable to:
Discontinued operations - 1.7 1.4
Extraordinary items 3.2 0.1 0.9
Accounting change - - 0.2
Provision for income tax as shown
on the Consolidated Income
Statement $17.4 $32.0 $22.3
Provision for income taxes consisted of (in millions):
1996 1995 1994
Federal:
Current $14.2 $31.9 $21.2
Deferred - (1.7) (1.4)
Total $14.2 $30.2 $19.8
F-15
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The significant components of deferred tax assets and liabilities, excluding
the effects of unrealized gains and losses on marketable securities,
included in the Consolidated Balance Sheet were as follows (in millions):
December 31,
1996 1995
Deferred tax assets:
Net operating loss carryforwards $47.6 $47.9
Accrued expenses 13.8 13.9
Investment securities, including
affiliate 31.9 36.7
Valuation allowance for deferred
tax assets (38.6) (50.5)
Deferred tax liabilities:
Unamortized insurance
acquisition costs (61.8) (52.4)
Policyholder liabilities (14.5) (17.1)
At December 31, 1996, AAG had net operating loss carryforwards for federal
income tax purposes of approximately $136 million which are scheduled to
expire from 2001 through 2007.
L. LEASES
Leases relate principally to certain administrative facilities and
discontinued operations. Future minimum lease payments, net of sublease
revenues, under operating leases having initial or remaining
non-cancelable lease terms in excess of one year at December 31, 1996 are
payable as follows: 1997 - $800,000; 1998 - $2.2 million; 1999 - $2.5
million; 2000 - $2.3 million; 2001 - $2.4 million; 2002 and beyond -
$9.1 million.
Rental expense for operating leases was $2.6 million in 1996, $1.6 million
in 1995 and $1.7 million in 1994.
M. CONTINGENCIES
The Company is continuing its clean-up activities at certain of its former
manufacturing operations and third-party sites, in some cases in accordance
with consent agreements with federal and state environmental agencies.
Changes in regulatory standards and further investigations could affect
estimated costs in the future. Management believes 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. Based on prior
costs and discussions with independent environmental consultants, the
Company believes the remaining aggregate cost of environmental work at all
sites for which it has responsibility will range from $4 million to $7
million. The reserve for environmental work was $5.3 million at
December 31, 1996.
F-16
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In 1991, the Company identified possible deficiencies in procedures for
reporting quality assurance information to the Defense Electronics Supply
Center 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. The
Company believes it has sufficient reserves to cover the estimated
settlement amount.
N. STATUTORY INFORMATION; RESTRICTIONS ON TRANSFERS OF FUNDS AND ASSETS OF
SUBSIDIARIES
Insurance companies are required to file financial statements with state
insurance regulatory authorities prepared on an accounting basis prescribed
or permitted by such authorities (statutory basis). Certain statutory
amounts for GALIC, AAG's primary insurance subsidiary, were as follows (in
millions):
1996 1995 1994
Policyholders' surplus $285.0 $272.8 $255.9
Asset valuation reserve 91.4 90.2 79.5
Interest maintenance reserve 24.7 32.2 27.7
Pretax income from operations $ 87.1 $ 85.8 $ 83.4
Net income from operations 68.1 60.5 53.4
Net income 66.2 71.4 54.2
The amount of dividends which can be paid by GALIC without prior approval of
regulatory authorities is subject to restrictions relating to capital and
surplus and statutory net income. Based on net income at December 31, 1996,
GALIC may pay approximately $66.2 million in dividends in 1997 without prior
approval.
F-17
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
O. ADDITIONAL INFORMATION
Summary Financial Information of AAG Holding AAG has guaranteed all of the
outstanding debt of AAG Holding. (See Note G.) Summarized consolidated
financial information for AAG Holding is as follows (in millions):
December 31,
Balance Sheet 1996
Investments $6,272
Unamortized insurance acquisition costs 195
Assets held in separate accounts 247
Other assets 278
Insurance reserves $5,942
Notes payable to parent 166
Long-term debt of AAG Holding 110
Liabilities related to separate accounts 247
Other liabilities 96
TOPrS $ 75
Stockholder's equity $ 356
Income Statement 1996*
Revenues $ 91
Pretax income from operations 8
Net income 5
* Since November 1, 1996
Related Party Transactions In the fourth quarter of 1994, AAG purchased
Annuity Investors Life Insurance Company ("AILIC", formerly Carillon Life
Insurance Company) from Great American Insurance Company ("GAI") for $9.0
million in cash. At December 31, 1994, AILIC had statutory assets of $9.0
million and statutory surplus of $6.3 million. AAG acquired AILIC primarily
for its variable annuity licenses.
In connection with AAG's purchase of GALIC from GAI in 1992, GAI agreed to
neutralize the financial effects on GALIC of the adoption of an actuarial
guideline with respect to non-traditional life insurance and annuity
products. In satisfaction of this obligation, (i) GAI has agreed to
purchase, at AAG's option, up to $57 million of AAG Preferred Stock and (ii)
terms of GALIC's investment management services contract with AFG were
modified to reduce the fees owed under certain circumstances. In December
1996 and 1995, AAG sold $21.7 million and $17.0 million, respectively, of
its Series B Preferred Stock to GAI; the proceeds were contributed to GALIC.
Also in December 1996, AAG sold $10.3 million of its Series B Preferred
Stock to AFC.
Net investment income includes approximately $1 million in 1996, 1995 and
1994 of payments from a subsidiary of AFG for the rental of an office
building owned by GALIC.
F-18
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Fair Value of Financial Instruments The following table shows (in millions)
the carrying value and estimated fair value of AAG's financial instruments
at December 31.
1996 1995
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Assets
Fixed maturity investments $5,821.3 $5,850.2 $5,423.8 $5,526.6
Equity securities 51.0 51.0 32.6 32.6
Investment in affiliate 16.5 34.1 20.3 36.7
Liabilities
Annuity benefits accumulated(a) $5,365.6 $5,180.0 $5,052.0 $4,887.0
Notes payable(b) 114.9 119.0 167.7 177.7
TOPrS(c) $ 75.0 $ 76.5 - -
(a) Carrying values do not reflect deferred policy acquisition
costs of $110.5 million at December 31, 1996 and $72.7
million at December 31, 1995.
(b) Carrying values do not reflect issue costs of $1.3 million
at December 31, 1996 and $3.6 million at December 31, 1995.
(c) Carrying value does not reflect issue costs of $2.6 million
at December 31, 1996.
When available, fair values 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, discounted cash flows, fair value of
comparable securities or similar methods. The fair value of short-term
investments, mortgage loans on real estate and policy loans approximate
their carrying value. 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.
F-19
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unrealized Gains On Marketable Securities, Net The components of the
Consolidated Balance Sheet caption "Unrealized gains on marketable
securities, net" in stockholders' equity are summarized as follows (in
millions):
Unadjusted
Asset Effect of Reported
(Liability) SFAS 115 Amount
1996
Fixed maturities - available for sale $3,254.9 $ 70.7 $3,325.6
Equity securities 16.1 34.9 51.0
Unamortized insurance acquisition
costs, net 197.5 (2.8) 194.7
Annuity benefits accumulated (5,357.9) (7.7) (5,365.6)
Deferred income taxes on net
unrealized gains - (33.3) (33.3)
Unrealized gains on marketable
securities, net $ 61.8
1995
Fixed maturities - available for sale $2,787.6 $139.0 $2,926.6
Equity securities 14.1 18.5 32.6
Unamortized insurance acquisition
costs, net 155.0 (5.2) 149.8
Annuity benefits accumulated (5,037.0) (15.0) (5,052.0)
Deferred income taxes on net
unrealized gains - (48.0) (48.0)
Unrealized gains on marketable
securities, net $ 89.3
Other The Company has a defined benefit pension plan covering former U.S.
employees of its discontinued manufacturing operations. Pension benefits
are based upon past service with the Company and compensation levels.
Contributions are made by the Company in amounts necessary to satisfy
requirements of ERISA. At December 31, 1996 and 1995, respectively, pension
liabilities of $19.0 million and $11.8 million were included in the balance
sheet.
F-20
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
P. QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly results necessarily rely heavily on estimates. These estimates
and certain other factors, such as the seasonal nature of the Company's
affiliate and certain other operations and the discretionary sales of
assets, cause the quarterly results not to be necessarily indicative of
results for longer periods of time.
The following table represents quarterly results of operations for the years
ended December 31, 1996 and 1995 (in millions, except per share data).
First Second Third Fourth Total
1996 Quarter Quarter Quarter Quarter Year
Realized gains (losses) $ 0.3 $ 0.6 $ 0.5 ($ 0.2) $ 1.2
Total revenues 139.0 150.9 145.9 141.5 577.3
Income from continuing operations 14.7 16.3 17.1 13.0 61.1
Extraordinary items (1.6) (2.7) (1.7) - (6.0)
Net income 13.1 13.6 15.4 13.0 55.1
Earnings (loss) per common share:
Continuing operations $0.33 $0.37 $0.39 $0.30 $1.39
Extraordinary items (0.04) (0.06) (0.04) - (0.14)
Net income per common share $0.29 $0.31 $0.35 $0.30 $1.25
Average common shares outstanding 43.1 43.1 43.1 43.1 43.1
1995
Realized gains $ 0.1 $ - $ 6.9 $ 8.7 $ 15.7
Total revenues 98.6 101.2 109.4 130.4 439.6
Income from continuing operations 11.4 12.2 16.6 18.5 58.7
Discontinued operations - - - (3.2) (3.2)
Extraordinary items - - - (0.2) (0.2)
Net income 11.4 12.2 16.6 15.1 55.3
Earnings (loss) per common share(a)
Continuing operations $0.29 $0.31 $0.41 $0.43 $1.45
Discontinued operations - - - (0.08) (0.08)
Extraordinary items - - - - -
Net income per common share $0.29 $0.31 $0.41 $0.35 $1.37
Average common shares outstanding 39.1 39.1 40.8 43.1 40.5
(a) Quarterly earnings per share do not add to year-to-date amounts in 1995
due to the issuance of common shares.
Q. SUBSEQUENT EVENT (Unaudited)
In a private offering in March 1997, a wholly-owned subsidiary trust of AAG
Holding issued $75 million of 8-7/8% preferred securities similar to the
TOPrS issued in November 1996.
F-21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements are Included in Part II, Item 8.
2. Financial Statement Schedules:
Selected Quarterly Financial Data is included in Note P to the
Consolidated Financial Statements.
Schedules filed herewith:
For 1996, 1995 and 1994 Page
II - Condensed Financial Information of Registrant S-2
All other schedules for which provisions are made in the
applicable regulation of the Securities and Exchange
Commission have been omitted as they are not applicable, not
required, or the information required thereby is set forth in
the Financial Statements or the notes thereto.
3. Exhibits - See Exhibit Index on Page E-1.
(b) Reports on Form 8-K: None
S-1
<PAGE>
AMERICAN ANNUITY GROUP, INC. - PARENT ONLY
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
Condensed Balance Sheet
December 31,
Assets: 1996 1995
Cash and short-term investments $ 1.9 $ 1.4
Investment in subsidiaries(a)(b) 384.8 687.0
Note receivable from AAG Holding(b) 122.0 -
Other assets 47.8 20.0
$556.5 $708.4
Liabilities and Capital:
Accounts payable, accrued expenses and
other liabilities $ 44.6 $ 49.4
Payables to affiliates 24.2 52.3
Notes payable(b)(c) 1.2 177.4
Stockholders' equity(a) 486.5 429.3
$556.5 $708.4
Condensed Income Statement
Year ended December 31,
1996 1995 1994
Revenues:
Equity in undistributed earnings of
subsidiaries $ 47.6 $ 64.7 $ 47.3
Capital distribution from subsidiaries 61.2 54.2 44.0
Other revenues 10.6 1.7 0.4
119.4 120.6 91.7
Costs and Expenses:
Interest and other financing expenses 15.2 19.0 21.9
Other expenses 25.7 10.9 6.6
40.9 29.9 28.5
Income from continuing operations before
income taxes 78.5 90.7 63.2
Provision for income taxes 17.4 32.0 22.3
Income from continuing operations 61.1 58.7 40.9
Discontinued operations, net of tax - (3.2) (2.6)
Income before extraordinary items and
cumulative effect of accounting change 61.1 55.5 38.3
Extraordinary items, net of tax (6.0) (0.2) (1.7)
Cumulative effect of accounting change,
net of tax - - (0.5)
Net Income $ 55.1 $ 55.3 $ 36.1
___________
(a) Includes unrealized gains of $61.8 million and $89.3 million in
1996 and 1995, respectively, and includes advances to subsidiaries.
(b) In 1996, AAG transferred certain assets and liabilities to AAG Holding
Company, Inc. (See Note G to the Consolidated Financial Statements.)
(c) Includes $14.0 million principal amount of notes payable owned by GALIC
in 1995.
S-2
<PAGE>
AMERICAN ANNUITY GROUP, INC. - PARENT ONLY
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
Condensed Statement of Cash Flows
Year Ended December 31,
1996 1995 1994
Operating Activities:
Net income $55.1 $55.3 $36.1
Adjustments:
Discontinued operations - 3.2 2.6
Extraordinary items 6.0 0.2 1.7
Accounting change - - 0.5
Equity in net earnings of subsidiaries (70.8) (77.0) (59.7)
Depreciation and amortization 1.6 0.9 0.8
Decrease (increase) in other assets (8.5) 0.1 2.7
Increase (decrease) in balances with
affiliates (26.5) 13.5 13.1
Increase (decrease) in other liabilities 0.1 2.5 (12.8)
Capital distributions from subsidiaries 61.2 54.2 44.0
Contributions to subsidiaries (12.7) (33.0) -
Other, net 1.3 - -
6.8 19.9 29.0
Investing Activities:
Purchase of AAG Holding Company debentures (23.1) - -
Increase in intercompany notes (23.8) - -
Purchase of Laurentian Capital Corporation,
net of cash acquired - (63.6) -
Sales of real estate and other assets 0.2
Additional investments in subsidiaries - - (9.3)
Sale of AILIC to GALIC - 6.5 -
(46.7) (57.1) (9.3)
Financing Activities:
Additions to notes payable 87.7 33.5 30.0
Reductions of notes payable (74.8) (48.1) (55.1)
Issuance of Common Stock - 37.3 -
Issuance of Preferred Stock 32.0 17.0 -
Cash dividends paid (4.5) (3.0) (3.1)
40.4 36.7 (28.2)
Net Increase (Decrease) in Cash and
Short-term Investments 0.5 (0.5) (8.5)
Cash and short-term investments at beginning
of period 1.4 1.9 10.4
Cash and short-term investments at
end of period $ 1.9 $ 1.4 $ 1.9
S-3
<PAGE>
AMERICAN ANNUITY GROUP, INC.
INDEX TO EXHIBITS
Number Exhibit Description
2.0 Agreement and Plan of Merger dated as of May 25, 1995 incorporated by
reference to the Schedule 13D filed by American Premier Group, Inc.
on June 2, 1995 with respect to the equity securities of Laurentian
Capital Corporation.
3.1 Certificate of Incorporation of Registrant
3.2 By-laws of Registrant
4.0 Registrant has no outstanding debt issues exceeding 10% of the assets
of Registrant and consolidated subsidiaries.
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.
E-1
<PAGE>
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.
12.0 Earnings to fixed charges.
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Auditors.
27.0 Financial Data Schedule for 1996 - included in Report filed
electronically with the Securities and Exchange Commission.
E-2
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, American Annuity Group, Inc. has duly caused this
Report to be signed on its behalf by the undersigned, duly authorized.
American Annuity Group, Inc.
Signed: March 25, 1997 BY:
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
Chairman of the Board March 25, 1997
Carl H. Lindner of Directors
Director March 25, 1997
S. Craig Lindner
Director March 25, 1997
Robert A. Adams
Director March 25, 1997
William R. Martin*
Director March 25, 1997
Ronald F. Walker
Senior Vice President, March 25, 1997
William J. Maney Treasurer and Chief
Financial Officer
(Principal Accounting Officer)
* Chairman of Audit Committee
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 3,325,600
<DEBT-CARRYING-VALUE> 2,495,700
<DEBT-MARKET-VALUE> 2,524,600
<EQUITIES> 51,000
<MORTGAGE> 68,100
<REAL-ESTATE> 37,600
<TOTAL-INVEST> 6,271,900
<CASH> 42,700
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 194,700
<TOTAL-ASSETS> 7,024,100
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 575,400
<POLICY-HOLDER-FUNDS> 5,365,600
<NOTES-PAYABLE> 114,900
0
49,000
<COMMON> 43,300
<OTHER-SE> 394,200
<TOTAL-LIABILITY-AND-EQUITY> 7,024,100
103,600
<INVESTMENT-INCOME> 467,700
<INVESTMENT-GAINS> 1,200
<OTHER-INCOME> 7,000
<BENEFITS> 364,100
<UNDERWRITING-AMORTIZATION> 34,100
<UNDERWRITING-OTHER> 85,300
<INCOME-PRETAX> 78,500
<INCOME-TAX> 17,400
<INCOME-CONTINUING> 61,100
<DISCONTINUED> 0
<EXTRAORDINARY> (6,000)
<CHANGES> 0
<NET-INCOME> 55,100
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.25
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
EXHIBIT 12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND FIXED CHARGES AND PREFERRED DIVIDENDS
(In millions)
Year Ended December 31,
1996 1995 1994
Income from continuing operations
before income taxes $78.5 $ 90.7 $63.2
Less equity in (earnings) loss of
affiliate 2.2 (0.1) 2.8
Plus dividends from affiliate 0.5 0.5 0.5
Plus minority interest in
subsidiaries having fixed charges 0.5 - 0.1
Fixed charges:
Interest and other debt expenses 14.3 17.6 21.4
Preferred dividends of subsidiary
trust 1.0 - -
One-third of rentals 0.9 0.5 0.6
Earnings $97.9 $109.2 $88.6
Fixed charges:
Interest and other debt expenses $14.3 $ 17.6 $21.4
Preferred dividends of subsidiary
trust 1.0 - -
One-third of rentals 0.9 0.5 0.6
Fixed Charges $16.2 $ 18.1 $22.0
Fixed charges and preferred
dividends:
Fixed charges - per above $16.2 $ 18.1 $22.0
Preferred dividends (*) 1.8 - 1.4
Fixed Charges and Preferred
Dividends $18.0 $ 18.1 $23.4
Ratio of Earnings to Fixed Charges 6.0 6.0 4.0
Earnings in excess of Fixed Charges $81.7 $ 91.1 $66.6
Ratio of Earnings to Fixed Charges
and Preferred Dividends 5.4 6.0 3.8
Earnings in excess of Fixed Charges
and Preferred Dividends $79.8 $ 91.1 $65.2
(*) Amounts represent preferred dividend requirements multiplied
by the ratio that pretax earnings bears to net earnings.
E-3
AMERICAN ANNUITY GROUP, INC.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AAG at December 31,
1996. All corporations are subsidiaries of AAG and, if indented,
subsidiaries of the company under which they are listed.
<TABLE>
<CAPTION>
Name of Company
<S> <C> <C>
AAG Holding Company, Inc. Ohio 100%
Great American Life Insurance Company Ohio 100
Annuity Investors Life Insurance Company Ohio100
Loyal American Life Insurance Company Alabama 100
Prairie National Life Insurance Company S o u t h
Dakota 100
American Memorial Life Insurance Company S o u t h
Dakota 100
American Annuity Group Capital Trust I Delaware 100
</TABLE>
The names of certain subsidiaries are omitted, as such
subsidiaries in the aggregate would not constitute a significant
subsidiary.
See Part I, Item 1 of this Report for a description of certain
companies in which AAG owns a significant portion and accounts
for under the equity method.
E-4
AMERICAN ANNUITY GROUP, INC.
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements pertaining to the Employee Stock Purchase Plan of
American Annuity Group, Inc. (Form S-8 No. 33-55189), the Agent
Stock Purchase Plan of American Annuity Group, Inc. (Form S-2 No.
33-57259), the American Annuity Group, Inc. Deferred Compensation
Plan (Form S-8 No. 333.17383) and the American Annuity Group,
Inc. Directors' Compensation Plan (Form S-8 No. 333-13777) of our
report dated February 28, 1997, with respect to the consolidated
financial statements and schedules of American Annuity Group,
Inc. included in this Annual Report (Form 10-K) for the year
ended December 31, 1996.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 25, 1997
E-5
