SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
March 31, 2000 No. 1-11632
AMERICAN ANNUITY GROUP, INC.
Incorporated under IRS EmployerI.D.
the Laws of Delaware No. 06-1356481
250 East Fifth Street, Cincinnati, Ohio 45202
(513) 333-5300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of May 1, 2000, there were 42,286,093 shares of the Registrant's Common
Stock outstanding.
Page 1 of 19
AMERICAN ANNUITY GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
March 31, December 31,
2000 1999
Assets
Investments:
Fixed maturities - at market
(amortized cost - $6,061.7 and $6,073.2) $5,919.5 $5,946.7
Equity securities - at market
(cost - $46.1 and $43.6) 69.2 72.3
Investment in affiliate 13.5 12.3
Mortgage loans on real estate 23.8 16.0
Real estate 72.7 73.6
Policy loans 215.2 217.2
Short-term investments 49.8 80.2
Total investments 6,363.7 6,418.3
Cash 28.7 39.4
Accrued investment income 95.3 98.0
Unamortized insurance acquisition costs, net 430.4 406.2
Deferred taxes on unrealized losses 33.7 27.2
Other assets 225.5 214.4
Variable annuity assets (separate accounts) 466.4 354.4
$7,643.7 $7,557.9
Liabilities and Capital
Annuity benefits accumulated $5,494.3 $5,519.5
Life, accident and health reserves 525.8 520.6
Notes payable 201.1 201.3
Payable to affiliates, net 76.2 69.8
Accounts payable, accrued expenses and other
liabilities 131.4 147.0
Variable annuity liabilities
(separate accounts) 466.4 354.4
Total liabilities 6,895.2 6,812.6
Mandatorily redeemable preferred securities
of subsidiary trusts 218.1 219.6
Stockholders' Equity:
Common Stock, $1 par value
-100,000,000 shares authorized
- 42,284,028 and 42,374,086 shares
outstanding 42.3 42.4
Capital surplus 348.4 349.7
Retained earnings 203.9 186.5
Unrealized losses on marketable
securities, net (64.2) (52.9)
Total stockholders' equity 530.4 525.7
$7,643.7 $7,557.9
2
AMERICAN ANNUITY GROUP, INC. 10-Q
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(In millions, except per share amounts)
Three months ended
March 31,
2000 1999
Revenues:
Life, accident and health premiums $ 49.9 $ 25.6
Net investment income 123.3 119.9
Realized gains (losses) on sales of
investments (2.9) 4.0
Other income 10.9 4.0
181.2 153.5
Costs and Expenses:
Annuity benefits 66.2 64.9
Life, accident and health benefits 36.7 18.9
Insurance acquisition expenses 15.2 8.2
Trust preferred distribution requirement 4.6 4.7
Interest and other debt expenses 3.6 2.4
Other expenses 31.8 23.7
158.1 122.8
Operating earnings before income taxes 23.1 30.7
Provision for income taxes 6.5 9.5
Net operating earnings 16.6 21.2
Equity in earnings of affiliate, net of tax 0.8 1.2
Income before accounting change 17.4 22.4
Cumulative effect of accounting change,
net of tax - (4.7)
Net Income $ 17.4 $ 17.7
Basic earnings (loss) per common share:
Income before accounting change $0.41 $0.53
Accounting change - (0.11)
Net income $0.41 $0.42
Diluted earnings (loss) per common share:
Income before accounting change $0.41 $0.52
Accounting change - (0.11)
Net income $0.41 $0.41
Average number of common shares:
Basic 42.4 42.5
Diluted 42.6 43.2
3
AMERICAN ANNUITY GROUP, INC. 10-Q
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions)
Three months ended
March 31,
2000 1999
Common Stock:
Balance at beginning of period $ 42.4 $ 42.6
Common Stock retired (0.1) (0.2)
Balance at end of period $ 42.3 $ 42.4
Capital Surplus:
Balance at beginning of period $349.7 $354.1
Common Stock issued 0.5 0.2
Common Stock retired (1.8) (4.3)
Balance at end of period $348.4 $350.0
Retained Earnings:
Balance at beginning of period $186.5 $131.9
Net income 17.4 17.7
Balance at end of period $203.9 $149.6
Unrealized Gains (Losses), Net:
Balance at beginning of period ($ 52.9) $160.1
Change during period (11.3) (45.4)
Balance at end of period ($ 64.2) $114.7
Comprehensive Income (Loss):
Net income $ 17.4 $ 17.7
Other comprehensive loss - change in net
unrealized losses on marketable securities (11.3) (45.4)
Comprehensive income (loss) $ 6.1 ($ 27.7)
4
AMERICAN ANNUITY GROUP, INC. 10-Q
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Three months ended
March 31,
2000 1999
Cash Flows from Operating Activities:
Net income $ 17.4 $ 17.7
Adjustments:
Cumulative effect of accounting change - 4.7
Equity in earnings of affiliate, net of tax (0.8) (1.2)
Increase in life, accident and health reserves 3.6 9.0
Benefits to annuity policyholders 66.2 64.9
Amortization of insurance acquisition costs 15.2 8.2
Depreciation and amortization 2.3 3.2
Realized losses (gains) 2.9 (4.0)
Increase in insurance acquisition costs (33.7) (28.2)
Other, net (12.2) (1.4)
60.9 72.9
Cash Flows from Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (240.9) (405.0)
Equity securities (2.5) (4.3)
Real estate, mortgage loans and other assets (9.1) (6.8)
Purchase of subsidiaries - (26.6)
Cash and short-term investments of acquired
subsidiaries - 31.1
Maturities and redemptions of fixed
maturity investments 103.3 203.0
Sales of:
Fixed maturity investments 135.6 163.8
Equity securities 0.2 7.0
Real estate, mortgage loans and other assets 0.2 18.8
Decrease in policy loans 2.0 1.2
(11.2) (17.8)
Cash Flows from Financing Activities:
Fixed annuity receipts 126.4 107.5
Annuity surrenders, benefits and withdrawals (192.8) (190.0)
Net transfers to variable annuity assets (21.5) (3.1)
Additions to notes payable - 19.0
Reductions of notes payable (0.2) (0.2)
Issuance of Common Stock 0.5 0.2
Retirement of Common Stock (1.9) (4.5)
Repurchase of trust preferred securities (1.3) (5.5)
(90.8) (76.6)
Net decrease in cash and short-term investments (41.1) (21.5)
Beginning cash and short-term investments 119.6 133.0
Ending cash and short-term investments $ 78.5 $111.5
5
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Description of the Company
American Annuity Group, Inc. ("AAG" or "the Company") markets retirement
products, primarily fixed and variable annuities, and various forms of
life and supplemental health insurance through independent agents,
payroll deduction plans, financial institutions and in-home sales.
American Financial Group, Inc. ("AFG") and its subsidiaries owned 83% of
AAG's Common Stock at May 1, 2000.
B. Accounting Policies
Basis of Presentation The accompanying Consolidated Financial
Statements for AAG and its subsidiaries are unaudited; however,
management believes that all adjustments (consisting only of normal
recurring accruals unless otherwise disclosed herein) necessary for fair
presentation have been made. The results of operations for interim
periods are not necessarily indicative of results to be expected for the
year. The financial statements have been prepared in accordance with
the instructions to Form 10-Q and therefore do not include all
information and footnotes necessary to be in conformity with generally
accepted accounting principles.
Certain reclassifications have been made to prior periods to conform to
the current period's presentation. All significant intercompany
balances and transactions have been eliminated. All acquisitions have
been treated as purchases. The results of operations of companies since
their formation or acquisition are included in the consolidated
financial statements.
The preparation of the financial statements 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.
Investments All fixed maturity securities are considered "available for
sale" and reported at fair value with unrealized gains and losses
reported as a separate component of stockholders' equity. 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. Premiums and discounts on mortgage-backed
securities are amortized over their expected average lives using the
interest method.
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.
Investment in Affiliate AAG's investments in equity securities of
companies that are 20% to 50% owned by AFG and its subsidiaries are
generally carried at cost, adjusted for a proportionate share of their
undistributed earnings or losses. Changes in AAG's equity in its
affiliate caused by issuances of the affiliate's stock are recognized in
earnings when such issuances are not part of a broader reorganization.
6
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Insurance Acquisition Costs and Expenses Insurance acquisition costs
and expenses consist primarily of deferred policy acquisition costs and
the present value of future profits on business in force of acquired
insurance companies. In addition, certain marketing and commission
costs are expensed as paid and included in insurance acquisition
expenses.
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.
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 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.
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.
Present Value of Future Profits Included in insurance acquisition costs
are amounts representing the present value of future profits on business
in force of 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.
Life, Accident and Health Reserves Liabilities for future policy
benefits under traditional life, accident and health policies are
computed using the net level premium method. Computations are based on
anticipated investment yields,
7
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
mortality, morbidity and surrenders and include provisions for
unfavorable deviations. Reserves established for accident and health
claims are modified as necessary to reflect actual experience and
developing trends.
The liability for future policy benefits for interest sensitive life and
universal life policies is equal to the sum of the accumulated fund
balances under such policies.
Variable Annuity Assets and Liabilities Separate accounts related to
variable annuities represent deposits invested in underlying investment
funds on which AAG earns a fee. The investment funds are selected and
may be changed only by the policyholder.
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 and GALIC have separate tax allocation agreements with
American Financial Corporation ("AFC"), a subsidiary of AFG, 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. 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.
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."
8
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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. The projected future cost of providing these benefits is
expensed over the period the employees earn such benefits.
Start-Up Costs Prior to 1999, certain costs associated with
introducing new products and distribution channels had been deferred and
amortized on a straight-line basis over five years. In 1999, AAG
implemented Statement of Position ("SOP") 98-5, "Reporting on the Costs
of Start-Up Activities." The SOP required that (i) costs of start-up
activities be expensed as incurred and(ii) unamortized balances of
previously deferred costs be expensed and reported as the cumulative
effect of a change in accounting principle. Accordingly, AAG expensed
previously capitalized start-up costs of $4.7 million (net of tax) or
$0.11 per diluted share, effective January 1, 1999.
Derivatives The Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
during the second quarter of 1998. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including derivative
instruments that are embedded in other contracts, and for hedging
activities and must be implemented no later than January 1, 2001. SFAS
No. 133 requires the recognition of all derivatives (both assets and
liabilities) in the balance sheet at fair value. Changes in fair value
of derivative instruments are included in current income or as a
component of comprehensive income (outside current income) depending on
the type of derivative. Implementation of SFAS No. 133 is not expected
to have a material effect on AAG's financial position or results of
operations.
Earnings Per Share Basic earnings per share is calculated using the
weighted-average number of shares of common stock outstanding during the
period. Diluted earnings per share include the effect of the assumed
exercise of dilutive common stock options.
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.
9
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
C. Acquisitions and Sale of Subsidiaries
In October 1999, AAG acquired United Teacher Associates Insurance
Company for $81 million in cash, pending post-closing adjustments under
which AAG may receive as much as several million dollars.
In July 1999, AAG acquired Consolidated Financial Corporation, an
insurance agency, for approximately $21 million in cash.
In February 1999, AAG acquired Great American Life Insurance Company of
New York (formerly known as Old Republic Life Insurance Company of New
York) for approximately $27 million in cash.
D. Segments of Operations
AAG operates in three major segments: (i) retirement products, (ii)
life, accident and health insurance and (iii) corporate and other.
AAG's retirement product companies sell tax-deferred annuities to
employees of primary and secondary educational institutions, hospitals
and in the non-qualified markets. Approximately one-fourth of AAG's
retirement annuity premiums came from California in the first quarter of
2000. No other state accounted for more than 10% of premiums. Sales
from AAG's top two Managing General Agencies accounted for one-eighth of
retirement annuity premiums in the first quarter of 2000.
AAG's life, accident and health businesses sell various forms of life
and supplemental health products in the United States and Puerto Rico.
Sales in Puerto Rico accounted for approximately 25% of AAG's life,
accident and health premiums in the first quarter of 2000.
Corporate and other consists primarily of AAG (parent) and AAG Holding.
10
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table shows AAG's revenues and operating profit (loss) by
significant business segment (in millions):
Three months ended
March 31,
2000 1999
Revenues
Retirement products $115.4 $111.9
Life, accident & health:
U.S. 51.8 20.5
Puerto Rico 14.6 13.8
Corporate and other 2.3 3.3
Total operating revenues 184.1 149.5
Realized gains (losses) (2.9) 4.0
Total revenues per income statement $181.2 $153.5
Operating profit (loss) - pretax
Retirement products $ 33.2 $ 31.3
Life, accident & health:
U.S. 2.5 2.2
Puerto Rico 2.0 1.9
Corporate and other (11.7) (8.7)
Pretax earnings from operations 26.0 26.7
Realized gains (losses) (2.9) 4.0
Total pretax income per income statement $ 23.1 $ 30.7
11
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
E. Investment in Affiliate
Investment in affiliate reflects AAG's 4% ownership (2.7 million shares;
carrying value of $13.5 million at March 31, 2000) of the common stock
of Chiquita Brands International which is accounted for under the equity
method. AFG and its other subsidiaries own an additional 32% 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 $13
million at March 31, 2000 and December 31, 1999.
F. Unamortized Insurance Acquisition Costs
Unamortized insurance acquisition costs consisted of the following (in
millions):
March 31, December 31,
2000 1999
Deferred policy acquisition costs $463.2 $435.7
Present value of future profits acquired 112.9 115.1
Unearned revenues (145.7) (144.6)
$430.4 $406.2
G. Notes Payable
Notes payable consisted of the following (in millions):
March 31, December 31,
2000 1999
Direct obligations of AAG $ 2.2 $ 2.2
Obligations of AAG Holding (guaranteed by AAG):
6-7/8% Senior Notes due 2008 100.0 100.0
Bank Credit Line 97.0 97.0
Other subsidiary debt 1.9 2.1
Total $201.1 $201.3
AAG Holding has a floating rate revolving credit agreement with several
banks under which it may borrow a maximum of $200 million through
September 29, 2000. The maximum amount available reduces quarterly
between September 30, 2000 and December 31, 2003. At March 31, 2000,
and December 31, 1999, the weighted-average interest rate on amounts
borrowed under AAG Holding's bank credit line was 6.53% and 6.76%,
respectively.
At March 31, 2000, scheduled principal payments on debt for the
remainder of 2000 and the subsequent five years were as follows (in
millions):
2000 2001 2002 2003 2004 2005
$0.7 $0.7 $37.7 $60.6 $0.2 $0.2
12
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
H. Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
Wholly-owned subsidiary trusts of AAG Holding issued $225 million of
preferred securities and, in turn, purchased a like amount of AAG
Holding subordinated debt which provides interest and principal
payments to fund the Trusts' obligations. The preferred securities
are mandatorily redeemable upon maturity or redemption of the
subordinated debt. The three preferred securities issues are
summarized as follows:
Date of Optional
Issuance Issue(Maturity Date) 3/31/00 12/31/99 Redemption Dates
November
1996 9-1/4% TOPrS* (2026) $73,110,000 $74,600,000 On or after
11/7/2001
March
1997 8-7/8% Preferred
Securities (2027) 70,000,000 70,000,000 On or after
3/1/2007
May 1997 7-1/4% ROPES** (2041) 75,000,000 75,000,000 Prior to
9/28/2000 and
after 9/28/2001
* Trust Originated Preferred Securities
** Remarketed Par Securities
In the first quarter of 2000, AAG repurchased $1.5 million of its preferred
securities for $1.3 million in cash.
In the first quarter of 1999, AAG repurchased $5.4 million of its preferred
securities for $5.5 million in cash.
AAG and AAG Holding effectively provide an unconditional guarantee of the
Trusts' obligations.
I. Stockholders' Equity
The Company is authorized to issue 25,000,000 shares of Preferred
Stock, par value $1.00 per share.
At March 31, 2000, there were 3.0 million shares of AAG Common Stock
reserved for issuance under AAG's stock option plans. Under the
plans, the exercise price of each option equals the market price of
AAG Common Stock at the date of grant. Options generally become
exercisable at the rate of 20% per year commencing one year after
grant. All options expire ten years after the date of grant.
The change in net unrealized losses on marketable securities for the
three months ended March 31 included the following (in millions):
2000
Pretax Taxes Net
Unrealized holding
losses on securities
arising during the period ($20.7) $7.5 ($13.2)
Reclassification adjustment
for investment losses (gains)
realized in net income 2.9 (1.0) 1.9
Change in net unrealized
losses on marketable securities ($17.8) $6.5 ($11.3)
1999
Pretax Taxes Net
Unrealized holding
losses on securities
arising during the period ($64.6) $21.8 ($42.8)
Reclassification adjustment
for investment losses (gains)
realized in net income (4.0) 1.4 (2.6)
Change in net unrealized
losses on marketable securities ($68.6) $23.2 ($45.4)
13
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
J. Earnings Per Share
The number of common shares outstanding used in calculating diluted
earnings per share in the first quarter of 2000 and 1999 includes
0.2 million shares and 0.7 million shares, respectively, for the
effect of the assumed exercise of AAG's stock options.
K. Contingencies
There have been no significant changes to the matters discussed and
referred to in Note N "Contingencies" of AAG's Annual Report on Form
10-K for 1999.
L. Additional Information
Statutory Information of Great American Life Insurance
Company 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):
March 31, December 31,
2000 1999
Capital and surplus $390.3 $403.8
Asset valuation reserve 66.9 66.5
Interest maintenance reserve 7.4 9.8
Three months ended March 31,
2000 1999
Pretax income from operations $19.1 $11.1
Net income from operations 14.9 8.3
Net income 14.9 8.4
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 for the year ended December 31, 1999, GALIC may pay
$40.4 million in dividends in 2000 without prior approval. In the
first quarter of 2000, GALIC paid $15 million in dividends.
14
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
American Annuity Group, Inc. ("AAG" or "the Company") 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 stockholder dividends.
Forward-Looking Statements The Private Securities Litigation Reform Act of
1995 encourages corporations to provide investors with information about the
Company's anticipated performance and provides protection from liability if
future results are not the same as management's expectations. This document
contains certain forward-looking statements that are based on assumptions
which management believes are reasonable, but, by their nature, inherently
uncertain. Future results could differ materially from those projected.
Factors that could cause such differences include, but are not limited to:
changes in economic conditions, regulatory actions and competitive
pressures. AAG undertakes no obligation to update any forward-looking
statements.
IT Initiative In 1999, AFG initiated an enterprise-wide study of its
Information Technology ("IT") resources, needs and opportunities (including
those of AAG). AAG expects that the initiative will entail extensive effort
and costs and may lead to substantial changes in the area, which should
result in significant cost savings, efficiencies and effectiveness in the
future. While the costs (most of which will be expensed) will precede any
savings to be realized, management expects benefits to greatly exceed the
costs incurred, all of which will be funded through available working
capital.
LIQUIDITY AND CAPITAL RESOURCES
Ratios AAG's ratio of earnings to fixed charges continues to exceed 3
times; its consolidated debt to capital ratio is 27%. Consolidated debt
includes the Company's notes payable and its Remarketed Par Securities
("ROPES"). Capital represents the sum of consolidated debt, redeemable
preferred securities of subsidiary trusts and stockholders' equity
(excluding unrealized gains (losses) on marketable securities).
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 March 31, 2000, the capital ratio of each
of AAG's principal insurance subsidiaries was approximately 4.0 times its
authorized control level RBC.
Sources and Uses of Funds To pay interest and principal on borrowings,
obligations related to discontinued manufacturing operations and other
holding company costs, AAG (parent) and AAG Holding use cash and investments
on hand, capital distributions from their principal subsidiary, Great
American Life Insurance Company ("GALIC") and bank borrowings. At May 1,
2000, AAG (parent) had over $100 million available under its bank credit
line. 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 during the remainder of 2000
without prior regulatory approval is $25.4 million.
15
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Based upon the current level of operations and anticipated growth, AAG
believes that it will have sufficient resources to meet its liquidity
requirements.
Investments AAG invests primarily in fixed income investments which,
including loans and short-term investments, comprised 98% of its investment
portfolio at March 31, 2000. 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.
The NAIC assigns quality ratings to publicly traded as well as privately
placed securities. At March 31, 2000, 91% 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.
At March 31, 2000, AAG's mortgage-backed securities ("MBSs") portfolio
represented approximately one-third of its fixed maturity investments. 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.
Management believes that the structure and discounted nature of the MBSs
will reduce 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 market in which these securities trade is
highly liquid. Aside from interest rate risk, AAG does not believe a
material risk (relative to earnings or liquidity) is inherent in holding
such investments.
RESULTS OF OPERATIONS
General The comparability of AAG's income statement is affected by the
acquisitions of subsidiaries discussed in Footnote C to its financial
statements.
Net earnings from operations (before realized gains (losses), equity in
earnings of affiliate and an accounting change) for the first quarter of
2000 were $18.5 million compared to $18.6 for the same period in 1999. On a
diluted basis, net earnings from operations (before realized gains (losses),
equity in earnings of affiliate and an accounting change) for the same
periods were $0.43 per share.
Retirement Products The following table summarizes AAG's premiums for its
retirement annuities (in millions).
Three months ended
March 31,
2000 1999
Annuity Premiums:
Single premium fixed rate annuities $ 66 $ 52
Flexible premium fixed rate annuities 41 41
Single premium variable annuities 73 35
Flexible premium variable annuities 17 12
$197 $140
16
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Sales of annuity products linked to the performance of the stock market
(equity-indexed and variable annuities) were more than $50 million higher in
the first quarter of 2000 compared to the same period in 1999.
Life, Accident and Health Premiums The following table summarizes AAG's
life, accident and health premiums and benefits as shown in the Consolidated
Income Statement (in millions).
Three months ended
March 31,
2000 1999
Premiums
Life insurance $19 $18
Accident and health insurance 31 8
$50 $26
Benefits
Life insurance $15 $15
Accident and health insurance 22 4
$37 $19
Net Investment Income Net investment income increased 3% in the first
quarter of 2000 compared to the same period in 1999 resulting primarily from
higher invested assets due to the acquisition of United Teacher Associates
Insurance Company in the fourth quarter of 1999.
Other Income The increase in other income reflects revenues from an
insurance agency acquired in 1999, higher revenues from AAG's brokerage
subsidiary, an increase in fees earned on AAG's growing variable annuity
business and increased surrender fees.
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 of Affiliate Equity in net earnings of affiliate
represents AAG's proportionate share of the results of Chiquita Brands
International. Chiquita reported net income for the first quarter of 2000
and 1999 of $35 million compared to $49 million.
Annuity Benefits Annuity benefits reflect amounts accrued on annuity
policyholders' funds accumulated. The majority of AAG's fixed rate annuity
products permit AAG to change the crediting rate at any time (subject to
minimum interest rate guarantees of 3% or 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.
On its deferred annuities (annuities in the accumulation phase), AAG
generally credits interest to policyholders' accounts at their current
stated "surrender" interest rates. Furthermore, for "two-tier" deferred
annuities (annuities under which a higher interest amount can be earned if a
policy is annuitized rather than surrendered), AAG accrues an additional
liability to provide for expected deaths and annuitizations. Changes in
crediting rates, actual surrender and annuitization experience or
modifications in actuarial assumptions can affect this accrual.
17
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
On immediate annuities (annuities in the pay-out phase), interest is
credited based on discount rates used at the time the policies are
annuitized. Discount rates are generally based on interest rates
in effect at annuitization.
Insurance Acquisition Expenses Insurance acquisition expenses include
amortization of deferred policy acquisition costs ("DPAC") as well as
commissions on sales of life insurance products. Insurance acquisition
expenses also include amortization of the present value of future profits of
businesses acquired amounting to $3.1 million in the first quarter of 2000,
up from $1.7 million in the first quarter of 1999 due to the October 1999
acquisition of United Teacher Associates Insurance Company.
Interest and Other Debt Expenses Interest and other debt expenses
increased 50% in the first quarter of 2000 compared to the same period in
1999 due primarily to amounts borrowed to fund acquisitions as well as
higher interest rates on AAG's bank credit line.
Other Expenses The increase in other expenses reflects primarily the
acquisition of companies in the second half of 1999.
Cumulative Effect of Accounting Change In the first quarter of 1999, AAG
implemented Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities." The SOP requires that costs of start-up activities be
expensed as incurred and that unamortized balances of previously deferred
costs be expensed and reported as the cumulative effect of a change in
accounting principle. Accordingly, AAG expensed previously capitalized
start-up costs of $4.7 million (net of tax) in the first quarter of 1999.
ITEM 3
Qualitative and Quantitative Disclosure About Market Risk
As of March 31, 2000, there were no material changes to the other
information provided in AAG's Form 10-K for 1999 under the caption "Exposure
to Market Risk" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
18
AMERICAN ANNUITY GROUP, INC. 10-Q
PART II
OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule as of March 31, 2000. For
submission in electronic filing only.
(b) Report on Form 8-K - None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
American Annuity Group, Inc.
May 12, 2000 BY:/s/William J. Maney
William J. Maney
Executive Vice President, Treasurer
and Chief Financial Officer
19
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