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, 1999 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
American Annuity Group Capital Trust I (Guaranteed by Registrant):
9-1/4% Trust Originated Preferred Securities New York
Other Securities for which reports are submitted pursuant to Section 15(d)
of the Act:
American Annuity Group Capital Trust II (Guaranteed by Registrant):
8-7/8% Trust Preferred Securities
AAG Holding Company, Inc. (Guaranteed by Registrant):
6-7/8% Senior Notes due June 1, 2008
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and need not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this
Form 10-K. [X]
As of March 1, 2000, there were 42,383,949 shares of the Registrant's
Common Stock outstanding. The aggregate market value of Common Stock held
by non-affiliates at that date was approximately $114.5 million based upon
non-affiliate holdings of 7,323,954 shares and a market price of $15.63 per
share.
Documents Incorporated by Reference:
Proxy Statement for the 2000 Annual Meeting of Stockholders (portions of
which are incorporated by reference into Part III hereof).
AMERICAN ANNUITY GROUP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I
Page
Item 1. Business
Introduction 1
Retirement Products 2
Life, Accident and Health Products 5
Sale of Funeral Services Division 6
Investments 6
Independent Ratings 8
Competition 9
Regulation 9
Employees 10
Foreign Operations 10
New Tax Legislation 11
Item 2. Properties 11
Item 3. Legal Proceedings 12
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 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk **
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure *
Part III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners
and Management 23
Item 13. Certain Relationships and Related Transactions 23
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K S-1
(*) The response to this item is "none".
(**) Included in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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.
PART I
ITEM 1
Business
Introduction
American Annuity Group, Inc. ("AAG" or "the Company"), which was
incorporated as a Delaware corporation in 1987, is an 83%-owned subsidiary
of American Financial Group, Inc. ("AFG"). AAG is a holding company which
markets retirement products, primarily fixed and variable annuities, and
various forms of life and supplemental health insurance through the
following subsidiaries:
Year acquired
Subsidiary or formed
Great American Life Insurance Company ("GALIC") 1992
Annuity Investors Life Insurance Company ("AILIC") 1994
Loyal American Life Insurance Company ("Loyal") 1995
Great American Life Assurance Company of Puerto
Rico, Inc. ("GAPR") 1997
GALIC's Life Division 1997
United Teacher Associates Insurance Company ("UTA") 1999
Standard & Poor's rates GALIC, AILIC and Loyal A+ (Strong). A.M. Best rates
all of the above insurance companies A (Excellent), except for UTA which has
a rating of A- (Excellent). Duff & Phelps rates GALIC, AILIC, and Loyal AA-
(very high claims paying ability). Moody's rates GALIC A3 (good financial
security).
Acquisitions in recent years have supplemented AAG's internal growth as the
assets of the holding company and its operating subsidiaries have increased
from $4.5 billion at the end of 1992 to approximately $7.5 billion at the
end of 1999. Premiums over the last five years were as follows (in
millions):
Premiums*
Insurance Product 1999 1998 1997 1996 1995
Annuities $588 $521 $489 $540 $457
Life and health 126 104 42 43 2
$714 $625 $531 $583 $459
* Table does not include premiums of subsidiaries or divisions until
their first full year following acquisition or formation. All periods
exclude premiums of subsidiaries sold.
In October 1999, AAG acquired United Teacher Associates. UTA provides
retired and active teachers with supplemental health products and retirement
annuities, and purchases blocks of insurance policies from other insurance
companies.
In July 1999, AAG acquired Consolidated Financial Corporation, an insurance
agency. Consolidated Financial historically has been one of the top 10
sellers of AAG's annuity products.
In February 1999, AAG acquired Great American Life Insurance Company of New
York (formerly known as Old Republic Life Insurance Company of New York) to
facilitate AAG's entry into the New York market.
In September 1998, AAG sold its Funeral Services Division. This division,
which included American Memorial Life Insurance Company and Arkansas
National Life Insurance Company, had assets of approximately $1 billion as
of September 30, 1998 and 1997 premiums of $111 million.
1
Retirement Products
AAG's principal retirement products are Flexible Premium Deferred Annuities
("FPDAs") and Single Premium Deferred Annuities ("SPDAs"). Annuities are
long-term retirement saving instruments that benefit from income 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. 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.
The following table (in millions) presents combined financial information
concerning AAG's principal annuity subsidiaries.
Generally Accepted Accounting Principles ("GAAP") Basis
1999 1998 1997 1996 1995
Total assets $6,657 $6,549 $6,289 $5,942 $5,611
Fixed annuity reserves 5,349 5,396 5,355 5,211 4,920
Variable annuity reserves 354 120 37 3 -
Stockholder's equity 801 862 770 658 623
Statutory Accounting Principles Basis
1999 1998 1997 1996 1995
Total assets $6,493 $6,159 $5,977 $5,760 $5,417
Fixed annuity reserves 5,564 5,538 5,469 5,302 4,977
Variable annuity reserves 354 120 37 3 -
Capital and surplus 404 350 317 285 273
Asset valuation reserve(a) 67 63 65 91 90
Interest maintenance reserve(a) 10 21 24 25 32
Annuity receipts:
Flexible premium:
First year $ 55 $ 45 $ 38 $ 36 $ 42
Renewal 145 149 160 182 196
200 194 198 218 238
Single premium 388 327 291 322 219
Total annuity receipts $ 588 $ 521 $ 489 $ 540 $ 457
(a) Allocation of surplus.
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.
2
Premiums have increased over the last few years due primarily to the
introduction of products linked to the performance of the stock market
(equity-indexed and variable annuities). Sales of these products have more
than offset the decline in renewal premiums on traditional fixed policies.
Single premium annuity receipts in 1997 reflect the decrease of business
written by a single agency from $99 million in 1996 to $23 million in 1997.
AAG is no longer writing business through this agency.
Annuity contracts are generally classified as either fixed rate (including
equity-indexed) or variable. The following table presents premiums by
classification:
Premiums 1999 1998 1997 1996 1995
Traditional fixed 55% 72% 83% 98% 100%
Variable 35 17 9 * -
Equity-indexed 10 11 8 2 -
100% 100% 100% 100% 100%
* less than 1%
With a traditional 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 subject to any guaranteed minimum interest crediting rates in
the policy.
The Company seeks to maintain a desired spread between the yield on its
investment portfolio and the rate it credits to its fixed rate annuities.
AAG 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.
All of AAG's traditional fixed rate annuities offer a minimum interest rate
guarantee of 3% or 4%; the majority permit AAG to change the crediting rate
at any time (subject to the minimum guaranteed interest rates). In
determining the frequency and extent of changes in the crediting rate, AAG
takes into account the economic environment and the relative competitive
position of its products.
Over the last few years, traditional fixed rate annuities have met
substantial competition from mutual funds and other equity-based
investments. In response, AAG began offering variable annuities and equity-
indexed annuities. 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. Premiums directed to the variable
options in policies issued by AAG are invested in funds managed by various
independent investment managers. AAG earns a fee on amounts deposited into
variable accounts. Policyholders may also choose to direct all or a portion
of their premiums to various fixed rate options, in which case AAG earns a
spread on amounts deposited.
An equity-indexed fixed annuity provides policyholders with a crediting rate
tied, in part, to the performance of an existing stock market index while
protecting them against the related downside risk through a guarantee of
principal. AAG hedges the equity-based risk component of this product
through the purchase of call options on the appropriate index. These
options are designed to offset substantially all of the increases in the
liabilities associated with equity-indexed annuities. AAG has adopted
guidelines for approving counterparties (option issuers), counterparty
selection standards and counterparty credit exposure limits. At December
31, 1999, all counterparties to AAG's call options were rated Class 1
(highest) by the National Association of Insurance Commissioners ("NAIC").
3
The following table reflects the geographical distribution of annuity
premiums in 1999 compared to 1995.
1999 1995 1999 1995
California 29% 19% Minnesota 4% 4%
Ohio 7 6 New Jersey 4 4
Washington 7 6 Texas 4 5
Florida 5 7 North Carolina 3 6
Massachusetts 5 6 All others 28 31
Michigan 4 6 100% 100%
AAG's FPDAs are sold primarily to employees of qualified not-for-profit
organizations under Section 403(b) of the Internal Revenue Code. Employees
of these 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 from other qualified investments. Federal income
taxes are not payable on contributions or earnings until amounts are
withdrawn.
Historically, the Company's principal marketing focus had been on sales to
employees of educational institutions in the kindergarten through high
school ("K-12") segment. However, sales of non-qualified annuities have
begun to represent an increasing percentage of premiums as AAG has developed
products and distribution channels targeted to the non-qualified markets.
In 1999, non-qualified premiums represented 30% of total premiums sold
compared to 15% in 1995.
AAG distributes its annuity products through more than 100 managing general
agents ("MGAs") who, in turn, direct approximately 1,000 actively producing
independent agents. One marketing organization wrote approximately 11% of
AAG's annuity premiums in 1999. No other organization wrote more than 5% in
1999.
AAG seeks to attract and retain agents who are experienced, highly motivated
and who consistently sell a high volume of the types of annuities offered by
the Company. Toward this end, AAG maintains a "President's Advisory
Council" consisting of leading producers who market primarily AAG products.
The President's Advisory Council serves as a major influence on new product
design and marketing strategy.
To extend the distribution of its annuities to a broader customer base, AAG
developed a personal producing general agent ("PPGA") distribution system.
More than 100 PPGAs are contracted to sell annuities in those territories
not served by an MGA.
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.
In the last several years, AAG has developed several organizations to
distribute its financial services and products to markets not previously
serviced by AAG's distribution system. AAG Securities, Inc. is a
broker/dealer licensed in all 50 states to sell stocks, bonds, options,
mutual funds and variable insurance contracts through independent
representatives and financial institutions. AAG Securities also acts as the
principal underwriter and distributor for the Company's variable annuity
products.
4
AAG designs its products with certain provisions to encourage policyholders
to maintain their funds with AAG for at least five to ten years. Partly due
to these features, annuity surrenders have averaged less than 10% 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 product groups over the past five years.
Persistency Rates
Product Group 1999 1998 1997 1996 1995
Flexible premium 89% 88% 89% 90% 91%
Single premium 89 88 90 92 94
Persistency rates are affected by many of the same factors that affect
annuity sales. Although the recent stock market and interest rate
environment have affected persistency in the Company's fixed rate annuities,
management believes that its persistency rate has benefited from the two-
tier design of certain of its 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 competitive long-term
interest rates. At December 31, 1999, two-tier annuities accounted for less
than half of the Company's fixed annuity reserves, compared to almost 90% at
the beginning of 1995.
In 1999, almost three-fourths of fixed annuity premiums received were on
single-tier policies compared to 60% in 1995. After the initial surrender
charges have been reduced to zero, single-tier annuities carry one value
whether the policy is surrendered or annuitized.
AAG is licensed to sell its fixed annuity products in all 50 states; it is
licensed to sell its variable products in all states except New Hampshire
and Vermont. At December 31, 1999, AAG had approximately 280,000 annuity
policies in force. The retirement products group employs over 400 people in
the United States (primarily in Cincinnati) and over 150 programmers and
administrative people in India.
Life, Accident and Health Products
AAG offers a variety of life, accident and health products through Loyal,
GAPR and GALIC's Life Division. This group produced over $120 million of
statutory premiums in 1999. At year end 1999 it had assets of over $640
million. It also had more than 740,000 policies and $11.9 billion of life
insurance in force.
5
Loyal offers a variety of life and supplemental health insurance products
that are normally sold on the basis of a fixed dollar amount per pay period.
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
principal products sold by Loyal include cancer, universal life, traditional
whole life, hospital indemnity and short-term disability insurance. Loyal's
marketing strategy emphasizes third party sponsorship to assist in its
selling process. In the payroll deduction market, Loyal's products are
presented by marketing companies who provide job-site presentations 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, job-site or lobby sales. Loyal employs approximately 140 people,
primarily in Cincinnati.
GAPR sells in-home service life and supplemental health products through a
network of company-employed agents. Ordinary life, cancer, credit and group
life products are sold through independent agents. GAPR employs
approximately 600 people in Puerto Rico, including 440 company-employed
agents.
In December 1997, GALIC's Life Division began offering term, universal and
whole life insurance products through national marketing organizations. In
1999, the Life Division had over 6,000 agents write at least one policy.
The Life Division employs approximately 180 people in Cincinnati.
In October 1999, AAG acquired United Teacher Associates. UTA provides
active and retired teachers with supplemental health products and annuities,
and purchases blocks of insurance policies from other insurance companies.
UTA produced over $64 million of statutory premiums in 1999. At year end
1999, it had assets of nearly $300 million and more than 155,000 policies in
force. UTA employs approximately 160 people in Austin, Texas.
In late 1999, AAG began offering long-term care products.
Sale of Funeral Services Division
In September 1998, AAG sold its Funeral Services Division for approximately
$165 million in cash, realizing a $14.8 million after-tax gain. The Funeral
Services Division provided life insurance and annuities to fund pre-arranged
funerals, as well as administrative services for pre-arranged funeral
trusts. This division included American Memorial Life Insurance Company
(acquired in 1995) and Arkansas National Life Insurance Company (acquired in
1998).
Investments
Investments comprise almost 90% of the Company's assets (excluding variable
annuity assets) and are the principal source of income. Fixed income
investments (consisting of fixed maturity investments, policy loans,
mortgage loans and short-term investments) comprise 98% of AAG's investment
portfolio. Risks inherent in
connection with fixed income securities include market price volatility and
loss upon default. Factors which can affect the market price of these
securities
include: (i) changes in market interest rates; (ii) creditworthiness of
issuers; (iii) the number of market makers and investors and (iv) defaults
by major issuers of securities.
6
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 the domiciliary jurisdiction of each of AAG's life
insurance subsidiaries 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.
The 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 1999
1 AAA, AA, A 70%
2 BBB 21
Total investment grade 91
3 BB 4
4 B 4
5 CCC, CC, C 1
6 D *
Total non-investment grade 9
Total fixed maturities 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 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, 1999, the average maturity of AAG's fixed maturity
investments was approximately six years (including mortgage-backed
securities, which also had an estimated average life of approximately six
years). The table below sets forth the maturities of the Company's fixed
maturity investments based on their market value.
Maturity
One year or less 5%
After one year through five years 23
After five years through ten years 23
After ten years 17
68
Mortgage-backed securities 32
100%
7
The following table shows the performance of AAG's investment portfolio,
excluding equity investments in an affiliate (dollars in millions).
1999 1998 1997
Average cash and investments at cost$6,394 $6,535 $6,417
Gross investment income 501 512 499
Realized gains (losses) (7) 11 5
Percentage earned:
Excluding realized gains (losses) 7.8% 7.8% 7.8%
Including realized gains (losses) 7.7% 8.0% 7.9%
Independent Ratings
The Company's principal insurance subsidiaries ("Insurance Companies") are
rated by Standard & Poor's, A.M. Best, Duff & Phelps and Moody's. GALIC is
rated A3 (good financial security) by Moody's. Such ratings are generally
based on items of concern to policyholders and agents and are not directed
toward the protection of investors.
Standard
& Poor's A.M. Best Duff & Phelps
GALIC A+ (Strong) A (Excellent) AA- (Very high)
AILIC A+ (Strong) A (Excellent) AA- (Very high)
Loyal A+ (Strong) A (Excellent) AA- (Very high)
GAPR Not rated A (Excellent) Not rated
UTA Not rated A- (Excellent) Not rated
In evaluating a company, independent rating agencies review such factors as
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.
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 believes that a rating in the "A" category by at least
one rating agency is necessary to successfully market tax-deferred annuities
to public education employees and other not-for-profit groups.
AAG's insurance entities also compete in markets other than the sale of tax-
deferred annuities. While ratings are an important competitive factor,
management believes that these entities can successfully compete in these
markets with their respective ratings.
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.
8
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 and agents; (v) product design (including interest
rates credited and premium rates charged) and (vi) commissions. Since
policies are marketed and distributed primarily through independent agents
(except at GAPR), the Insurance Companies must also compete for agents.
No single insurer dominates the markets in which the Insurance Companies
compete. Competitors include: (i) individual insurers and insurance groups;
(ii) mutual funds and (iii) other financial institutions. 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. Legislation adopted in 1999 substantially eliminated restrictions
on affiliations among insurance companies, banks and securities firms. It
is too early to predict what impact this legislation will have in the
markets in which the Insurance Companies compete.
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.
The NAIC is an organization comprised of the chief insurance regulators for
each of the 50 states, the District of Columbia and the four U.S.
territories. 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.
9
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
(including GALIC, AILIC and Loyal) 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.
The NAIC has under consideration numerous proposals related to the marketing
and sale of annuities and other types of insurance products. It is too
early to predict whether any of these proposals will be adopted and whether
states will make these provisions part of their laws.
Many of the Company's other subsidiaries are subject to regulation by
various state, federal and other regulatory authorities. Several
subsidiaries are insurance agencies and as such are regulated by state
insurance departments. AAG Securities is subject to the rules of the
National Association of Securities Dealers, Inc. and the securities laws of
the states in which it transacts business. AILIC's variable insurance
products are subject to the rules and regulations of the Securities and
Exchange Commission and "Blue Sky" laws of the states in which their
products are sold.
Effective January 1, 2000, a new statutory reserving regulation, commonly
referred to as Regulation XXX, was adopted by several states. It is
anticipated that many other states will adopt similar versions of this
regulation in the near future. The regulation increases the reserves a
company must hold on certain types of policies issued after the effective
date. The Company has entered into a reinsurance arrangement to reduce the
impact of this new requirement. The Company does not believe this
requirement will have a material impact on the operations or financial
results of the Life Division.
Legislation adopted in 1999 substantially eliminated restrictions on
affiliations among insurance companies, banks and securities firms. It is
too early to predict what impact this legislation will have in the markets
in which the insurance companies compete.
Employees
As of December 31, 1999, AAG and its subsidiaries employed about 1,900
people, including approximately 440 company-employed agents in Puerto Rico.
None of the employees is represented by a labor union. AAG believes that
its employee relations are satisfactory.
Foreign Operations
In 1998, AAG opened an office in Bangalore, India. Employees located at
this office perform computer programming and certain back office functions
for the Company's insurance operations. Management believes there are
sufficient resources available at domestic locations should there be any
interruption in the operations at this office and as a result no materially
adverse impact would result from any such interruption.
AAG also owns an insurance company in Puerto Rico (see Item 1 - "Life,
Accident and Health Products").
10
ITEM 2
Properties
Location
AAG, GALIC and Loyal rent office space in Cincinnati, Ohio totaling
approximately 230,000 square feet under leases expiring primarily in 2006
through 2008. In connection with AAG's realignment, the Company intends to
sublease up to 60,000 square feet of its excess office space to others.
Several of the Company's subsidiaries lease marketing and administrative
offices in locations throughout the United States.
GAPR rents office space in Puerto Rico totaling approximately 70,000 square
feet under leases expiring primarily in 2001 through 2005.
American Data Source India Private Limited, a software development and
administrative services subsidiary of AAG, rents space in Bangalore, India
totaling approximately 30,000 square feet under leases expiring primarily in
2001.
AAG owns a building in Austin, Texas totaling approximately 40,000 square
feet, the vast majority of which is used by UTA for its own operations.
The remainder of the space is leased to other tenants.
Management believes that its corporate offices are generally well maintained
and adequate for the Company's present needs.
AAG owns facilities related to its former manufacturing operations totaling
approximately 200,000 square feet in North Adams, Massachusetts and 60,000
square feet in Longwood, Florida. These facilities are currently being
leased to companies using them for manufacturing and other operations.
11
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
Technologies, Inc.) for the investigation and clean-up of hazardous
substances disposed of or spilled by its former 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 clean-up 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 March 2000, a jury in Dallas, Texas, awarded a verdict against GALIC in
the amount of $11.2 million in a lawsuit brought by two former agents of
GALIC (Martin v. Great American Life Insurance Company, 191st District Court
of Dallas County, Texas, Case No. 96-04843). The Company believes that the
verdict was contrary to both the facts and the law and expects to prevail on
appeal. The ultimate outcome of this case will not have a material adverse
impact on the financial condition of the Company.
Great American Life Insurance Company ("GALIC") was named a defendant in
purported class action lawsuits (Woodward v. Great American Life Insurance
Company, Hamilton County Court of Common Pleas, Case No. A9900587, filed
February 2, 1999 and Marshak v. Great American Life Insurance Company,
Harris County, Texas filed June 18, 1999). The complaints seek unspecified
money damages (the Texas complaint also seeks declaratory relief) based on
alleged (i) failure of GALIC to allow the tax-free transfer of the annuity
value of certain annuities to other product providers, and (ii) misleading
and fraudulent disclosures
12
concerning GALIC's interest crediting practices. The Texas complaint also
alleges that the sale of annuities to tax-qualified plans was inappropriate.
The Plaintiffs in the Texas action have suspended the case pending
development in the Ohio case. GALIC believes it has meritorious defenses
but it is not possible to predict the ultimate impact of this action on 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 March 1, 2000, there were
approximately 6,700 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.
1999 1998
High Low High Low
First quarter $24.50 $21.13 $23.44 $21.75
Second quarter 24.50 21.19 25.38 22.38
Third quarter 25.00 21.50 24.50 21.88
Fourth quarter 21.63 15.63 23.81 22.06
The Company paid annual common dividends of $.10 per share in 1999 and 1998.
Although no future dividend policy has been determined, management believes
the Company will continue to have the capability to pay similar dividend
amounts.
AFG beneficially owned approximately 83% of AAG's Common Stock at March 1,
2000.
13
ITEM 6
Selected Financial Data
The following financial data has 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 acquisitions of American Memorial and
Loyal in November 1995, GAPR in December 1997 and United Teacher Associates
in October 1999 and the sale of the Funeral Services Division in September
1998 (in millions, except per share amounts).
Income Statement Data: 1999 1998 1997 1996 1995
Total revenues $635.9 $727.9 $636.3 $579.5 $439.5
Operating earnings before
income taxes $ 92.0 $143.9 $103.4 $ 80.7 $ 90.6
Income from continuing operations $ 63.5 $ 97.5 $ 71.4 $ 61.1 $ 58.7
Loss from discontinued operations - - - - (3.2)
Extraordinary items - (0.8) (1.5) (6.0) (0.2)
Change in accounting principle (4.7) - - - -
Net income $ 58.8 $ 96.7 $ 69.9 $ 55.1 $ 55.3
Basic earnings per common share:
Continuing operations $1.50 $2.27 $1.63 $1.39 $1.45
Discontinued operations - - - - (0.08)
Extraordinary items - (0.02) (0.03) (0.14) -
Change in accounting principle (0.11) - - - -
Net income $1.39 $2.25 $1.60 $1.25 $1.37
Diluted earnings per common share:
Continuing operations $1.48 $2.23 $1.61 $1.39 $1.45
Discontinued operations - - - - (0.08)
Extraordinary items - (0.02) (0.03) (0.14) -
Change in accounting principle (0.11) - - - -
Net income $1.37 $2.21 $1.58 $1.25 $1.37
Cash dividends per common share $0.10 $0.10 $0.10 $0.08 $0.07
Balance Sheet Data at year end:
Total assets $7,530.7$7,190.4$7,710.3$7,024.1$6,611.0
Notes payable 201.3 131.0 135.8 114.9 167.7
Mandatorily redeemable preferred
securities of subsidiary trusts 219.6 225.0 225.0 75.0 -
Net unrealized gains (losses)
included in stockholders' equity (52.9) 160.1 133.2 61.8 89.3
Total stockholders' equity 525.7 688.7 583.9 486.5 429.3
14
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 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.
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.
1999 1998 1997
Earnings to fixed charges 3.9 5.6 5.1
Consolidated debt to capital 27% 23% 25%
For purposes of the calculations of consolidated debt to capital,
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 December 31, 1999, the capital ratio of
each of AAG's principal insurance subsidiaries was at least 4.0 times its
authorized control level RBC.
15
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 February
29, 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 in 2000 without prior
regulatory approval is $40.4 million.
During 1999, AAG and its subsidiaries used bank borrowings and cash on hand
to make acquisitions totalling approximately $130 million and to repurchase
$5 million of its preferred securities and $5 million of Common Stock.
In 1998, AAG and AAG Holding retired $128 million of debt (including $24
million held by affiliates) and $15 million of Common Stock using proceeds
from a public debt offering and cash on hand.
The September 1998 sale of its Funeral Services Division netted
approximately $165 million in cash ($145 million after-tax). The majority
of the proceeds were received by AAG's insurance subsidiaries.
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, 1999, 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.
AAG invests primarily in fixed income investments which, including loans and
short-term investments, comprised 98% of its investment portfolio at
December 31, 1999. 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, 1999, AAG had approximately $127 million in net unrealized
losses on its fixed maturity portfolio compared to net unrealized gains of
$240 million at December 31, 1998. This decline in value, representing
approximately 6% of AAG's bond portfolio, resulted primarily from an
increase in the general level of market interest rates. All of AAG's fixed
maturity investments are classified as "available for sale."
At December 31, 1999, AAG's mortgage-backed securities ("MBSs") portfolio
represented less than 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.
16
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.
Uncertainties
IT Initiative From inception of the Year 2000 Project in 1997, AAG
estimates that it incurred approximately $27 million in Year 2000 costs,
including capitalized costs of $15.2 million, to successfully ensure its
systems function properly in the year 2000 and beyond. Although a
significant portion of the costs charged to expense were related primarily
to allowing systems to continue to execute properly, the Project also
included the upgrading of a significant number of systems and enhanced the
knowledge of virtually all existing systems.
In the third quarter of 1999, AFG's newly hired Chief Information Officer
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.
Litigation In March 2000, a jury in Dallas, Texas, awarded a verdict
against GALIC in the amount of $11.2 million in a lawsuit brought by two
former agents of GALIC. The Company believes that the verdict was contrary
to both the facts and the law and expects to prevail on appeal. The
ultimate outcome of this case will not have a material adverse impact on the
financial condition of the Company.
Exposure to Market Risk Market risk represents the potential
economic loss arising from adverse changes in the fair value of financial
instruments. AAG's exposures to market risk relate primarily to its fixed
maturity investment portfolio, annuity contracts and long-term debt which
are exposed to interest rate risk. AAG's investments in equity securities
and derivatives were not significant at December 31, 1999.
Fixed Maturity Portfolio The fair value of AAG's fixed maturity
portfolio is directly impacted by changes in market interest rates. AAG's
fixed maturity portfolio is comprised of substantially all fixed rate
investments with primarily short-term and intermediate-term maturities.
This practice allows flexibility in reacting to fluctuations of interest
rates. AAG's portfolio is managed with an attempt to achieve an adequate
risk-adjusted return while maintaining sufficient liquidity to meet
policyholder obligations. AAG uses various actuarial models in an attempt
to align the duration of invested assets to the projected cash flows of
policyholder liabilities.
17
The following table provides information about AAG's fixed maturity
investments at December 31, 1999 and 1998, that are sensitive to interest
rate risk. These tables show (dollars in millions) principal cash flows and
related weighted-average interest rates by expected maturity date for each
of the five subsequent years and for all years thereafter. Callable bonds
and notes are included based on call date or maturity date depending upon
which date produces the most conservative yield. MBSs and sinking fund
issues are included based on maturity year adjusted for expected payment
patterns. Actual cash flows may differ from those expected.
December 31, 1999 December 31, 1998
Principal Principal
Cash Flows Rate Cash Flows Rate
2000 $ 350 7.9% 1999 $480 8.2%
2001 390 8.3 2000 550 7.8
2002 560 8.0 2001 660 8.3
2003 690 7.6 2002 700 7.8
2004 670 7.8 2003 780 7.5
Thereafter 3,490 7.7 Thereafter 2,680 7.6
Total $6,150 7.8% $5,850 7.8%
Fair Value $5,947 $6,023
Annuity Contracts Substantially all of AAG's fixed rate annuity
contracts permit AAG to change crediting rates (subject to minimum interest
rate guarantees of 3% to 4% per annum) enabling management to react to
changes in market interest rates and maintain an adequate spread. Projected
payments in each of the next five years and for all years thereafter on
AAG's fixed annuity liabilities at December 31 are as follows (dollars in
millions):
Fair
First Second Third Fourth Fifth Thereafter Total Value
1999 $690 $620 $550 $490 $440 $2,730 $5,520 $5,371
1998 660 620 560 500 450 2,660 5,450 5,307
Nearly half of AAG's fixed annuity liabilities at December 31, 1999, were
two-tier in nature in that policyholders can receive a higher amount if they
annuitize rather than surrender their policy, even if the surrender period
has expired. Current stated crediting rates on AAG's principal fixed
annuity products range from 3% on equity-indexed annuities (before any
equity participation) to over 7% on certain new policies (including first
year bonus amounts). AAG estimates that its effective weighted-average
crediting rate over the next five years will approximate 5%. This rate
reflects actuarial assumptions as to: (i) deaths; (ii) the number of
policyholders who annuitize and receive higher credited amounts and (iii)
the number of policyholders who surrender. Actual experience and changes in
actuarial assumptions may result in different effective crediting rates than
those above.
18
Debt and Preferred Securities The following table shows scheduled
principal payments on fixed-rate long-term debt of AAG and related weighted
average interest rates for the next five years and for all years thereafter
(in millions):
December 31, 1999 December 31, 1998
Scheduled Scheduled
Principal Principal
Payments Rate Payments Rate
2000 through 2004 * 1999 through 2003 *
Thereafter $101.2 6.9% Thereafter $100.8 6.9%
Total $104.3 6.8% $104.0 6.8%
Fair Value $ 94.4 $ 97.0
* Less than $1 million each year
At December 31, 1999 and 1998, respectively, AAG and its subsidiaries had
$97 million and $27 million in variable-rate debt maturing primarily in 2002
and 2003. The weighted average interest rate on AAG's variable-rate debt
was 6.8% at December 31, 1999, compared to 6.1% at December 31, 1998. There
were $220 million and $225 million of subsidiary trust preferred securities
outstanding at December 31, 1999, and 1998, none of which are scheduled for
maturity or mandatory redemption during the next five years; the weighted
average interest rate on these trust securities at both dates was 8.5%.
Results of Operations
General The comparability of AAG's financial statement is affected by the
acquisitions and sale of subsidiaries discussed in Note C to its financial
statements.
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. However, core earnings should not be considered a
substitute for net income as an indication of AAG's overall performance.
The following table (in millions, except per share amounts) compares the
Company's core earnings over the past three years.
AAG (Consolidated): 1999 1998 1997
Revenues per income statement $635.9 $727.9 $636.3
Less realized losses (gains) on sales of
investments and subsidiaries 7.1 (32.3) (5.2)
Core operating revenues 643.0 695.6 631.1
Expenses per income statement 543.9 584.0 532.9
Less provision for realignment expenses (10.0) - -
Less provision for relocation expenses - - (4.0)
Core operating expenses 533.9 584.0 528.9
Core operating earnings before tax 109.1 111.6 102.2
Income tax expense 32.5 35.4 32.1
Net core operating earnings $ 76.6 $ 76.2 $ 70.1
Net core operating earnings per common
share (basic) $ 1.81 $ 1.77 $ 1.60
Net core operating earnings per common
share (diluted) $ 1.78 $ 1.74 $ 1.58
19
The following table summarizes AAG's annuity sales (in millions).
1999 1998 1997
Annuity Premiums:
Single premium fixed rate annuities $230 $260 $254
Flexible premium fixed rate annuities 153 172 192
Single premium variable annuities 158 67 37
Flexible premium variable annuities 47 22 6
$588 $521 $489
Sales of annuity products linked to the performance of the stock market
(equity-indexed and variable annuities) helped offset a decrease in sales of
traditional fixed annuities.
Life, Accident and Health Premiums and Benefits
The following table summarizes AAG's life, accident and health premiums and
benefits as shown in the Consolidated Income Statement (in millions).
Premiums 1999 1998 1997
Life insurance $ 72 $ 62 $ 23
Accident and health insurance 52 30 21
124 92 44
Funeral Services Division - 78 78
$124 $170 $122
Benefits
Life insurance $ 57 $ 45 $ 22
Accident and health insurance 29 14 11
86 59 33
Funeral Services Division - 73 77
$ 86 $132 $110
Life, accident and health premiums and benefits increased (excluding Funeral
Services Division sold in 1998) in 1999 due primarily to the acquisition of
United Teacher Associates in October 1999 and increased sales by GALIC's
Life Division. Increases in life, accident and health premiums and benefits
in 1998 reflect primarily the acquisition of GAPR.
Net Investment Income Net investment income decreased 2% in 1999 resulting
primarily from less invested assets due to the sale of the Funeral Services
Division. Net investment income increased 3% in 1998, reflecting an
increase in the Company's average fixed maturity investment base. This
increase was partially offset by decreasing market interest rates and the
sale of AAG's Funeral Services Division.
Realized Gains In September 1998, AAG sold its Funeral Services Division to
that Division's biggest customer, Service Corporation International. This
customer accounted for approximately one-half of American Memorial's sales
in 1997.
Individual securities are sold from time to time as market opportunities
appear to present optimal situations under AAG's investment strategies.
20
Other Income Other income increased in 1999 and 1998 due primarily to
increased revenues from AAG's agency and brokerage subsidiaries, additional
variable annuity fees and increased life insurance policy fees.
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% 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. While management believes the
interest rate and stock market environment over the last several years has
contributed to an increase in annuitizations and surrenders, the Company's
persistency rate remains approximately 90%.
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. The
decrease in annuity benefits from 1997 to 1998 reflects both decreases in
crediting rates and changes in actuarial assumptions.
Insurance Acquisition Expenses Insurance acquisition expenses include
amortization of deferred policy acquisition costs ("DPAC") as well as
commissions on sales of life insurance products. The decrease in 1999
reflects the sale of the Funeral Services Division. Insurance acquisition
expenses also include amortization of the present value of future profits of
businesses acquired amounting to $7.7 million in 1999, $10.6 million in 1998
and $8.1 million in 1997.
Interest and Other Debt Expenses Interest and other debt expenses increased
10% in 1999 and 21% in 1998 due to higher average amounts outstanding.
Issuances of debt and preferred securities have been used to fund
acquisitions and to maintain a portfolio of investments at AAG (parent).
Provision for Realignment Expenses In the fourth quarter of 1999, AAG
recorded a charge for estimated expenses related to realignment within the
Company's operating units. The charge is primarily the result of the
Company's decision to replace a number of its current computer operating
systems with a single system. The charge also includes various expenses
associated with the elimination in 1999 of redundant positions.
Provision for Relocation Expenses In 1997, AAG relocated most of the
operations of Loyal from Mobile, Alabama to Cincinnati, Ohio to more closely
coordinate its efforts with those of other AAG operations. The estimated
cost of the relocation ($4.0 million) was expensed in 1997.
Other Expenses Other expenses increased 14% in 1999, reflecting: (i) higher
personnel costs and consulting expenses (related primarily to expanded Year
2000 testing and other systems costs); (ii) increased costs associated with
new business initiatives and acquisitions and (iii) operating expenses of
subsidiaries acquired. These increases were partially offset by the absence
of expenses resulting from the sale of the Funeral Services Division. Other
expenses increased 21% in 1998, reflecting primarily: (i) operating expenses
of GAPR, which was acquired in December 1997; (ii) higher depreciation and
amortization costs and (iii) increases in personnel costs.
21
Income Taxes AAG's effective tax rate reflects reductions of the valuation
allowance associated with certain deferred tax assets (See Note K).
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 (loss) from continuing
operations before unusual items of ($49 million) in 1999, $55 million in
1998 and $0.3 million in 1997. Chiquita reported net income (loss) before
extraordinary items of ($58 million) in 1999, ($18 million) in 1998 and $0.3
million in 1997. Included in AAG's equity in Chiquita's 1998 and 1997
earnings are gains attributable to Chiquita's issuance of common stock.
Extraordinary Items Extraordinary items reflect AAG's losses, net of tax,
on retirements of its debt.
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.
Recent Accounting Standards The following accounting standards have been
implemented by AAG in 1998 and 1999 or will be implemented in 2001. The
implementation of these standards is discussed under various subheadings of
Note B to the Financial Statements (segment information is discussed in Note
D); effects of each are shown in the relevant Notes. Implementation of
Statement of Financial Accounting Standards ("SFAS") No. 133 in the first
quarter of 2001 is not expected to have a significant effect on AAG.
Accounting Year
Standard Subject of Standard Implemented
SFAS #130 Comprehensive Income 1998
SFAS #131 Segment Information 1998
SOP 98-5 Start-Up Costs 1999
SFAS #133 Derivatives 2001
Other standards issued in recent years did not apply to AAG or had only
negligible effects on AAG.
ITEM 7A
Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7A is included in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
22
ITEM 8
Financial Statements and Supplementary Data
PAGE
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1999 and 1998 F-2
Consolidated Income Statement:
Years Ended December 31, 1999, 1998 and 1997 F-3
Consolidated Statement of Changes in Stockholders' Equity:
Years Ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statement of Cash Flows:
Years Ended December 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
"Selected Quarterly Financial Data" has been included in Note Q to the
Consolidated Financial Statements.
Please refer to "Forward Looking Statements" following the index in front of
this Form 10-K.
PART III
The information required by the following Items will be included in AAG's
definitive Proxy Statement for the 2000 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
23
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Annuity Group, Inc.
We have audited the accompanying consolidated balance sheet of American
Annuity Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1999. 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 auditing standards generally
accepted in the United States. 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,
1999 and 1998, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the
United States. 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.
Ernst & Young LLP
Cincinnati, Ohio
March 9, 2000
F-1
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
December 31,
1999 1998
Assets
Investments:
Fixed maturities - at market
(amortized cost - $6,073.2 and
$5,782.8) $5,946.7 $6,023.1
Equity securities - at market (cost - $43.6
and $46.7) 72.3 85.2
Investment in affiliate 12.3 15.9
Mortgage loans on real estate 16.0 40.1
Real estate 73.6 55.1
Policy loans 217.2 220.5
Short-term investments 80.2 73.6
Total investments 6,418.3 6,513.5
Cash 39.4 59.4
Accrued investment income 98.0 97.6
Unamortized insurance acquisition costs, net 406.2 247.4
Other assets 214.4 152.5
Variable annuity assets (separate accounts) 354.4 120.0
$7,530.7 $7,190.4
Liabilities and Capital
Annuity benefits accumulated $5,519.5 $5,449.6
Life, accident and health reserves 520.6 341.6
Notes payable 201.3 131.0
Payable to affiliates, net 69.8 54.1
Deferred taxes on unrealized gains (losses) (27.2) 84.3
Accounts payable, accrued expenses and other
liabilities 147.0 96.1
Variable annuity liabilities
(separate accounts) 354.4 120.0
Total liabilities 6,785.4 6,276.7
Mandatorily redeemable preferred securities
of subsidiary trusts 219.6 225.0
Stockholders' Equity:
Common Stock, $1 par value
-100,000,000 shares authorized
- 42,374,086 and 42,576,933 shares
outstanding 42.4 42.6
Capital surplus 349.7 354.1
Retained earnings 186.5 131.9
Unrealized gains (losses) on marketable
securities, net (52.9) 160.1
Total stockholders' equity 525.7 688.7
$7,530.7 $7,190.4
See Notes to Consolidated Financial Statements.
F-2
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(In millions, except per share amounts)
Year ended December 31,
1999 1998 1997
Revenues:
Life, accident and health premiums $123.9 $170.4 $121.5
Net investment income 496.3 506.9 494.3
Realized gains (losses) on sales of:
Investments (7.1) 10.7 5.2
Subsidiaries - 21.6 -
Other income 22.8 18.3 15.3
635.9 727.9 636.3
Costs and Expenses:
Annuity benefits 262.6 261.7 278.8
Life, accident and health benefits 86.4 131.7 110.1
Insurance acquisition expenses 45.0 65.0 36.3
Trust preferred distribution requirement 18.6 19.0 15.5
Interest and other debt expenses 11.9 10.8 8.9
Provision for realignment expenses 10.0 - -
Provision for relocation expenses - - 4.0
Other expenses 109.4 95.8 79.3
543.9 584.0 532.9
Operating earnings before income taxes 92.0 143.9 103.4
Provision for income taxes 26.5 46.1 32.5
Net operating earnings 65.5 97.8 70.9
Equity in earnings of affiliate,
net of tax (2.0) (0.3) 0.5
Income before extraordinary items and
accounting change 63.5 97.5 71.4
Extraordinary items, net of tax - (0.8) (1.5)
Cumulative effect of accounting change,
net of tax (4.7) - -
Net Income $ 58.8 $ 96.7 $ 69.9
Preferred dividend requirement - - 1.0
Net income applicable to Common Stock $ 58.8 $ 96.7 $ 68.9
Basic earnings (loss) per common share:
Income before extraordinary items and
accounting change $1.50 $2.27 $1.63
Extraordinary items - (0.02) (0.03)
Accounting change (0.11) - -
Net income $1.39 $2.25 $1.60
Diluted earnings (loss) per common share:
Income before extraordinary items and
accounting change $1.48 $2.23 $1.61
Extraordinary items - (0.02) (0.03)
Accounting change (0.11) - -
Net income $1.37 $2.21 $1.58
Average number of common shares:
Basic 42.4 43.0 43.2
Diluted 43.0 43.7 43.7
Cash dividends per common share $0.10 $0.10 $0.10
See Notes to Consolidated Financial Statements.
F-3
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions)
Year ended December 31,
1999 1998 1997
Preferred Stock:
Balance at beginning of year $ - $ - $ 49.0
Preferred Stock retired - - (49.0)
Balance at end of year $ - $ - $ -
Common Stock:
Balance at beginning of year $ 42.6 $ 43.2 $ 43.3
Common Stock retired (0.2) (0.6) (0.1)
Balance at end of year $ 42.4 $ 42.6 $ 43.2
Capital Surplus:
Balance at beginning of year $354.1 $368.0 $358.5
Capital contribution - - 9.3
Common Stock issued 0.6 0.4 0.2
Common Stock retired (5.0) (14.3) (1.0)
Preferred Stock retired - - 2.0
Preferred dividends declared - - (1.0)
Balance at end of year $349.7 $354.1 $368.0
Retained Earnings:
Balance at beginning of year $131.9 $ 39.5 ($ 26.1)
Net income 58.8 96.7 69.9
Common dividends declared (4.2) (4.3) (4.3)
Balance at end of year $186.5 $131.9 $ 39.5
Unrealized Gains (Losses), Net:
Balance at beginning of year $160.1 $133.2 $ 61.8
Change during year (213.0) 26.9 71.4
Balance at end of year ($ 52.9) $160.1 $133.2
Comprehensive Income (Loss):
Net Income $ 58.8 $ 96.7 $ 69.9
Other comprehensive income (loss) - change
in net unrealized gains (losses)
on marketable securities (213.0) 26.9 71.4
Comprehensive income (loss) ($154.2) $123.6 $141.3
See Notes to Consolidated Financial Statements.
F-4
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Year ended December 31,
1999 1998 1997
Cash Flows from Operating Activities:
Net income $ 58.8 $ 96.7 $ 69.9
Adjustments:
Extraordinary loss on prepayment of debt - 0.8 1.5
Cumulative effect of accounting change 4.7 - -
Equity in earnings of affiliate,
net of tax 2.0 0.3 (0.5)
Increase in life, accident and health
reserves 39.3 47.1 36.3
Benefits to annuity policyholders 262.6 261.7 278.8
Amortization of insurance acquisition costs 45.0 55.4 36.3
Depreciation and amortization 7.2 12.6 5.1
Realized losses (gains) 7.1 (32.3) (5.2)
Increase in insurance acquisition costs (119.4) (117.2) (72.6)
Other, net 7.3 (22.3) (38.5)
314.6 302.8 311.1
Cash Flows from Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,435.7) (1,121.9) (1,449.9)
Equity securities (7.9) (23.5) (12.5)
Real estate, mortgage loans and other assets (42.8) (25.7) (16.1)
Purchase of subsidiaries (128.7) (31.8) (51.3)
Sale of subsidiaries - 164.6 -
Cash and short-term investments of subsidiaries
acquired (sold) 66.1 (18.2) 2.6
Maturities and redemptions of fixed maturity
investments 617.6 673.0 408.2
Sales of:
Fixed maturity investments 750.4 369.5 747.6
Equity securities 11.3 6.3 5.8
Real estate, mortgage loans and other assets 42.3 20.4 20.9
Decrease (increase) in policy loans 3.8 1.5 (1.3)
(123.6) 14.2 (346.0)
Cash Flows from Financing Activities:
Fixed annuity receipts 446.4 480.6 493.7
Annuity surrenders, benefits and withdrawals (706.8) (690.4) (607.2)
Additions to notes payable 71.1 150.0 114.0
Reductions of notes payable (0.8) (156.1) (94.9)
Issuance of trust preferred securities - - 149.3
Issuance of Common Stock 0.6 0.4 -
Retirement of Common Stock (5.2) (14.9) (1.1)
Retirement of Preferred Stock - - (47.0)
Repurchase of trust preferred securities (5.5) - -
Cash dividends paid (4.2) (4.3) (5.3)
(204.4) (234.7) 1.5
Net increase (decrease) in cash and
short-term investments (13.4) 82.3 (33.4)
Beginning cash and short-term investments 133.0 50.7 84.1
Ending cash and short-term investments $ 119.6 $ 133.0 $ 50.7
See Notes to Consolidated Financial Statements.
F-5
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES
A. Description of the Company J. Stockholders' Equity
B. Summary of Significant Accounting Policies K. Income Taxes
C. Acquisitions and Sale of Subsidiaries L. Leases
D. Segments of Operations M. Earnings Per Share
E. Investments N. Contingencies
F. Investment in Affiliate O. Statutory Information
G. Unamortized Insurance Acquisition Costs P. Additional Information
H. Notes Payable Q. Quarterly Financial
I. Mandatorily Redeemable Preferred Data (Unaudited)
Securities of Subsidiary Trusts
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 December 31, 1999.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The accompanying Consolidated Financial Statements
include the accounts of AAG and its subsidiaries. Certain reclassifications
have been made to prior years to conform to the current year's presentation.
Acquisitions and sales of subsidiaries have resulted in certain differences
in the financial statements and have affected comparability between years.
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 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.
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.
F-6
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
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.
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 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.
F-7
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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, 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 its principal subsidiary, Great American Life
Insurance Company ("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 taxgroup 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
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."
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 were 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
statement of financial position 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.
F-9
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Fair Value of Financial Instruments Methods and assumptions used in
estimating fair values are described in Note P to the financial statements.
These fair values represent point-in-time estimates of value that might not
be particularly relevant in predicting AAG's future earnings or cash flows.
C. ACQUISITIONS AND SALE OF SUBSIDIARIES
In October 1999, AAG acquired United Teacher Associates Insurance Company
("UTA") for $81 million in cash, pending post-closing adjustments under
which AAG may receive as much as several million dollars. UTA provides
retired and active teachers with supplemental health products and retirement
annuities, and purchases blocks of insurance policies from other insurance
companies. UTA produced over $64 million of statutory premiums in 1999. At
year end 1999, it had assets of nearly $300 million.
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.
In December 1997, AAG acquired GAPR for approximately $50 million in cash.
On September 30, 1998, AAG sold its Funeral Services Division for
approximately $165 million in cash realizing a $14.8 million after-tax gain.
This division included American Memorial Life Insurance Company (acquired in
1995) and Arkansas National Life Insurance Company (acquired in 1998) and
had assets of approximately
$1 billion as of the sale date.
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 primarily tax-deferred annuities to
employees of primary and secondary educational institutions, hospitals and
in the non-qualified markets. More than one-fourth of AAG's retirement
annuity premiums came from California in 1997 through 1999. No other state
accounted for more than 10% of premiums. Sales from AAG's top two Managing
General Agencies accounted for 11% and 5% of retirement annuity premiums in
1999.
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 nearly 40% of AAG's life, accident and health
premiums in 1999.
Corporate and other consists primarily of AAG (parent), AAG Holding and the
Funeral Services Division.
In the first quarter of 1999, AAG implemented SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
requires segment information to be reported based on how management
internally evaluates the operating performance of its business units.
Implementation of this standard had no impact on AAG's financial position or
results of operations.
F-10
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following tables show AAG's assets, revenues and operating profit (loss)
by significant business segment (in millions):
Assets 1999 1998 1997
Retirement products $6,465.7 $6,424.6 $6,130.3
Life, accident & health:
U.S. 751.3 376.3 351.9
Puerto Rico 183.2 181.1 159.8
Corporate and other (a) 118.2 192.5 1,051.5
Investment in affiliate 12.3 15.9 16.8
Total assets per balance sheet $7,530.7 $7,190.4 $7,710.3
Revenues
Retirement products $464.4 $447.7 $448.1
Life, accident & health:
U.S. 106.6 66.9 59.7
Puerto Rico 54.7 53.3 4.5
Corporate and other (a) 17.3 127.7 118.8
Total operating revenues 643.0 695.6 631.1
Realized gains (losses) (b) (7.1) 32.3 5.2
Total revenues per income
statement $635.9 $727.9 $636.3
Operating profit (loss) - pretax
Retirement products $124.1 $115.2 $106.4
Life, accident & health:
U.S. 4.7 9.1 12.1
Puerto Rico 9.0 8.2 0.4
Corporate and other (a) (28.7) (20.9) (16.7)
Pretax earnings from operations 109.1 111.6 102.2
Realized gains (losses) (b) (7.1) 32.3 5.2
Provision for realignment expenses (c)(10.0) - -
Provision for relocation expenses - - (4.0)
Total pretax income per income
statement $ 92.0 $143.9 $103.4
(a) Decrease in "Corporate and other" reflects sale of Funeral
Services Division in 1998.
(b) Includes gain on sale of subsidiaries in 1998.
(c) Includes realignment expenses for retirement products ($1.5
million), life, accident and health ($0.4 million) and corporate
and other ($8.1 million).
F-11
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
E. INVESTMENTS
Fixed maturity investments at December 31, consisted of the following (in
millions):
1999
Amortized Market Gross Unrealized
Cost Value Gains Losses
Fixed maturities:
U. S. Government and government
agencies and authorities $ 225.3 $ 219.4 $ 1.2 ($ 7.1)
States, municipalities and
political subdivisions 90.1 86.4 0.3 (4.0)
Foreign governments 25.7 25.6 0.1 (0.2)
Public utilities 317.4 311.0 1.1 (7.5)
Mortgage-backed securities 1,928.5 1,900.9 25.4 (53.0)
All other corporate 3,466.6 3,384.9 23.7 (105.4)
Redeemable preferred stocks 19.6 18.5 0.2 (1.3)
$6,073.2 $5,946.7 $ 52.0 ($178.5)
1998
Amortized Market Gross Unrealized
Cost Value Gains Losses
Fixed maturities:
U. S. Government and government
agencies and authorities $ 218.0 $ 233.9 $ 15.9 $ -
States, municipalities and
political subdivisions 34.2 36.3 2.1 -
Foreign governments 25.8 28.0 2.2 -
Public utilities 419.0 433.3 14.5 (0.2)
Mortgage-backed securities 1,800.6 1,877.4 82.8 (6.0)
All other corporate 3,271.5 3,399.6 145.6 (17.5)
Redeemable preferred stocks 13.7 14.6 1.0 (0.1)
$5,782.8 $6,023.1 $264.1 ($ 23.8)
"Investing activities" related to fixed maturity investments included in
AAG's Consolidated Statement of Cash Flows consisted of the following (in
millions):
1999* 1998 1997
Purchases ($1,435.7)($1,121.9)($1,449.9)
Maturities and paydowns 617.6 673.0 408.2
Sales 750.4 369.5 747.6
Gross gains 21.0 12.3 20.0
Gross losses (29.8) (9.7) (13.9)
* As of December 31, 1998, all of AAG's fixed maturity investments were
classified as "available for sale".
F-12
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 market value as of December 31:
Maturity 1999
One year or less 5%
After one year through five years 23
After five years through ten years 23
After ten years 17
68
Mortgage-backed securities 32
100%
The distribution of maturities based on amortized cost is generally the
same. Mortgage-backed securities had an estimated average life of
approximately six years at December 31, 1999.
At December 31, 1999, AAG had a $60 million investment in National
Westminster Bank PLC debt obligations. AAG had no other investment in
excess of 10% of stockholders' equity not guaranteed by the U.S. Government
or government agencies.
At December 31, 1999 and 1998, gross unrealized gains on its marketable
equity securities were $35.7 million and $39.5 million, respectively. At
December 31, 1999 and 1998, gross unrealized losses were $7.0 million and
$1.0 million, respectively. Realized gains and changes in unrealized
appreciation on fixed maturity and equity security investments are
summarized as follows (in millions):
Fixed Equity Tax
Maturities Securities Other Effects Total
1999
Realized ($ 8.8) $ 0.2 $1.5 $ 2.5 $ 4.6)
Change in unrealized (366.8) (9.8) - 131.8 (244.8)
1998
Realized $ 2.6 $ 1.8 $6.3 ($ 3.9) $ 6.8
Change in unrealized (1.3) (13.6) - 5.2 (9.7)
1997
Realized $ 6.1 $ 1.7 ($2.6) ($ 1.8)$ 3.4
Change in unrealized 142.0 17.2 - (55.7) 103.5
F-13
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Major categories of net investment income were as follows (in millions):
1999 1998 1997
Fixed maturities* $492.3 $502.1 $492.6
Other 9.1 9.5 6.4
Total investment income 501.4 511.6 499.0
Investment expenses (5.1) (4.7) (4.7)
Net investment income $496.3 $506.9 $494.3
* Includes income on fixed maturities, mortgage loans, policy loans and
short-term investments.
AAG's investment portfolio is managed by a subsidiary of AFG. Investment
expenses included investment management charges from this subsidiary
amounting to $2.9 million in 1999, $3.3 million in 1998 and $2.9 million in
1997.
F. INVESTMENT IN AFFILIATE
Investment in affiliate reflects AAG's 4% ownership (2.7 million shares;
carrying value of $12.3 million at December 31, 1999) 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 and $26 million at December 31, 1999 and 1998, respectively.
In the fourth quarter of 1998, Chiquita recorded an after-tax charge of $74
million due to significant damage to its operations as a result of
widespread flooding caused by Hurricane Mitch. Accordingly, AAG recorded
its proportionate share (4%) of this after-tax write-off. Included in
equity in Chiquita's earnings are gains of $1.0 million in 1998 and $1.3
million in 1997 attributable to Chiquita's issuance of common stock.
Included in AAG's retained earnings at December 31, 1998, was $8.7 million
applicable to equity in undistributed net losses of Chiquita.
G. UNAMORTIZED INSURANCE ACQUISITION COSTS
Unamortized insurance acquisition costs consisted of the following at
December 31, (in millions):
1999 1998
Deferred policy acquisition costs $435.7 $320.1
Present value of future profits
acquired 115.1 59.9
Unearned revenues (144.6) (132.6)
$406.2 $247.4
F-14
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
A progression of AAG's present value of future profits acquired ("PVFP") is
as follows (in millions):
1999 1998 1997
Beginning balance $ 59.9 $102.0 $ 72.5
Addition due to acquisition 62.9 3.6 37.5
Reduction due to sale - (32.0) -
Interest accrued 5.4 6.4 5.3
Amortization (13.1) (17.0) (13.3)
Other - (3.1) -
$115.1 $ 59.9 $102.0
The interest accrual rates used range primarily from 5% to 7%. During each
of the next five years, the PVFP is expected to decrease at a rate of
approximately 11% of the balance at the beginning of each respective year.
H. NOTES PAYABLE
Notes payable consisted of the following at December 31, (in millions):
1999 1998
Direct obligations of AAG $ 2.2 $ 1.2
Obligations of AAG Holding (guaranteed by AAG):
6-7/8% Senior Notes due 2008 100.0 100.0
Bank Credit Line 97.0 27.0
Other subsidiary debt 2.1 2.8
Total $201.3 $131.0
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 December 31, 1999 and 1998, the
weighted-average interest rate on amounts borrowed under AAG Holding's bank
credit line was 6.76% and 6.09%, respectively. At March 1, 2000, the
weighted-average interest rate on its credit line was 6.44%.
In February 1998, AAG Holding borrowed $50 million under the credit line and
retired its 11-1/8% Notes realizing a pretax extraordinary loss of $1.2
million. In June 1998, AAG Holding sold $100 million principal amount of 6-
7/8% Senior Notes due 2008 and used the net proceeds to repay outstanding
indebtedness under the bank credit line.
In August 1997, AAG Holding retired its 9-1/2% Senior Notes, realizing a
pretax extraordinary loss of $2.4 million.
At December 31, 1999 scheduled principal payments on debt for the subsequent
five years were as follows (in millions):
2000 2001 2002 2003 2004
$0.9 $0.7 $37.7 $60.6 $0.2
F-15
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cash interest payments were $11.2 million in 1999, $10.9 million in 1998 and
$9.4 million in 1997.
I. 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) 12/31/99 12/31/98 Redemption Dates
November
1996 9-1/4% TOPrS* (2026) $74,600,000 $75,000,000 On or after
11/7/2001
March
1997 8-7/8% Preferred Securities
(2027) 70,000,000 75,000,000 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 1999, AAG repurchased $5.4 million of its preferred
securities for $5.5 million in cash. Cash payments with respect to the
preferred securities were $19.6 million in 1999 and 1998 and $11.0 million
in 1997.
AAG and AAG Holding effectively provide an unconditional guarantee of the
Trusts' obligations.
J. STOCKHOLDERS' EQUITY
The Company is authorized to issue 25,000,000 shares of Preferred Stock, par
value $1.00 per share.
In December 1997, AAG merged its underfunded pension plan with two pension
plans of affiliates (see Note P - "Pension Plan"). The net overfunded
amount of the affiliates' plans was recorded as a capital contribution.
In March 1997, AAG repurchased all 490,000 shares of its Preferred Stock for
approximately $47 million.
AAG's dividend paying capability is limited by certain customary debt
covenants to amounts based on cumulative earnings and losses, debt ratios
and other items.
F-16
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The change in net unrealized gains (losses) on marketable securities
included the following (in millions):
1999
Pretax Taxes Net
Unrealized holding gains (losses)
on securities arising during
the period ($321.8) $110.5 ($211.3)
Unrealized gain on securities
transferred from held to
maturity - - -
Reclassification adjustment for
investment losses (gains) realized
in net income and unrealized gains
of subsidiaries sold (2.7) 1.0 (1.7)
Change in net unrealized gains
(losses) on marketable securities ($324.5) $111.5 ($213.0)
1998
Pretax Taxes Net
Unrealized holding gains (losses)
on securities arising during
the period $ 6.6 ($1.0) 5.6
Unrealized gain on securities
transferred from held to
maturity 60.6 (21.2) 39.4
Reclassification adjustment for
investment losses (gains) realized
in net income and unrealized gains
of subsidiaries sold (27.8) 9.7 (18.1)
Change in net unrealized gains
(losses) on marketable securities $ 39.4 ($12.5) $26.9
1997
Pretax Taxes Net
Unrealized holding gains (losses)
on securities arising during
the period $ 117.6 ($41.2) 76.4
Unrealized gain on securities
transferred from held to
maturity - - -
Reclassification adjustment for
investment losses (gains) realized
in net income and unrealized gains
of subsidiaries sold (7.7) 2.7 (5.0)
Change in net unrealized gains
(losses) on marketable securities $ 109.9 ($38.5) $71.4
At December 31, 1999, 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.
Data for AAG's Stock Option Plan is presented below:
1999 1998 1997
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of
year 2,464,080 $16.42 2,178,190 $15.21 1,548,969 $13.38
Granted 247,474 $22.81 417,000 $22.51 633,070 $19.70
Forfeited (159,045) $16.24 (90,332) $16.57 (3,849) $13.51
Exercised (31,394) $13.25 (40,778) $13.80 -
Outstanding at
end of year 2,521,115 $17.10 2,464,080 $16.42 2,178,190 $15.21
Options exercisable
at year-end 1,095,673 $15.30 701,561 $14.43 309,024 $13.38
The average remaining life of AAG's options was 7.7 years at December 31,
1999. The exercise prices of options issued during the year ranged from
$21.73 to $24.25 in 1999; $22.13 to $24.38 in 1998 and $14.00 to $21.75 in
1997.
No compensation cost has been recognized for stock option grants. Had
compensation cost been determined for stock option awards based on the fair
values at grant dates consistent with the method prescribed by SFAS No. 123,
AAG's net income (in millions) and earnings per share would have been lower
by the following amounts:
1999 1998 1997
Net earnings ($ 3.3) ($ 3.5) ($ 4.0)
Earnings per share ($0.07) ($0.09) ($0.09)
For SFAS No. 123 purposes, calculations were determined using the Black-
Scholes option pricing model and the following assumptions:
1999 1998 1997
Dividend yield <1% <1% <1%
Expected volatility 20% 20% 20%
Expected life (years) 7.5 7.5 7.5
Risk free interest rates:
Low 5.0% 4.7% 5.7%
High 5.9% 5.7% 6.5%
F-17
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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).
1999 1998 1997
Earnings before income taxes:
Operating $92.0 $143.9 $103.4
Equity in earnings of affiliate (3.0) (0.4) 0.8
Extraordinary items - (1.2) (2.3)
Cumulative effect of accounting change (7.2) - -
Earnings before income taxes $81.8 $142.3 $101.9
Tax computed at statutory rate $28.6 $ 49.8 $ 35.7
Effect of:
Reduction of valuation allowance (5.3) (6.6) (3.5)
Book basis over tax basis of
subsidiaries sold - 2.3 -
Other, net (0.3) 0.1 (0.2)
Total provision (all current) 23.0 45.6 32.0
Amounts applicable to earnings of affiliate 1.0 0.1 (0.3)
Amounts applicable to extraordinary items - 0.4 0.8
Amounts applicable to accounting change 2.5 - -
Provision for income tax as shown in
Consolidated Income Statement $26.5 $ 46.1 $ 32.5
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,
1999 1998
Deferred tax assets:
Net operating loss carryforwards $30.0 $29.4
Accrued expenses 10.0 5.1
Investment securities, including
affiliate 43.4 36.3
Valuation allowance for deferred
tax assets (21.2) (26.4)
Deferred tax liabilities:
Unamortized insurance
acquisition costs (99.9) (68.8)
Policyholder liabilities (38.5) (17.2)
Capitalized assets (5.1) (8.6)
The gross deferred tax asset has been reduced by a valuation allowance based
on an analysis of the likelihood of realization. Factors considered in
assessing the needs for a valuation allowance include: (i) applicable
statutory carryforward periods and (ii) the likelihood of generating larger
amounts of taxable income in the future. The likelihood of realizing this
asset is reviewed periodically.
F-18
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
At December 31, 1999, AAG had net operating loss carryforwards for federal
income tax purposes of approximately $86 million which are scheduled to
expire from 2003 through 2005.
L. LEASES
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, 1999 are payable as follows: 2000 - $6.1 million;
2001 - $5.5 million; 2002 - $4.6 million; 2003 - $4.5 million; 2004 - $4.4
million; 2005 and beyond - $9.3 million.
Rental expense for operating leases was $5.6 million in 1999, $4.9 million
in 1998 and $2.9 million in 1997.
M. EARNINGS PER SHARE
The number of common shares outstanding used in calculating diluted earnings
per share in 1999 and 1998 include 0.6 million shares and 0.7 million
shares, respectively, for the effect of the assumed exercise of AAG's stock
options.
N. CONTINGENCIES
In March 2000, a jury in Dallas, Texas, awarded a verdict against GALIC in
the amount of $11.2 million in a lawsuit brought by two former agents of
GALIC. The Company believes that the verdict was contrary to both the facts
and the law and expects to prevail on appeal. The ultimate outcome of this
case will not have a material adverse impact on the financial condition of
the Company.
In 1999, GALIC was named a defendant in purported class action lawsuits
seeking unspecified money damages. GALIC believes it has meritorious
defenses but it is not possible to predict the ultimate impact of this
action on the Company.
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. At December 31,
1999, 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 $4.8 million to $12.7 million. The majority of these costs are
expected to be paid out over the next three years. AAG is actively pursuing
recovery of a portion of the costs from the companies which provided
insurance coverage for the former manufacturing operations. The Company's
reserve for environmental costs was $5.3 million at December 31, 1999, and
$4.7 million at December 31, 1998.
F-19
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
O. 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):
1999 1998 1997
Capital and surplus $403.8 $350.4 $317.0
Asset valuation reserve 66.5 62.6 64.7
Interest maintenance reserve 9.8 20.6 23.9
Pretax income from operations $ 42.4 $111.2 $ 91.7
Net income from operations 33.8 99.9 72.7
Net income 34.6 35.6 73.6
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, 1999,
GALIC may pay $40.4 million in dividends in 2000 without prior approval.
P. ADDITIONAL INFORMATION
Summary Financial Information of AAG Holding AAG has guaranteed all of the
outstanding debt of AAG Holding. Summarized consolidated financial
information for AAG Holding is as follows (in millions):
1999 1998 1997
Revenues $ 552 $ 665 $ 617
Pretax income 59 130 92
Net income 36 84 60
Cash and investments $6,258 $6,291
Unamortized insurance acquisition costs 363 208
Variable annuity assets (separate accounts) 354 120
Other assets 307 281
Insurance reserves $5,933 $5,692
Notes payable:
Due parent 102 115
Due others 199 130
Variable annuity liabilities
(separate accounts) 354 120
Other liabilities 131 167
Mandatorily redeemable preferred securities
of subsidiary trusts $ 225 $ 225
Stockholder's equity $ 338 $ 451
F-20
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Related Party Transactions In a 1997 transaction, AAG purchased a minority
ownership position in a company engaged in the production of ethanol. AAG's
Chairman purchased the remaining ownership. During 1998, this company
borrowed $4.0 million from AAG under a subordinated note bearing interest at
14% and used the proceeds to pay a portion of a $6.3 million capital
distribution, including $3.1 million to AAG. AAG's equity investment in
this company at December 31, 1999, was $1.8 million. In addition, AAG has
extended a $5 million line of credit to this company; no amounts have been
borrowed under the credit line.
GALIC has a line of credit with a company owned in part by AFG and a brother
of AAG's Chairman. Under the agreement, this company may borrow up to $8
million at 13% with interest deferred and added to principal. At December
31, 1999, $6.7 million was due GALIC under the line.
Net investment income includes approximately $900,000 in 1999, 1998 and 1997
of payments from a subsidiary of AFG for the rental of an office building
owned by GALIC.
Fair Value of Financial Instruments The following table shows the carrying
value and estimated fair value of AAG's financial instruments at December 31
(in millions):
1999 1998
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Assets
Fixed maturity investments $5,946.7 $5,946.7 $6,023.1 $6,023.1
Equity securities 72.3 72.3 85.2 85.2
Investment in affiliate 12.3 12.7 15.9 25.6
Liabilities
Annuity benefits accumulated $5,519.5 $5,370.6 $5,449.6 $5,307.2
Notes payable 201.3 191.4 131.0 130.4
Trust preferred securities $ 219.6 $ 204.7 $ 225.0 $ 231.4
Stockholders' equity $ 525.7 $ 762.7 $ 688.7 $ 979.3
When available, fair values are based on prices quoted in the most active
market for each security, including AAG Common Stock. 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.
Fair value of stockholders' equity is based on the quoted market price of
AAG's Common Stock.
F-21
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unrealized Gains (Losses) on Marketable Securities, Net The components of
the Consolidated Balance Sheet caption "Unrealized gains (losses) on
marketable securities, net" in stockholders' equity are summarized as
follows (in millions):
Unadjusted Adjusted
Asset Effect of Asset
(Liability) SFAS 115 (Liability)
1999
Fixed maturities $6,073.2 ($126.5) $5,946.7
Equity securities 43.6 28.7 72.3
Unamortized insurance acquisition
costs, net 401.6 4.6 406.2
Annuity benefits accumulated (5,532.6) 13.1 (5,519.5)
Deferred taxes on unrealized losses - 27.2 27.2
Unrealized gains (losses) ($ 52.9)
1998
Fixed maturities $5,782.8 $240.3 $6,023.1
Equity securities 46.7 38.5 85.2
Unamortized insurance acquisition
costs, net 256.3 (8.9) 247.4
Annuity benefits accumulated (5,424.1) (25.5) (5,449.6)
Deferred taxes on unrealized gains - (84.3) (84.3)
Unrealized gains (losses) $160.1
Pension Plan The Company has a defined benefit pension plan (the "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. Effective December 31, 1997,
the Plan was merged with two other defined benefit plans which had been
sponsored by affiliates of the Company.
F-22
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Q. 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, 1999 and
1998 (in millions, except per share data).
First Second Third Fourth Total
1999 Quarter Quarter Quarter Quarter Year
Realized gains (losses) $ 4.0 ($ 2.3) ($ 5.9 )($ 2.9) ($ 7.1)
Total revenues 153.5 149.7 155.9 176.8 635.9
Income before accounting
change 22.4 18.4 15.4 7.3* 63.5
Accounting change (4.7) - - - (4.7)
Net Income 17.7 18.4 15.4 7.3* 58.8
Basic earnings (loss) per common share:
Income before accounting
change $0.53 $0.43 $0.36 $0.17* $1.50
Accounting change (0.11) - - - (0.11)
Net income $0.42 $0.43 $0.36 $0.17* $1.39
Diluted earnings (loss) per common share:
Income before accounting
change $0.52 $0.43 $0.35 $0.17* $1.48
Accounting change (0.11) - - - (0.11)
Net income $0.41 $0.43 $0.35 $0.17* $1.37
Average common shares outstanding
Basic 42.5 42.4 42.4 42.4 42.4
Diluted 43.2 43.1 43.1 42.8 43.0
1998
Realized gains (losses) $ 10.2 $ 1.5 $ 25.6 ($ 5.0)$ 32.3
Total revenues 187.8 185.9 211.0 143.2 727.9
Income before extraordinary
items 25.7 21.7 37.3 12.8 97.5
Extraordinary items (0.8) - - - (0.8)
Net income 24.9 21.7 37.3 12.8 96.7
Basic earnings (loss) per common share:
Income before extraordinary
items $0.60 $0.50 $0.87 $0.30 $2.27
Extraordinary items (0.02) - - - (0.02)
Net income $0.58 $0.50 $0.87 $0.30 $2.25
Diluted earnings (loss) per common share:
Income before extraordinary
items $0.59 $0.49 $0.85 $0.30 $2.23
Extraordinary items (0.02) - - - (0.02)
Net income $0.57 $0.49 $0.85 $0.30 $2.21
Average common shares outstanding
Basic 43.1 43.1 43.0 42.7 43.0
Diluted 43.8 43.9 43.7 43.4 43.7
* In the fourth quarter of 1999, AAG recorded a $10 million ($6.5 million
after-tax) realignment charge. Excluding this charge, fourth quarter 1999
basic and diluted earnings per share would have been $0.15 higher.
Quarterly earnings per share may not add to year-to-date amounts due to
changes in shares outstanding.
F-23
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 Q to the
Consolidated Financial Statements.
Schedules filed herewith:
For 1999, 1998 and 1997 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) Report on Form 8-K: None
S-1
AMERICAN ANNUITY GROUP, INC. - PARENT ONLY
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
Condensed Balance Sheet
December 31,
Assets: 1999 1998
Investments:
Fixed maturities - at market
(amortized cost - $17.0 and $68.7) $ 14.6 $ 67.6
Equity securities - at market
(cost - $2.1 and $1.9) 2.1 1.9
Cash and short-term investments 1.1 3.6
Investment in affiliate 21.3 24.8
Investment in subsidiaries (a) 420.2 512.0
Note receivable from AAG Holding 94.8 115.0
Other assets 33.1 16.5
$587.2 $741.4
Liabilities and Capital:
Accounts payable, accrued expenses and
other liabilities $ 26.9 $ 22.3
Payables to affiliates 32.4 29.2
Notes payable 2.2 1.2
Stockholders' equity (b) 525.7 688.7
$587.2 $741.4
Condensed Income Statement
Year ended December 31,
1999 1998 1997
Revenues:
Net investment income and other income $ 29.3 $ 37.5 $ 34.1
Realized gains (losses) on sales of:
Investments 1.7 (1.5) 0.1
Subsidiaries - 4.6 -
Equity in undistributed earnings of
subsidiaries 27.9 72.7 (92.9)
Capital distributions from subsidiaries 43.7 50.6 181.1
102.6 163.9 122.4
Costs and Expenses:
Interest and other financing expenses 0.1 0.1 0.2
Provision for realignment expenses (c) 2.8 - -
Provision for relocation expenses - - 4.0
Other expenses 7.7 15.9 14.0
10.6 16.0 18.2
Operating earnings before income taxes 92.0 147.9 104.2
Provision for income taxes 26.5 47.5 32.8
Net operating earnings 65.5 100.4 71.4
Equity in earnings of affiliate, net of tax (2.0) (2.9) -
Income before extraordinary items and
accounting change 63.5 97.5 71.4
Extraordinary items, net of tax - (0.8) (1.5)
Cumulative effect of accounting change,
net of tax (4.7) - -
Net Income $ 58.8 $ 96.7 $ 69.9
(a) Includes unrealized gains (losses) of ($51.3) million and $160.8 million
in 1999 and 1998, respectively.
(b) Includes unrealized gains (losses) of ($52.9) million and $160.1 million
in 1999 and 1998, respectively.
(c) Represents AAG (parent only) portion of realignment charge.
S-2
AMERICAN ANNUITY GROUP, INC. - PARENT ONLY
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
Condensed Statement of Cash Flows
Year Ended December 31,
1999 1998 1997
Operating Activities:
Net income $58.8 $96.7 $ 69.9
Adjustments:
Extraordinary items - 0.8 1.5
Cumulative effect of accounting change 4.7 - -
Equity in net earnings of subsidiaries (44.2) (76.6) (58.8)
Realized losses (gains) (1.7) 1.5 (0.1)
Gain on sale of subsidiaries - (4.6) -
Depreciation and amortization 1.0 1.4 2.2
Decrease (increase) in other assets (9.6) 1.1 (1.9)
Increase (decrease) in balances with
affiliates 3.4 (5.1) 9.5
Increase (decrease) in other liabilities 5.0 (3.4) (11.2)
Capital distributions from subsidiaries 44.1 8.9 181.2
Contributions to subsidiaries (51.3) (61.6) (3.1)
Other, net (0.1) 6.2 (0.7)
10.1 (34.7) 188.5
Investing Activities:
Purchase of investments (47.6) (59.9) (104.8)
Decrease in intercompany notes receivable 11.3 13.3 0.7
Purchase of subsidiaries (22.2) - (51.7)
Maturities and redemptions of fixed maturity
investments 3.9 51.4 0.5
Sales of investments 55.3 38.2 22.0
Sale of subsidiaries - 10.6 -
0.7 53.6 (133.3)
Financing Activities:
Additions to notes payable 1.1 - -
Reductions of notes payable (0.1) (0.1) (0.1)
Issuance of Common Stock 0.6 0.4 -
Retirement of Common Stock (5.2) (14.9) (1.1)
Retirement of Preferred Stock - - (47.0)
Repurchase of trust preferred securities (5.5) - -
Cash dividends paid (4.2) (4.3) (5.3)
(13.3) (18.9) (53.5)
Net Increase (Decrease) in Cash and
Short-term Investments (2.5) - 1.7
Cash and short-term investments at beginning
of period 3.6 3.6 1.9
Cash and short-term investments at end of period $ 1.1 $ 3.6 $ 3.6
S-3
AMERICAN ANNUITY GROUP, INC.
INDEX TO EXHIBITS
Number Exhibit Description
3.1 Certificate of Incorporation of Registrant
3.2 By-laws of Registrant
4 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.
12 Earnings to fixed charges.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27.1 Financial Data Schedule for 1999 - included in Report filed
electronically with the Securities and Exchange Commission.
27.2 Restated Financial Data Schedule for nine months ended September 30,
1997 - included in Report filed electronically with the Securities
and Exchange Commission.
E-1
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 29, 2000 BY:s/CARL H. LINDNER
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
s/CARL H. LINDNER Chairman of the Board March 29, 2000
Carl H. Lindner of Directors
s/S. CRAIG LINDNER Director March 29, 2000
S. Craig Lindner
s/ROBERT A. ADAMS Director March 29, 2000
Robert A. Adams
s/WILLIAM R. MARTIN Director* March 29, 2000
William R. Martin
s/JOHN T. LAWRENCE, III Director* March 29, 2000
John T. Lawrence, III
s/RONALD W. TYSOE Director* March 29, 2000
Ronald W. Tysoe
s/WILLIAM J. MANEY Executive Vice President, March 29, 2000
William J. Maney Treasurer and Chief
Financial Officer
(Principal Accounting Officer)
* Member of Audit Committee
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 5,946,700
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 72,300
<MORTGAGE> 16,000
<REAL-ESTATE> 73,600
<TOTAL-INVEST> 6,418,300
<CASH> 39,400
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 406,200
<TOTAL-ASSETS> 7,530,700
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 520,600
<POLICY-HOLDER-FUNDS> 5,519,500
<NOTES-PAYABLE> 201,300
219,600<F1>
0
<COMMON> 42,400
<OTHER-SE> 483,300
<TOTAL-LIABILITY-AND-EQUITY> 7,530,700
123,900
<INVESTMENT-INCOME> 496,300
<INVESTMENT-GAINS> (7,100)
<OTHER-INCOME> 22,800
<BENEFITS> 349,000
<UNDERWRITING-AMORTIZATION> 45,000
<UNDERWRITING-OTHER> 109,400
<INCOME-PRETAX> 92,000
<INCOME-TAX> 26,500
<INCOME-CONTINUING> 63,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (4,700)
<NET-INCOME> 58,800
<EPS-BASIC> 1.39
<EPS-DILUTED> 1.37
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>(A) Mandatorily Redeemable Preferred Securities of subsidiary trusts
</FN>
</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,
1999 1998 1997
Income before income taxes, extraordinary
items and accounting change $ 92.0 $143.9 $103.4
Plus dividends from affiliate 0.5 0.5 0.5
Plus minority interest in subsidiaries
having fixed charges 1.0 - 0.2
Fixed charges:
Interest and other debt expenses 11.9 10.8 8.9
Preferred dividends of subsidiary trusts 18.6 19.0 15.5
One-third of rentals 1.9 1.7 1.0
Earnings $125.9 $175.9 $129.5
Fixed charges:
Interest and other debt expenses $ 11.9 $ 10.8 $ 8.9
Preferred dividends of subsidiary trusts 18.6 19.0 15.5
One-third of rentals 1.9 1.7 1.0
Fixed charges $ 32.4 $ 31.5 $ 25.4
Fixed charges and preferred dividends:
Fixed charges - per above $ 32.4 $ 31.5 $ 25.4
Preferred dividends (*) - - 1.4
Fixed charges and preferred dividends $ 32.4 $ 31.5 $ 26.8
Ratio of earnings to fixed charges 3.9 5.6 5.1
Earnings in excess of fixed charges $ 93.5 $144.4 $104.1
Ratio of earnings to fixed charges and
preferred dividends 3.9 5.6 4.8
Earnings in excess of fixed charges and
preferred dividends $ 93.5 $144.4 $102.7
(*) Amounts represent preferred dividend requirements of AAG (parent)
multiplied by the ratio that pretax earnings bears to net earnings.
E-2
AMERICAN ANNUITY GROUP, INC.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AAG at December 31, 1999. All
corporations are subsidiaries of AAG and, if indented, subsidiaries of the
company under which they are listed.
Name of Company
AAG Holding Company, Inc. Ohio 100%
Great American Life Insurance Company Ohio 100
Annuity Investors Life Insurance Company Ohio 100
GALIC of New York New York 100
Loyal American Life Insurance Company Ohio 100
United Teacher Associates Insurance Company Texas 99.9
American Annuity Group Capital Trust I Delaware 100
American Annuity Group Capital Trust II Delaware 100
American Annuity Group Capital Trust III Delaware 100
Great American Life Assurance Company of
Puerto Rico, Inc. Puerto Rico 99.9
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-3
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-3 No. 33-57259), the American Annuity Group,
Inc. Deferred Compensation Plan (Form S-8 No. 333-17383), the American
Annuity Group, Inc. Directors' Compensation Plan (Form S-8 No. 333-13777),
the American Annuity Group, Inc. Bonus Plan (Form S-3 No. 333-68323), the
1998 American Annuity Group, Inc. Agent Stock Option Plan (Form S-3 No. 333-
51535) and the American Annuity Group, Inc. 1994 Stock Option Plan (Form S-8
No. 333-41091) of our report dated March 9, 2000, 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, 1999.
Ernst & Young LLP
Cincinnati, Ohio
March 24, 2000
E-4
