Subsidiaries of AFC own several buildings in downtown Cincinnati. AFC and its affiliates occupy about three-fifths of the aggregate 600,000 square feet of commercial and office space.
AFC's insurance subsidiaries lease the majority of their office and storage facilities in numerous cities throughout the United States, including GAI's and AAG's home offices in Cincinnati. Two of AAG's subsidiaries own home office buildings in Mobile, Alabama and Rapid City, South Dakota. These companies occupy approximately 70% of the 126,000 square feet and lease the remaining space to unaffiliated tenants.
AFC is organized as a holding company with almost all of its operations being conducted by subsidiaries and affiliates. The parent corporation, however, has continuing cash needs for administrative expenses, the payment of principal and interest on borrowings and dividends on AFC Preferred Stock. Therefore, certain analyses are best done on a parent only basis while others are best done on a total enterprise basis. In addition, since many of its businesses are financial in nature, AFC does not prepare its balance sheet using a current-noncurrent format. Consequently, certain traditional ratios and financial analysis tests are not meaningful.
As discussed in Note A to the financial statements, at the close of business on December 31, 1996, AFG contributed to AFC 81% of the common stock of American Premier. Since AFC and American Premier are under the common control of AFG, the acquisition of American Premier has been recorded by AFC at AFG's historical cost in a manner similar to a pooling of interests. Accordingly, the historical consolidated financial statements of AFC for periods subsequent to the April 3, 1995 Mergers have been restated to include the accounts of American Premier.
AFC's ratio of earnings to fixed charges, excluding and including preferred dividends, on a total enterprise basis for the three years ended December 31, 1996, are shown below.
1996 1995 1994 Earnings to fixed charges 4.99 3.10 1.69 Earnings to fixed charges plus preferred dividends 3.96 2.60 1.40
Subsequent to the Mergers, American Premier entered into a credit agreement with AFG under which American Premier and AFG will make loans of up to $200 million available to each other. Principal amounts payable to AFG under the credit agreement totaled $175.5 million and $84.0 million at December 31, 1996 and 1995, respectively.
In September and October of 1996, three nationally recognized rating agencies issued or upgraded ratings on AFC, American Premier and AAG public debentures. All of the AFC debentures and the AAG senior debentures are now rated investment grade; the APU and AAG subordinated debentures are rated investment grade by two of the agencies. Generally, the upgrades reflect the expectation that consolidated debt to total capital will remain conservative and that coverage ratios will benefit from higher subsidiary earnings and a lower level of fixed charges at AFG's subsidiaries.
Bank credit lines at several subsidiary holding companies provide ample liquidity and can be used to obtain funds for the operating subsidiaries or, if necessary, for the parent company. Agreements with the banks generally run for three to seven years and are renewed before maturity. While it is highly unlikely that all such amounts would ever be borrowed at one time, a maximum of $510 million is available under these bank facilities, $45 million of which was borrowed at December 31, 1996.
In the past, funds have been borrowed under certain of these bank facilities and used for working capital, capital infusions into subsidiaries, and to retire other issues of short-term or high-rate debt. Also, AFC believes it may be prudent and advisable to borrow up to $200 million of bank debt in the normal course in order to retire public or privately held fixed rate obligations over the next year or two.
Cash provided by: 1996 1995 1994 Operations: Dividends from subsidiaries $105.3 $165.3 $ 17.3 Dividends from AFG 8.7 4.3 - Tax allocation payments from subsidiaries 102.5 73.9 65.9 Interest and dividends from others 1.4 2.8 4.4 Federal income tax refunds 0.1 9.5 0.3 From operations 218.0 255.8 87.9 Other transactions: Net advances from affiliates 45.7 162.0 135.8 Sales of assets to non-affiliates 59.3 3.1 15.0 Sales of assets to affiliates 1.7 43.7 - Sales of affiliates 44.0 - 6.0 Issuance of Preferred Stock 16.8 - - Exercise of stock options - 8.7 - Additional borrowings 0.1 98.8 0.7 Other 13.9 8.6 10.7 Total cash provided 399.5 580.7 256.1
Cash utilized for: Operations: Interest payments 22.7 47.9 61.8 Dividend payments 24.9 25.4 29.5 Federal income tax payments 31.0 23.0 28.6 BVIP payments - 48.9 0.7 Other holding company costs 30.4 29.3 35.3 For operations 109.0 174.5 155.9 Other transactions: Purchases of affiliates and other investments 33.6 149.4 - Principal payments on debt 177.9 252.9 89.9 Repurchases of Preferred Stock 36.9 2.9 6.7 Other 0.7 0.8 1.4 Total cash utilized 358.1 580.5 253.9
Payments of dividends by AFC's insurance subsidiaries are subject to various laws and regulations which limit the amount of dividends that can be paid without regulatory approval. Under Ohio law, the maximum amount of dividends which may be paid without (i) prior approval or (ii) expiration of a 30 day waiting period without disapproval is the greater of statutory net income or 10% of policyholders' surplus as of the preceding December 31, but only to the extent of earned surplus as of the preceding December 31. The maximum amount of dividends payable (without prior approval) to AFC in 1997 from its insurance subsidiaries is approximately $253 million.
Under tax allocation agreements with AFC, its 80%-owned U.S. subsidiaries generally compute tax provisions as if filing separate returns based on book taxable income computed in accordance with generally accepted accounting principles. The resulting provision (or credit) is currently payable to (or receivable from) AFC. Beginning with the 1997 federal tax return, American Premier and its 80%-owned U.S. subsidiaries will join AFC's consolidated return.
Uncertainties Two lawsuits were filed in 1994 against American Premier by USX Corporation ("USX") and a former USX subsidiary. The lawsuits seek contribution from American Premier for all or a portion of a $600 million final antitrust judgment entered against a USX subsidiary in 1994. The lawsuits argue that USX's liability for that judgment is attributable to the alleged activities of American Premier's predecessor in an unlawful antitrust conspiracy among certain railroad companies. American Premier and its outside counsel believe that American Premier has substantial defenses and should not suffer a material loss as a result of this litigation.
Great American's liability for unpaid losses and loss adjustment expenses includes amounts for various liability coverages related to environmental and hazardous product claims. The insurance industry typically includes only claims relating to polluted waste sites and asbestos in defining environmental exposures, whereas Great American extends this definition to include claims relating to breast implants, repetitive stress on keyboards, DES (a drug used in pregnancies years ago alleged to cause cancer and birth defects), and other latent injuries. At December 31, 1996, Great American had recorded $343 million (net of reinsurance recoverables of $163 million) for environmental pollution and hazardous products claims on policies written many years ago where, in most cases, coverage was never intended. Due to inconsistent court decisions on many coverage issues and the difficulty in determining standards acceptable for cleaning up pollution sites, significant uncertainties exist which are not likely to be resolved in the near future.
AFC's subsidiaries are parties in a number of proceedings relating to former operations. See Note N to the financial statements.
General As previously noted, financial statements for periods subsequent to April 1995 have been restated to include the accounts of American Premier. AFC had accounted for American Premier as an investee from the second quarter of 1993 through the first quarter of 1995. As a result of these changes, current year income statement components are not comparable to prior years.
Pretax earnings before extraordinary items were $338 million in 1996, $252 million in 1995 and $44 million in 1994.
While AFC desires and seeks to earn an underwriting profit on all of its business, it is not always possible to do so. As a result, AFC attempts to expand in the most profitable areas and control growth or even reduce its involvement in the least profitable ones.
1996 1995 1994 Net Written Premiums (GAAP) NSA Group $1,135 $1,277 $1,186 Specialty Operations 993 1,097 1,250 Commercial and Personal Operations 660 717 683 Other Lines - 1 5 $2,788 $3,092 $3,124
The combined ratio of the specialty operations in 1995 reflects improved results experienced in the crop hail and farm lines as well as coverages of U.S. operations of Japanese companies. The 1995 combined ratio also includes losses resulting from participation in a voluntary pool from which AFC withdrew.
1996 compared to 1995 Investment income increased $96 million (13%) from 1995; adjusting for the effects of the Mergers retroactively to January 1, 1995, investment income increased $55 million (7%) from 1995 due primarily to an increase in the average amount of investments held.
1995 compared to 1994 AFC's equity in net earnings of investee corporations increased $32 million in 1995. Chiquita reported a $105 million improvement in operating income primarily due to net gains from the sale of non-core assets, higher banana prices outside the European Union, the favorable effect of foreign exchange rates on European sales, and earnings improvements from other food products.
Annuity receipts totaled approximately $570 million in 1996, $460 million in 1995 and $440 million in 1994. Annuity receipts have increased over the last few years due to sales of newly introduced single premium products and, in 1995, the development of new distribution channels.
Annuity benefits increased $17 million (7%) in 1996 and $13 million (5%) in 1995 primarily due to an increase in average annuity benefits accumulated.
1996 compared to 1995 Interest expense for 1996 was $86.1 million and interest expense for 1995, adjusted to reflect the effect of the Mergers retroactively to January 1, 1995, was $116.3 million. The $30 million (26%) decrease reflects significant debt retirements during both 1995 and 1996.
Consolidated Statement of Changes in Capital Accounts: Years ended December 31, 1996, 1995 and 1994