GAI, its subsidiaries, and American Premier's insurance subsidiaries lease the majority of their office and storage facilities in numerous cities throughout the United States, including GAI's and American Annuity's home offices in Cincinnati.
Chiquita owns approximately three-fourths of the 171,000 acres used for the cultivation of its bananas and oil palm and support activities. It also owns over one-half of the 42 ocean-going refrigerated vessels used primarily for transporting tropical fruit.
Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of AFC's financial condition and results of operations. This discussion should be read in conjunction with the financial statements beginning on page.
Following the merger, AFC expects to borrow funds from American Premier to retire substantial portions of its debt. Which issues and how much of AFC's debt will be retired and what rate of interest will be charged on funds borrowed from American Premier have not been determined. The balance sheet effects of any such debt retirements are not expected to be material. The earnings effect will depend primarily on the difference, if any, between the interest rate charged by American Premier and the rates on the debt to be retired.
The National Association of Insurance Commissioners has adopted a model law enacting risk based capital ("RBC") formulas which applies to both life and property and casualty companies. The RBC formulas determine the amount of capital that an insurance company needs to ensure that it has an acceptably low expectation of becoming financially impaired. At December 31, 1994, the capital ratios of all AFC insurance companies exceed the RBC requirements by substantial amounts.
Under tax allocation agreements with AFC, 80%-owned U.S. subsidiaries generally compute tax provisions as if filing a separate return 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. Following the 1995 merger, AFC and American Premier will each continue to file consolidated returns as common parents of separate consolidated tax groups.
Management believes AFC has sufficient resources to meet its liquidity requirements through operations in the short-term and long-term future. If funds generated from operations, including dividends from subsidiaries, are insufficient to meet fixed charges in any period, AFC would be required to meet such charges through bank borrowings, sales of securities or other assets, or similar transactions.
Uncertainties In exchange for $5 million, AFC has agreed to indemnify Spelling Entertainment Group Inc. for up to $35 million in excess of a threshold amount of $25 million of the costs Spelling may incur in the 12 years beginning April 1, 1993 to resolve Spelling's environmental matters, bankruptcy claims and certain other matters. Additionally, an AFC subsidiary has responsibility for environmental costs, which are estimated to be between $8.6 million and $14 million, associated with the sales of former manufacturing properties. The subsidiary has reserved $11.7 million at December 31, 1994.
Approximately 94% of the bonds and redeemable preferred stocks held by AFC were rated "investment grade" (credit rating of AAA to BBB) at December 31, 1994, compared to less than 60% at the end of 1988. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated and non-investment grade.
At December 31, 1994, AFC had gross unrealized gains and losses on bonds and redeemable preferred stocks and equity securities as follows (in millions):
General Due to decreases in ownership percentages, AFC ceased accounting for American Premier and Spelling as subsidiaries and began accounting for them as investees in April 1993 and July 1992, respectively. AFC had accounted for American Premier as a subsidiary from 1992 through the first quarter of 1993 due to AFC's ownership exceeding 50%. As a result of these changes, current year income statement components are not comparable to prior years and are not indicative of future years.
Pretax earnings were $44 million in 1994 compared to $262 million in 1993 and a pretax loss of $145 million in 1992.
Results for 1994 include AFC's share ($28 million) of American Premier's loss on the sale of General Cable notes, GAI's $19 million charge relating to a rate rollback liability in California and a $35 million charge related to payments under AFC's Book Value Incentive Plan. These items were partially offset by a $42 million decrease in interest expense.
Results for 1993 include (i) $155 million in gains from the sales of AFC's insurance agency operations, Spelling Entertainment Group and 4.5 million shares of American Premier and additional proceeds received on the 1990 sale of the NSA Group, and (ii) AFC's share ($52 million) of a tax benefit recorded by American Premier in the second, third and fourth quarters of 1993. These items were partially offset by a write-off of debt discount and expenses of $24 million.
An unusually large loss for "property and multiple peril" coverage in 1992 generally reflects the effects of Hurricanes Andrew and Iniki.
Unusually good results for "workers' compensation and other liability" coverage in 1992 and 1994 generally reflect reductions in redundant reserves on certain matured coverages, and general improvement in 1994 in workers' compensation due to industry-wide reforms, improved pricing, and favorable trends in medical care inflation and incidents of fraud, along with emphasis on specific programs (i.e. Drug- Free Workplace) and a focus on profitable pockets of business and classes.
An unusually large loss for "all other" coverage in 1994 generally reflects the effects of the Northridge, California earthquake and poor results from an industrial risk pool arrangement.
See the discussion of Underwriting and Loss and Loss Adjustment Expense Reserves under Item 1 - "Business - Great American Insurance Group".
1994 compared to 1993 Excluding American Premier, investment income increased $20 million (4%) due to an increase in average investments held.
1993 compared to 1992 AFC's equity in the net earnings of investees in 1993 was $70 million compared to a loss of $339 million in 1992. The principal items responsible for this improvement were (i) the absence of losses from GACC in 1993 compared to AFC's loss of $187 million from that investment in 1992, (ii) a $107 million improvement from Chiquita's operations and (iii) $92 million in earnings from American Premier which became an investee in the second quarter of 1993 when AFC's ownership declined below 50%.
Gains on Sales of Subsidiaries The gains on sales of subsidiaries in 1993 include fourth quarter pretax gains of (i) $44 million from the sale of American Business Insurance, Inc. and (ii) $31 million representing an adjustment on the 1990 sale of AFC's non-standard automobile insurance group to American Premier.
Income Taxes See Note L to the Financial Statements for an analysis of other items affecting AFC's effective tax rate. Certain subsidiaries were not able to recognize tax benefits on significant operating losses in 1992, accordingly, AFC's effective tax rate was greater than the normal rate of 34%.
Recent Accounting Standards The following Statements of Financial Accounting Standards ("SFAS") have been implemented by AFC in 1992, 1993 or 1994 or will be implemented in 1995. The implementation of these standards is discussed under various subheadings of Note B to the Financial Statements; effects of each are shown in relevant Notes. Implementation of SFAS No. 114 in the first quarter of 1995 is not expected to have a significant effect on AFC.