APU's insurance subsidiaries lease the majority of their office and storage facilities in numerous cities throughout the United States.
1996 1995 1994 1993 1992 Earnings Statement Data (a): Net Written Premiums $1,251 $1,492 $1,636 $1,379 $1,067
(a) Amounts above include the following pretax items for the years indicated: 1996 - Gains on sales of Buckeye, coal properties and other real estate ($102 million); Tax benefit attributable to an increase in APU's deferred tax asset ($38 million). 1994 - Loss on sale of General Cable securities ($76 million). 1993 - Tax benefit attributable to an increase in APU's net deferred tax asset ($132 million); Gain on sale of equity investments ($99 million); Provision for asset impairment ($20 million); Loss on sale of subsidiaries ($22 million).
APU's insurance operations consist primarily of a group of nonstandard private passenger automobile insurance companies (the "NSA Group") and a business which sells workers' compensation insurance principally in California ("Republic Indemnity").
During 1995, in connection with its previously announced divestiture effort, APU completed the sale of its last industrial business. In addition, in March 1996 APU sold its investment in a subsidiary which holds a 2% general partnership interest in an independent pipeline common carrier of refined petroleum products. See Note C of Notes to Financial Statements.
Ratios From the date of the Mergers to the end of 1996, approximately $340 million of APU debt was retired, resulting in a net reduction of aggregate debt by approximately 70%. These debt reductions will reduce APU's interest expense by over $35 million annually.
The ratio of APU's (parent-only) long-term debt to total capital was 13%, 17% and 24% at December 31, 1996, 1995 and 1994, respectively. APU's ratio of earnings to fixed charges on a total enterprise basis was 8.92, 3.35 and 1.72 for the years ended December 31, 1996, 1995 and 1994, respectively.
The National Association of Insurance Commissioners' model law for risk based capital ("RBC") determines the amount of capital that an insurance company needs to ensure that it has an acceptable expectation of not becoming financially impaired. At December 31, 1996, the capital ratios of all APU's insurance companies substantially exceeded the RBC requirements.
Prior to the Mergers, APU had substantial cash and short-term investments at the parent company level. Subsequent to the Mergers, APU repurchased approximately $340 million of its subordinated notes and made loans to AFC and two of its subsidiaries under separate credit agreements. In December 1996, APU paid a dividend to AFG in the form of a $675 million note receivable from AFC, which represented the entire balance then outstanding under its credit agreement with AFC, plus $18.7 million of related accrued interest.
The maximum amount of dividends available to APU in 1997 from its insurance subsidiaries without seeking regulatory approval is approximately $154 million.
Through 1995, APU has filed consolidated federal income tax returns and will do so again for 1996. APU's federal income tax loss carryforward has been available to offset taxable income and, as a result, APU's obligation to pay federal income tax for 1996 is substantially eliminated. As a result of the Mergers, AFG (parent) has been included in APU's consolidated return for 1995 and 1996. At the close of business on December 31, 1996, AFG contributed 81% of the common stock of APU to AFC. Accordingly, beginning with the 1997 federal tax return, APU and its 80%-owned U.S. subsidiaries will join AFC's consolidated federal tax return. Under tax allocation agreements, APU's insurance subsidiaries generally compute tax provisions as if filing separate returns with the resulting provision (or credit) currently payable to (or receivable from) APU.
Fixed income investment funds are generally invested in securities with short-term and intermediate-term maturities with an objective of optimizing total return while allowing flexibility to react to changes in market conditions. At December 31, 1996, the average life of APU's bonds and redeemable preferred stocks was approximately 6 years.
Approximately 94% of the bonds and redeemable preferred stocks held by APU were rated "investment grade" (credit rating of AAA to BBB) by nationally recognized rating agencies at December 31, 1996. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated and non-investment grade. Management believes that the high quality investment portfolio should generate a stable and predictable investment return.
General Pretax earnings were $332 million in 1996 compared to $113 million in 1995 and $41 million in 1994.
Results for 1996 include an $80 million improvement in underwriting results of APU's insurance operations, a $51 million gain on the sale of Buckeye, a $51 million gain on the sale of certain coal properties and other real estate to AFC, a $33 million increase in interest income from loans to AFC, an $11 million increase in realized gains on the sale of securities and a $6 million decrease in interest on borrowed money. These items were partially offset by a $22 million decrease in portfolio interest and dividend income.
Results for 1994 include a $76 million loss on the sale of General Cable securities and a $4 million loss on the anticipated sale of one of APU's non-insurance businesses. These items were partially offset by a $26 million increase in investment income (excluding $25 million of interest income on the General Cable notes recorded in 1993) and a $10 million decrease in interest on borrowed money.
To understand the overall profitability of particular lines, timing of claims payments and the related impact of investment income must be considered. Certain "short-tail" lines of business (primarily property coverages) have quick loss payouts which reduce the time funds are held, thereby limiting investment income earned thereon. On the other hand, "long-tail" lines of business (primarily liability coverages and workers' compensation) have payouts that are either structured over many years or take many years to settle, thereby significantly increasing investment income earned on related premiums received.
Net written premiums and combined ratios for APU's insurance subsidiaries are as follows (dollars in millions):
1996 1995 1994 Net Written Premiums (GAAP) NSA Group $1,028.9 $1,203.2 $1,154.1 Republic Indemnity 222.1 287.5 479.5 Other Lines - 1.6 1.9 $1,251.0 $1,492.3 $1,635.5
Combined Ratios (GAAP) NSA Group 100.0% 105.7% 99.8% Republic Indemnity 76.8% 87.9% 91.1% Aggregate 96.1% 102.0% 97.0%
1996 compared to 1995 Excluding interest expense of $10 million in 1996 on amounts due to affiliates, interest expense decreased $16 million (35%) due primarily to APU's repurchase throughout 1996 of $65 million principal amount of its Subordinated notes, excluding repurchases made in December 1996 pursuant to a tender offer.
Income Taxes See Note J of Notes to Financial Statements for an analysis of APU's deferred tax asset and other items affecting APU's effective tax rate.
Consolidated Statement of Earnings: Years ended December 31, 1996, 1995 and 1994