AFC and subsidiaries own several buildings in downtown Cincinnati. AFC and its affiliates occupy about three-fifths of the aggregate 580,000 square feet of commercial and office space.
1995 1994 1993 Earnings to fixed charges 2.23 1.69 2.62 Earnings to fixed charges plus preferred dividends 1.90 1.40 2.26
Sources of Funds 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 generate cash through borrowings, sales of securities or other assets, or similar transactions.
Bank credit lines at several subsidiary holding companies provide ample liquidity which 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, up to $395 million is available under these bank facilities.
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, while little was drawn on the bank lines at December 31, 1995, AFC believes it may be prudent and advisable to borrow up to $200 million of bank debt in the normal course and use the proceeds to retire additional amounts of public or privately held fixed rate debt over the next year or two.
Funds to meet the parent company's expenditures have been provided from a variety of sources within the holding company, from subsidiaries and directly from outside sources, as detailed in the following table (in millions):
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) in 1996 from GAI based on its 1995 statutory net income is approximately $129 million.
For statutory accounting purposes, equity securities are generally carried at market value. At December 31, 1995, AFC's insurance companies owned publicly traded equity securities with a market value of $1.2 billion, including equity securities of AFC affiliates (including subsidiaries) of $960 million. Since significant amounts of these are concentrated in a relatively small number of companies, decreases in the market prices could adversely affect the insurance group's capital, potentially impacting the amount of dividends available or necessitating a capital contribution. Conversely, increases in the market prices could have a favorable impact on the group's dividend- paying capability.
Uncertainties 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, 1995, Great American had recorded $220 million (net of reinsurance recoverables of $164 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.
General AFC had accounted for American Premier as a subsidiary in 1992 and the first quarter of 1993 and as an investee from the second quarter of 1993 through the first quarter of 1995. AFC began accounting for American Financial Group as an investee in April 1995. As a result of these changes, current year income statement components are not comparable to prior years and are not indicative of future years.
Results for 1995 include an improvement of $32 million in underwriting results of the property and casualty insurance segment, a $50 million increase in investment income and the absence of nonrecurring charges recorded in 1994. These items were partially offset by increases of $13 million in annuity benefits and $23 million in interest on borrowed money.
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 to American Premier, 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.
Underwriting profitability is measured by the combined ratio which is a sum of the ratio of underwriting expenses, losses, and loss adjustment expenses to premiums. When the combined ratio is under 100%, underwriting results are generally considered profitable; when the ratio is over 100%, underwriting results are generally considered unprofitable. The combined ratio does not reflect investment income, other income or federal income taxes.
1995 compared to 1994 AFC's equity in net earnings of investee corporations increased $53 million in 1995. Chiquita reported a $105 million improvement in operating income due primarily to the absence on certain nonrecurring charges, net gains from the sale of non-core assets, cost reductions in its core business and higher banana prices outside the European Union.
Gains (Losses) on Sales of Investees The loss on sale of investees in 1995 primarily represents a pretax loss on the sale of Chiquita to American Premier.
The gain on sale of investees in 1994 represents a pretax gain on the sale of General Cable common stock.
Annuity Benefits For GAAP financial reporting purposes, annuity receipts are generally accounted for as interest-bearing deposits ("annuity benefits accumulated") rather than as revenues. Under these contracts, policyholders' funds are credited with interest on a tax-deferred basis until withdrawn by the policyholder. Annuity benefits represent primarily interest related to annuity policyholders' funds held. The rate at which GALIC credits interest on annuity policyholders' funds is subject to change based on management's judgment of market conditions.
Annuity benefits increased $13 million (5%) in 1995 and $13 million (6%) in 1994 due primarily to an increase in average annuity benefits accumulated.
AFC Parent's interest expense increased in 1995 due to an increase in average borrowings. In the second quarter of 1995, AFC borrowed $549 million under its new credit agreement with American Premier using the proceeds to retire $372 million of debt and for other corporate purposes. AFC Parent's interest expense decreased in 1994 due to (i) the issuance of $204 million of 9-3/4% debentures in exchange for higher rate debt and (ii) the repurchase of $79 million principal amount of debentures. GAHC's interest expense decreased in 1995 due to a decrease in bank borrowings and the retirement of its floating rate notes and 11% notes in the third and fourth quarters, respectively. The decrease in other companies' interest expense in 1994 is due primarily to the repayments of borrowings in 1993.
Other Operating and General Expenses Operating and general expenses included the following charges (in millions):
Consolidated Statement of Changes in Capital Accounts: Years ended December 31, 1995, 1994 and 1993
Consolidated Statement of Cash Flows: Years ended December 31, 1995, 1994 and 1993
"Selected Quarterly Financial Data" has been included in Note Q to the Consolidated Financial Statements.