GAFRI, GALIC and Loyal rent office space in Cincinnati, Ohio totaling approximately 195,000 square feet under leases expiring primarily in 2006 through 2008. Several of the Company's subsidiaries lease marketing and administrative offices in locations throughout the United States.
American Data Source India Private Limited, a software development and administrative services subsidiary of GAFRI, rents space in Bangalore, India totaling approximately 33,000 square feet under leases expiring primarily in 2003.
GAFRI 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. Space in these facilities is currently being leased to companies using it for manufacturing and other operations.
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 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).
Operating earnings before income taxes $ 81.1 $ 92.0 $143.9 $103.4 $ 80.7
Diluted earnings per common share: Continuing operations $1.26 $1.48 $2.23 $1.61 $1.39 Extraordinary items - - (0.02) (0.03) (0.14) Accounting changes 0.02 (0.11) - - - Net income $1.28 $1.37 $2.21 $1.58 $1.25
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 Great American Financial Resources, Inc. ("GAFRI" or "the Company"). This discussion should be read in conjunction with the financial statements beginning on page.
Ratios The following ratios may be considered relevant indicators of GAFRI's liquidity and are typically presented by GAFRI in its prospectuses and similar documents.
Consolidated debt to capital 23% 27% 23% ________________ * Before litigation costs; after litigation costs the ratio was 3.4 **Before realignment expenses; after realignment expenses the ratio was 3.9
Sources and Uses of Funds To pay interest and principal on borrowings and other holding company costs, GAFRI (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. 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 2001 without prior regulatory approval is $52.1 million. In 2000, GALIC made $33 million in such payments, net of capital contributions received from AAG Holding.
In the third quarter of 2000, GAFRI paid down approximately $50 million of its bank credit line. In January 2001, the Company replaced its existing agreement with a $155 million unsecured credit agreement which matures at December 31, 2004. At February 28, 2001, GAFRI (parent) had over $100 million available under its bank credit line.
GAFRI's sale of its Funeral Services Division in September 1998 netted approximately $165 million in cash ($145 million after-tax). The majority of the proceeds were received by GAFRI's insurance subsidiaries.
GAFRI invests primarily in fixed income investments which, including loans and short-term investments, comprised 98% of its investment portfolio at December 31, 2000. GAFRI generally invests in securities having intermediate-term maturities with an objective of optimizing interest yields while maintaining an appropriate relationship of maturities between GAFRI's assets and expected liabilities.
The NAIC assigns quality ratings to publicly traded as well as privately placed securities. At December 31, 2000, 92% of GAFRI's fixed maturity portfolio was comprised of investment grade bonds (NAIC rating of "1" or "2"). Management believes that the high credit quality of GAFRI's investment portfolio should generate a stable and predictable investment return.
Uncertainties Litigation In March 2000, a jury in Dallas, Texas, returned a verdict against GALIC with total damages 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.
December 31, 2000 December 31, 1999 Principal Principal Cash Flows Rate Cash Flows Rate 2001 $ 340 8.4% 2000 $ 350 7.9% 2002 419 7.8 2001 390 8.3 2003 823 7.7 2002 560 8.0 2004 551 8.0 2003 690 7.6 2005 688 7.9 2004 670 7.8 Thereafter 3,330 7.5 Thereafter 3,490 7.7
December 31, 2000 December 31, 1999 Scheduled Scheduled Principal Principal Payments Rate Payments Rate 2001 through 2005 * 2000 through 2004 * Thereafter $100.9 6.9% Thereafter $101.2 6.9%
was 6.3% at March 1, 2001, 7.3% at December 31, 2000, and 6.8% at December 31, 1999. There were $218 million and $220 million of subsidiary trust preferred securities outstanding at December 31, 2000, and 1999, 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 8.4%.
GAFRI (Consolidated): 2000 1999 1998 Revenues per income statement $824.3 $661.5 $746.4 Less realized losses (gains) on sales of investments and subsidiaries (7.8) 7.1 (25.6) Core operating revenues 816.5 668.6 720.8
Real Estate Operations GAFRI is engaged in a variety of real estate operations including hotels, an office building and a marina; GAFRI also owns several parcels of land. Revenues and expenses of these operations, including gains on disposal, are included in GAFRI's Consolidated Income Statement as shown below (in millions). 2000 1999 1998 Other income $38.3 $28.6 $29.6 Other expenses 31.3 25.6 18.5
Other income included a pretax gain on the sale of real estate assets of $6.7 million in 1998.
Annuity Benefits Annuity benefits reflect amounts accrued on annuity policyholders' funds accumulated. The majority of GAFRI's fixed rate annuity products permit GAFRI 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), GAFRI 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), GAFRI 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.
Provision for Litigation Costs In the second quarter of 2000, the Company recorded a charge of $32.5 million for liabilities related to various litigation in which the Company or one of its subsidiaries is a defendant. The charge represents amounts that the Company agreed to pay in various settled cases and estimates of the ultimate liability in certain cases not yet finalized. The most significant case included in this charge was a class action in which GALIC was a defendant. The settlement of this case was approved by the court in November 2000. (See Item 3 - "Legal Proceedings").
Equity in Losses of Affiliate Equity in losses of affiliate represents GAFRI's proportionate share of the results of Chiquita Brands International, as well as the writedown in 2000 of GAFRI's investment in Chiquita to market value of approximately $1 per share. Chiquita reported net losses attributable to common shareholders of $112 million, $75.5 million and $35.5 million in 2000, 1999 and 1998, respectively.
Chiquita's operating income declined in 1999 from 1998 primarily due to weak banana pricing, particularly in Europe as a result of the overallocation of EU banana import licenses early in the year and weakness in demand from Eastern Europe and Russia.
In the first quarter of 1999, GAFRI 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, GAFRI expensed previously capitalized start-up costs of $4.7 million (net of tax) in the first quarter of 1999.
Accounting Year Standard Subject of Standard Implemented SOP 98-5 Start-Up Costs 1999 SFAS #133 Derivatives 2000
Consolidated Income Statement: Years Ended December 31, 2000, 1999 and 1998
Consolidated Statement of Changes in Stockholders' Equity: Years Ended December 31, 2000, 1999 and 1998
The information required by the following Items will be included in GAFRI's definitive Proxy Statement for the 2001 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:
We have audited the accompanying consolidated balance sheet of Great American Financial Resources, Inc. and subsidiaries as of December 31, 2000 and 1999, 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, 2000. 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Great American Financial Resources, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, 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.
CONSOLIDATED BALANCE SHEET (Dollars in millions) December 31, 2000 1999 Assets Investments: Fixed maturities - at market (amortized cost - $6,088.0 and $6,073.2) $6,117.1 $5,946.7 Equity securities - at market (cost - $30.5 and $43.6) 67.9 72.3 Investment in affiliate 2.7 12.3 Mortgage loans on real estate 24.4 16.0 Real estate 72.2 73.6 Policy loans 213.5 217.2 Short-term investments 49.5 80.2 Total investments 6,547.3 6,418.3
Year ended December 31, 2000 1999 1998 Revenues: Life, accident and health premiums $230.4 $119.1 $165.5 Net investment income 495.7 493.3 502.5 Realized gains (losses) on sales of: Investments 7.8 (7.1) 4.0 Subsidiaries - - 21.6 Other income 90.4 56.2 52.8 824.3 661.5 746.4 Costs and Expenses: Annuity benefits 278.9 262.6 261.7 Life, accident and health benefits 175.2 86.4 131.7 Insurance acquisition expenses 62.3 45.0 65.0 Trust preferred distribution requirement 18.4 18.6 19.0 Interest and other debt expenses 13.8 11.9 10.8 Provision for litigation costs 32.5 - - Provision for realignment expenses - 10.0 - Other expenses 162.1 135.0 114.3 743.2 569.5 602.5
Operating earnings before income taxes 81.1 92.0 143.9 Provision for income taxes 21.0 26.5 46.1
Net operating earnings 60.1 65.5 97.8 Equity in losses of affiliate, net of tax (6.2) (2.0) (0.3)
Basic earnings (loss) per common share: Income before extraordinary item and accounting changes $1.27 $1.50 $2.27 Extraordinary item - - (0.02) Accounting changes 0.02 (0.11) - Net income $1.29 $1.39 $2.25
Diluted earnings (loss) per common share: Income before extraordinary item and accounting changes $1.26 $1.48 $2.23 Extraordinary item - - (0.02) Accounting changes 0.02 (0.11) - Net income $1.28 $1.37 $2.21
Average number of common shares: Basic 42.3 42.4 43.0 Diluted 42.7 43.0 43.7 Cash dividends per common share $0.10 $0.10 $0.10
Retained Earnings: Balance at beginning of year $186.5 $131.9 $ 39.5 Net income 54.7 58.8 96.7 Common dividends declared (4.2) (4.2) (4.3) Balance at end of year $237.0 $186.5 $131.9
CONSOLIDATED STATEMENT OF CASH FLOWS (In millions) Year ended December 31, 2000 1999 1998 Cash Flows from Operating Activities: Net income $ 54.7 $ 58.8 $ 96.7 Adjustments: Extraordinary loss on prepayment of debt - - 0.8 Cumulative effect of accounting changes (0.8) 4.7 - Equity in losses of affiliate, net of tax 6.2 2.0 0.3 Increase in life, accident and health reserves 78.8 39.3 47.1 Benefits to annuity policyholders 278.9 262.6 261.7 Amortization of insurance acquisition costs 62.3 45.0 55.4 Depreciation and amortization 6.7 7.2 12.6 Realized (gains) losses (7.8) 7.1 (25.6) Increase in insurance acquisition costs (146.7) (119.4) (117.2) Other, net (18.9) 18.2 (26.5) 313.4 325.5 305.3 Cash Flows from Investing Activities: Purchases of and additional investments in: Fixed maturity investments (794.1) (1,435.7) (1,121.9) Equity securities (10.7) (7.9) (23.5) Real estate, mortgage loans and other assets (15.8) (42.8) (25.7) Purchase of subsidiaries - (128.7) (31.8) Sale of subsidiaries - - 164.6 Cash and short-term investments of subsidiaries acquired (sold) - 66.1 (18.2) Maturities and redemptions of fixed maturity investments 392.4 617.6 673.0 Sales of: Fixed maturity investments 374.8 750.4 369.5 Equity securities 44.5 11.3 6.3 Real estate, mortgage loans and other assets 1.6 42.3 20.4 Decrease in policy loans 3.7 3.8 1.5 (3.6) (123.6) 14.2 Cash Flows from Financing Activities: Fixed annuity receipts 496.8 446.4 480.6 Annuity surrenders, benefits and withdrawals (731.9) (698.2) (688.2) Net transfers to variable annuity assets (50.5) (19.5) (4.7) Additions to notes payable 9.6 71.1 150.0 Reductions of notes payable (59.0) (0.8) (156.1) Issuance of Common Stock 1.1 0.6 0.4 Retirement of Common Stock (2.4) (5.2) (14.9) Repurchase of trust preferred securities (1.4) (5.5) - Cash dividends paid (4.2) (4.2) (4.3) (341.9) (215.3) (237.2) Net increase (decrease) in cash and short-term investments (32.1) (13.4) 82.3 Beginning cash and short-term investments 119.6 133.0 50.7 Ending cash and short-term investments $ 87.5 $ 119.6 $ 133.0
INDEX TO NOTES A. Description of the Company J. Stockholders' Equity B. Summary of Significant Accounting K. Income Taxes Policies L. Leases C. Acquisitions and Sale of M. Earnings Per Share Subsidiaries N. Contingencies D. Segments of Operations O. Statutory Information E. Investments P. Additional Information F. Investment in Affiliate Q. Quarterly Financial Data G. Unamortized Insurance (Unaudited) Acquisition Costs H. Notes Payable I. Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
Basis of Presentation The accompanying Consolidated Financial Statements include the accounts of GAFRI 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.
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.
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.
Variable Annuity Assets and Liabilities Separate accounts related to variable annuities represent deposits invested in underlying investment funds on which GAFRI 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.
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.
In 1999, GAFRI acquired United Teacher Associates Insurance Company ("UTA"), Consolidated Financial Corporation, an insurance agency, and Great American Life Insurance Company of New York (formerly known as Old Republic Life Insurance Company of New York) for approximately $129 million in cash.
In 1998, GAFRI sold its Funeral Services Division for approximately $165 million in cash realizing a $14.8 million after-tax gain. This division had assets of approximately $1 billion as of the sale date.
GAFRI's life and annuity operations offer fixed and variable annuity products and traditional life insurance products. GAFRI's annuity products are sold through managing general agents and independent agents to employees of primary and secondary educational institutions, hospitals and in the non-qualified markets. Traditional term, universal and whole life insurance products are sold through national marketing organizations. Approximately one-fourth of GAFRI's annuity premiums came from California in 1998 through 2000. No other state accounted for more than 10% of premiums. Sales from GAFRI's top two Managing General Agencies accounted for 7% and 4% of annuity premiums in 2000.
Corporate and other consists primarily of GAFRI (parent), AAG Holding and in 1998, the Funeral Services Division.
Revenues Life and annuity products $555.0 $520.3 $482.8 Supplemental insurance products(b) 193.3 79.3 59.5 GA Life of Puerto Rico 58.7 54.7 53.3 Corporate and other(c) 9.5 14.3 125.2 Total operating revenues 816.5 668.6 720.8
Realized gains (losses)(d) 7.8 (7.1) 25.6 Total revenues per income statement $824.3 $661.5 $746.4
Operating profit - pretax Life and annuity products $136.5 $120.1 $117.1 Supplemental insurance products 2.3 6.2 12.9 GA Life of Puerto Rico 9.8 9.0 8.2 Corporate and other (42.8) (26.2) (19.9) Pretax earnings from operations 105.8 109.1 118.3
(a) Increase in "Supplemental insurance products" assets in 1999 reflects the October 1999 acquisition of UTA. (b) Increase in "Supplemental insurance products" revenues in 2000 includes UTA revenues for a full year as opposed to only one quarter in 1999. (c) Decrease in "Corporate and other" revenues in 1999 reflects the sale of Funeral Services Division in 1998. (d) Includes gain on sale of subsidiaries in 1998. (e) Reflects litigation costs for "Life and annuity products" ($31.5 million)and "Supplemental insurance products" ($1.0 million). (f) Reflects realignment expenses for "Life and annuity products" ($1.5 million), "Supplemental insurance products" ($0.4 million) and "Corporate and other" ($8.1 million).
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)
At December 31, 2000, GAFRI had no investment in excess of 10% of stockholders' equity except for certain investments guaranteed by the U.S. Government or government agencies.
At December 31, 2000 and 1999, gross unrealized gains on its marketable equity securities were $39.8 million and $35.7 million, respectively. At December 31, 2000 and 1999, gross unrealized losses were $2.4 million and $7.0 million, respectively. Realized gains and changes in unrealized appreciation on fixed maturity and equity security investments are summarized as follows (in millions):
Fixed Equity Tax Maturities Securities Other Effects Total Realized ($ 12.8) $20.8 ($0.2) ($ 2.7) $ 5.1 Change in unrealized 155.6 8.7 - (56.0) 108.3
Realized ($ 8.8) $ 0.2 $1.5 $ 2.5 ($ 4.6) Change in unrealized (366.8) (9.8) - 129.8 (246.8)
Realized $ 2.6 $ 1.8 $6.3 ($ 3.9) $ 6.8 Change in unrealized (1.3) (13.6) - 6.4 (8.5)
2000 1999 1998 Fixed maturities* $491.5 $492.3 $502.1 Other 6.8 6.1 5.1 Total investment income 498.3 498.4 507.2 Investment expenses (2.6) (5.1) (4.7) Net investment income $495.7 $493.3 $502.5
2000 1999 Direct obligations of GAFRI $ 2.0 $ 2.2 Obligations of AAG Holding (guaranteed by GAFRI): 6-7/8% Senior Notes due 2008 100.0 100.0 Bank Credit Line 48.5 97.0 Other subsidiary debt 1.4 2.1 Total $151.9 $201.3
At December 31, 2000, scheduled principal payments on debt for the subsequent five years, adjusted to reflect the new credit agreement, were as follows (in millions):
Wholly-owned subsidiary trusts of GAFRI issued $225 million of preferred securities and, in turn, purchased a like amount of 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. GAFRI effectively provides an unconditional guarantee of the Trusts' obligations. The three preferred securities issues are summarized as follows:
Cash payments with respect to the preferred securities were $18.4 million in 2000 and $18.8 million in 1999.
Pretax Taxes Net Unrealized holding gains (losses) on securities arising during the period $154.7 ($52.6) $102.1 Reclassification adjustment for investment losses (gains) realized in net income and unrealized gains of subsidiaries sold (8.1) 2.8 (5.3) Unrealized gain on securities transferred from held to maturity - - - Change in net unrealized gains (losses) on marketable securities $146.6 ($49.8) $96.8
Pretax Taxes Net Unrealized holding gains (losses) on securities arising during the period $ 6.6 ($ 1.0) $ 5.6 Reclassification adjustment for investment losses (gains) realized in net income and unrealized gains of subsidiaries sold (27.8) 9.7 (18.1) Unrealized gain on securities transferred from held to maturity 60.6 (21.2) 39.4 Change in net unrealized gains (losses) on marketable securities $ 39.4 ($12.5) $26.9
Average Exercise Shares Price Outstanding at beginning of year 2,521,115 $17.10 Granted 650,000 $15.15 Forfeited (236,100) $19.32 Exercised (65,553) $13.43
Average Exercise Shares Price Outstanding at beginning of year 2,178,190 $15.21 Granted 417,000 $22.51 Forfeited (90,332) $16.57 Exercised (40,778) $13.80
The average remaining life of GAFRI's options was 7.2 years at December 31, 2000. The exercise prices of options issued during the year ranged from $15.00 to $17.50 in 2000; $21.73 to $24.25 in 1999 and $22.13 to $24.38 in 1998.
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,
2000 1999 1998 Dividend yield <1% <1% <1% Expected volatility 20% 20% 20% Expected life (years) 7.5 7.5 7.5 Risk free interest rates: Low 6.1% 5.0% 4.7% High 6.4% 5.9% 5.7%
2000 1999 1998 Earnings before income taxes: Operating $81.1 $92.0 $143.9 Equity in losses of affiliate (9.5) (3.0) (0.4) Extraordinary item - - (1.2) Cumulative effect of accounting changes 1.2 (7.2) - Earnings before income taxes $72.8 $81.8 $142.3
Amounts applicable to losses of affiliate 3.3 1.0 0.1 Amounts applicable to extraordinary item - - 0.4 Amounts applicable to accounting changes (0.5) 2.5 - Provision for income tax as shown in Consolidated Income Statement $21.0 $26.5 $ 46.1
Included in its consolidated tax provision is tax expense of $3.4 million, $3.2 million and $2.9 million in 2000, 1999 and 1998, respectively, related to GAFRI's operations in Puerto Rico.
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
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, 2000 are payable as follows: 2001 - $5.2 million; 2002 - $5.3 million; 2003 - $5.1 million; 2004 - $4.7 million; 2005 - $3.9 million; 2006 and beyond - $4.7 million.
In March 2000, a jury in Dallas, Texas, returned a verdict against GALIC with total damages 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.
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 GAFRI. At December 31, 2000, 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 million to $11 million. The majority of these costs are expected to be paid out over the next three years. The Company's reserve for environmental costs was $4.6 million at December 31, 2000, and $5.3 million at December 31, 1999.
Capital and surplus $362.5 $403.8 $350.4 Asset valuation reserve 75.6 66.5 62.6 Interest maintenance reserve 3.3 9.8 20.6
Securities owned by insurance subsidiaries having a carrying value of about $132 million at December 31, 2000, were on deposit as required by regulatory authorities.
GALIC has a line of credit with a company owned by AFG and brothers of GAFRI's Chairman. Under the agreement, this company may borrow up to $8 million at 13%. At December 31, 2000 and 1999, $8 million was due under the credit line.
Net investment income includes approximately $1 million in 2000, 1999 and 1998 of payments from a subsidiary of AFG for the rental of an office building owned by GALIC. In connection with AFG's IT initiative, approximately 70 of GAFRI's IT employees were transferred to AFG at the end of 1999. In 2000, GAFRI made approximately $8 million in payments to AFG for IT services.
2000 1999 Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value Assets Fixed maturity investments $6,117.1 $6,117.1 $5,946.7 $5,946.7 Equity securities 67.9 67.9 72.3 72.3 Investment in affiliate 2.7 2.7 12.3 12.7
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)
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, 2000 and 1999 (in millions, except per share data).
First Second Third Fourth Total 2000 Quarter Quarter Quarter Quarter Year Realized gains (losses) ($ 2.9) ($ 0.8) $ 18.5 ($ 7.0) $ 7.8 Total revenues 187.0 195.9 236.2 205.2 824.3
Income (loss) before accounting changes 17.4 (1.9) 30.5 7.9 53.9 Accounting changes - - - 0.8 0.8 Net income (loss) 17.4 (1.9) 30.5 8.7 54.7
Diluted earnings (loss) per common share: Income before accounting changes $0.41 ($0.05)* $0.72 $0.18 $1.26 Accounting changes - - - 0 02 0.02 Net income (loss) $0.41 ($0.05)* $0.72 $0.20 $1.28
Average common shares outstanding Basic 42.4 42.3 42.3 42.3 42.3 Diluted 42.6 42.6 42.8 42.8 42.7
Realized gains (losses) $ 4.0 ($ 2.3) ($ 5.9) ($ 2.9)($ 7.1) Total revenues 157.4 155.6 163.9 184.6 661.5
**In the fourth quarter of 1999, GAFRI 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.
December 31, Assets: 2000 1999 Investments: Fixed maturities - at market (amortized cost - $11.6 and $17.0) $ 9.4 $ 14.6 Equity securities - at market (cost - $0.3 and $2.1) 0.3 2.1 Cash and short-term investments 3.2 1.1 Investment in affiliate 2.7 21.3 Investment in subsidiaries (a) 594.5 420.2 Note receivable from AAG Holding 94.8 94.8 Other assets 38.6 33.1 $743.5 $587.2 Liabilities and Capital: Accounts payable, accrued expenses and other liabilities $ 30.3 $ 26.9 Payables to affiliates 39.5 32.4 Notes payable 2.0 2.2 Stockholders' equity (b) 671.7 525.7 $743.5 $587.2
Extraordinary item, net of tax - - (0.8) Cumulative effect of accounting changes, net of tax 0.8 (4.7) - Net Income $ 54.7 $ 58.8 $ 96.7
Cash Flows from Financing Activities: Additions to notes payable 0.1 1.1 - Reductions of notes payable (0.3) (0.1) (0.1) Issuance of Common Stock 1.1 0.6 0.4 Retirement of Common Stock (2.4) (5.2) (14.9) Repurchase of trust preferred securities - (5.5) - Cash dividends paid (4.2) (4.2) (4.3) (5.7) (13.3) (18.9)
Net increase (decrease) in cash and short-term investments 2.1 (2.5) - Beginning cash and short-term investments 1.1 3.6 3.6 Ending cash and short-term investments $ 3.2 $ 1.1 $ 3.6
10.1 Agreement of Allocation of Payment of Federal Income Taxes ("Great American Financial Resources 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.
10.4 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.
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Great American Financial Resources, Inc. has duly caused this Report to be signed on its behalf by the undersigned, duly authorized.
Signed: March 28, 2001 BY:s/CARL H. LINDNER Carl H. Lindner Chairman of the Board