Loyal's home office building in Mobile, Alabama, contains approximately 89,000 square feet, of which approximately two-thirds is utilized for Company purposes. The remainder of the building is leased to unaffiliated tenants.
These facilities are currently being leased to companies using them for manufacturing operations. The Company is attempting to sell these facilities.
The following financial data have 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 purchase of GALIC as of December 31, 1992 (as indicated by the vertical line) and the acquisition of Laurentian as of November 13, 1995 (in millions, except per share amounts).
Income Statement Data: 1995 1994 1993 1992 1991 Total revenues $439.6 $372.7 $388.9 $3.6 $1.9 Income (loss) from continuing operations 58.7 40.9 53.0 (9.0) (4.7) Loss from discontinued operations (3.2) (2.6) (9.6) (16.8) (47.8) Extraordinary items (0.2) (1.7) (3.4) - - Changes in accounting principle - (0.5) - (3.1) - Net income (loss) $ 55.3 $ 36.1 $ 40.0 ($28.9) ($52.5)
Income Statement Data: Total revenues * * * $342.5 $402.6 Income from continuing operations * * * 49.2 103.0 Net income * * * 42.5 64.3
Balance Sheet Data: Total assets * * * *$4,685.5 Net unrealized gains (losses) included in stockholders' equity * * * * (5.5) Total stockholders' equity * * * * 358.2
Ratios AAG's ratio of earnings to fixed charges was 6.0 in 1995, 4.0 in 1994 and 4.7 in 1993. The ratio of AAG's consolidated debt to equity excluding the effects of unrealized gains and losses on stockholders' equity was .49, .79 and 1.17 at December 31, 1995, 1994 and 1993, respectively. These same ratios including the effects of unrealized gains and losses were .39, .90 and .90, respectively.
The National Association of Insurance Commissioners' ("NAIC") model law for risk-based capital ("RBC") formulas 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, 1995, the capital ratios of each of AAG's principal insurance subsidiaries exceeded the RBC requirements by substantial amounts.
In 1994, management concluded that the Company's operations would benefit from a reduction in total indebtedness and the resulting reduction in debt service requirements. The perceived benefits included (i) the ability to retain cash to be utilized to expand the Company's operations, and (ii) the prospect for better ratings for the Company's insurance subsidiaries. As a result, in March 1994, AAG began to acquire its outstanding indebtedness, primarily through privately negotiated transactions. In total (through February 1996), the Company has repurchased $104 million principal amount of Notes. The total consideration paid in these transactions was 810,000 shares of the Company's Common Stock and $98 million in cash.
The November 1995 acquisition of Laurentian Capital Corporation ("LCC") was funded primarily with internal funds supplemented by bank borrowings and the proceeds of the August stock offering.
AAG's ability to pay interest and principal on its debt, dividends on its preferred stock, obligations related to the Company's discontinued manufacturing operations and other holding company costs is dependent on payments from GALIC in the form of capital distributions and income tax payments. In 1995, AAG received $41.0 million in tax allocation payments and $54.2 million in capital distributions from GALIC. In 1995, AAG made capital contributions of $31.5 million to GALIC.
Investments Insurance laws restrict the types and amounts of investments which are permissible for life insurers. These restrictions are designed to ensure the safety and liquidity of insurers' investment portfolios. The NAIC is still considering the formulation of a model investment law. The formulation is in the preliminary stages and management believes its impact on AAG's operations will not be material.
AAG invests primarily in fixed income investments which, including loans and short-term investments, comprised over 98% of its investment portfolio at December 31, 1995. AAG generally invests in securities with intermediate- term maturities with an objective of optimizing interest yields while maintaining an appropriate relationship of maturities between AAG's assets and expected liabilities. At December 31, 1995, AAG had approximately $242 million in net unrealized gains on its fixed maturity portfolio compared to net unrealized
At December 31, 1995, AAG had approximately 1.7% of total assets invested in mortgage loans and real estate. The majority of these investments were purchased within the last three years.
The following table (in millions) illustrates the Company's net operating earnings, as analyzed by management.
AAG (Consolidated): 1995 1994 1993 Revenues per income statement $439.6 $372.7 $388.9 Less realized (gains) losses (15.7) 0.1 (35.5) Operating revenues 423.9 372.8 353.4 Costs and expenses per income statement (348.9) (309.5) (308.9) Less provision for GALIC relocation expenses - - 8.0 Operating expenses (348.9) (309.5) (300.9) Operating earnings before taxes 75.0 63.3 52.5 Income tax expense 26.5 22.3 17.4 Net operating earnings $ 48.5 $ 41.0 $ 35.1
GALIC's annuity receipts have increased primarily on the strength of sales of newly introduced single premium products and the development of new single premium distribution channels.
Equity in Net Earnings (Loss) of Affiliate Equity in net earnings (loss) of affiliate represents AAG's proportionate share of Chiquita's earnings (losses). Chiquita reported income before extraordinary items for 1995 of $17 million compared to losses before extraordinary items of $49 million for 1994 and $51 million in 1993.
Amortization of Insurance Acquisition Costs Amortization of insurance acquisition costs increased to $12.7 million in 1995 from $7.1 million in 1994 due primarily to an increase in the average balance of deferred policy acquisition costs ("DPAC").
Interest on Borrowings and Other Debt Expenses Interest on borrowings decreased 18% in 1995 and 5% in 1994 due to repurchases of debt during 1995 and 1994. (See Note G to Consolidated Financial Statements.)
Other Expenses Other expenses increased 35% in 1995, reflecting additional costs for Guaranty Association fees and expanded distribution networks, and the operating and general expenses of Prairie and Loyal. In 1994, other expenses increased 13%. Additional costs for information systems, communications, rent and new distribution networks were partially offset by lower employee costs; 1993 employee costs were unusually high due to the temporary staff required for the relocation of operations from Los Angeles to Cincinnati.
Discontinued Operations The Company has sold all of its former manufacturing operations. Certain properties utilized in the former manufacturing operations continue to be held for sale, many of which are currently leased to companies using them for manufacturing operations.
The Company has certain obligations related to its former business activities. Among these obligations are the funding of pension plans, environmental costs, settlement of government claims, lease payments for a former plant site, certain retiree medical benefits, and certain obligations associated with the sales of the Company's manufacturing operations. (See Notes I and L to Consolidated Financial Statements.)
Extraordinary Items Extraordinary items reflect AAG's losses, net of tax, on retirements of its debt in 1995 ($150,000), 1994 ($1.0 million) and 1993 ($3.4 million). In addition, AAG recorded a pretax charge of $1.1 million ($700,000 net of tax), representing AAG's proportionate share of Chiquita's extraordinary loss on the retirement of certain debt in 1994.
Accounting Change Effective January 1, 1994, AAG implemented Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits", and recorded a pretax charge of $740,000 ($481,000, net of tax) for the projected future costs of providing certain benefits to employees of GALIC.
Consolidated Income Statement: Years Ended December 31, 1995, 1994 and 1993
Year ended December 31, 1995 1994 1993 Revenues: Net investment income $405.5 $371.8 $353.3 Realized gains (losses) on sales of investments 15.7 (0.1) 35.5 Life, accident and health premiums 15.7 2.2 2.4 Equity in net earnings (loss) of affiliate 0.1 (2.8) (2.9) Other income 2.6 1.6 0.6 439.6 372.7 388.9 Costs and Expenses: Annuity benefits 254.7 241.9 228.6 Life, accident and health benefits 13.2 1.5 1.7 Amortization of insurance acquisition costs 12.7 7.1 14.7 Interest on borrowings and other debt expenses 17.6 21.4 22.6 Provision for GALIC relocation expenses - - 8.0 Other expenses 50.7 37.6 33.3 348.9 309.5 308.9 Income from continuing operations before income taxes 90.7 63.2 80.0 Provision for income taxes 32.0 22.3 27.0
Income before extraordinary items and cumulative effect of accounting change 55.5 38.3 43.4
Extraordinary items, net of tax (0.2) (1.7) (3.4) Cumulative effect of accounting change, net of tax - (0.5) -
Cash dividends per common share $0.07 $0.06 $0.05 See Notes to Consolidated Financial Statements.
Capital Surplus: Balance at beginning of year $330.8 $301.0 $306.3 Common Stock issued during the year 33.3 33.0 - Common dividends declared (3.0) (2.3) (1.7) Preferred dividends declared - (0.8) (3.1) Accretion of Preferred Stock discount - (0.1) (0.5) Balance at end of year $361.1 $330.8 $301.0
Beginning cash and short-term investments 62.7 72.0 256.5 Ending cash and short-term investments $ 169.4 $ 62.7 $ 72.0
AAG's parent, American Financial Corporation ("AFC"), was acquired by American Financial Group, Inc. ("AFG") in April 1995. AFG and its subsidiaries owned 35,059,995 shares (81%) of AAG's Common Stock at December 31, 1995.
Basis of Presentation The accompanying consolidated financial statements include the accounts of AAG and its subsidiaries. Intercompany transactions and balances are eliminated in consolidation. Certain reclassifications have been made to prior periods to conform to the current year's presentation.
Investments Debt securities are classified as "held to maturity" and reported at amortized cost if AAG has the positive intent and ability to hold them to maturity. Debt and equity securities are classified as "available for sale" and reported at fair value with unrealized gains and losses reported as a separate component of stockholders' equity if the debt or equity securities are not classified as held to maturity or bought and held principally for selling in the near term. Only in certain limited circumstances, such as significant issuer credit deterioration or if required by insurance or other regulators, may a company change its intent to hold a certain security to maturity without calling into question its intent to hold other debt securities to maturity in the future.
Insurance Acquisition Costs Unamortized insurance acquisition costs consist primarily of deferred policy acquisition costs and the present value of future profits of acquired companies.
Deferred costs related to annuities and universal life insurance products are amortized, with interest, in relation to the present value of expected gross profits on the policies. These expected gross profits consist principally of estimated future net investment income and surrender, mortality and other policy charges, less estimated future interest on policyholders' funds, policy administration expenses and death benefits in excess of account values. DPAC is reported net of unearned revenue relating to certain policy charges that represent compensation for future services. These unearned revenues are recognized as income using the same assumptions and factors used to amortize DPAC.
Deferred costs related to traditional life and health insurance are amortized over the expected premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues were estimated using the same assumptions used for computing liabilities for future policy benefits.
Annuity Benefits Accumulated Annuity receipts and benefit payments are generally recorded as increases or decreases in "annuity benefits accumulated" rather than as revenue and expense. Increases in this liability for interest credited are charged to expense and decreases for surrender charges are credited to other income.
Assets Held In and Liabilities Related To Separate Accounts Investment annuity deposits and related liabilities represent deposits maintained by several banks under a previously offered tax-deferred annuity program. The Company receives an annual fee from each bank for sponsoring the program; if depositors elect to purchase an annuity from the Company, funds are transferred to the Company.
Income Taxes AAG, Great American Life Insurance Company ("GALIC") and all other 80%-owned U.S. non-life subsidiaries are consolidated with AFC for federal income tax purposes. The life insurance subsidiaries of LCC will file separate federal income tax returns through the year 2000.
AAG and GALIC have separate tax allocation agreements with AFC which designate how tax payments are shared by members of the tax group. In general, both companies compute taxes on a separate return basis. GALIC is obligated to make payments to (or receive benefits from) AFC based on taxable income without regard to temporary differences. In accordance with terms of AAG's indentures, AAG receives GALIC's tax allocation payments for the benefit of AAG's deductions arising from current operations. If GALIC's taxable income (computed on a statutory accounting basis) exceeds a current period net operating loss of AAG, the taxes payable by GALIC associated with the excess are payable to AFC. If the AFC tax group utilizes any of AAG's net operating losses or deductions that originated prior to AAG's entering AFC's consolidated tax group, AFC will pay to AAG an amount equal to the benefit received.
Debt Issuance Costs Debt expenses are amortized over the terms of the respective borrowings on the interest method.
AAG and certain of its subsidiaries provide certain benefits to eligible retirees. Effective January 1, 1994, AAG implemented Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" which covers benefits to former or inactive employees (primarily those on disability) who were not deemed retired under other Company plans. The projected future cost of providing these benefits is expensed over the period the employees earn such benefits.
On November 13, 1995, AAG acquired all of the outstanding shares of LCC. Its principal insurance subsidiaries were Prairie States Life Insurance Company ("Prairie") and Loyal American Life Insurance Company ("Loyal").
1995 1994 Total revenues $563.6 $500.6 Income before extraordinary items 61.6 47.5 Net income 61.4 45.3 Net income per share 1.42 1.06
Fixed maturity investments at December 31, consisted of the following (in millions): Held to Maturity Amortized Market Gross Unrealized Cost Value Gains Losses U. S. Government and government agencies and authorities $ - $ - $ - $ - Public utilities 393.1 405.5 13.4 (1.0) Mortgage-backed securities 659.6 686.0 27.0 (0.6) All other corporate 1,444.5 1,508.5 64.1 (0.1) $2,497.2 $2,600.0 $104.5 ($1.7)
Held to Maturity Amortized Market Gross Unrealized Cost Value Gains Losses U. S. Government and government agencies and authorities $ - $ - $ - $ - Public utilities 461.2 424.0 0.8 (38.0) Mortgage-backed securities 721.0 657.9 0.1 (63.2) All other corporate 2,091.5 1,980.5 6.7 (117.7) $3,273.7 $3,062.4 $7.6 ($218.9)
Available for Sale Amortized Market Gross Unrealized Cost Value Gains Losses U. S. Government and government agencies and authorities $ 130.3 $ 125.3 $0.1 ($ 5.1) Public utilities 66.2 63.7 0.2 (2.7) Mortgage-backed securities 604.6 564.8 0.7 (40.5) All other corporte 525.3 504.8 2.2 (22.7) $1,326.4 $1,258.6 $3.2 ($71.0)
Gross gains of $45.3 million and gross losses of $11.0 million were realized on sales of fixed maturity investments during 1993.
Distribution based on market value is generally the same. Mortgage-backed securities had an expected average life of approximately 7-1/2 years at December 31, 1995.
Certain risks are inherent in connection with fixed maturity securities, including loss upon default, price volatility in reaction to changes in interest rates and general market factors and risks associated with reinvestment of proceeds due to prepayments or redemptions in a period of declining interest rates.
Fixed Equity Tax MaturitiesSecurities Effects Total Realized $ 15.1 $ 0.6 ($ 5.5) $ 10.2 Change in unrealized 520.9 7.5 (184.9) 343.5
Realized $ 34.3 $ 1.2 ($ 12.4) $ 23.1 Change in unrealized 88.6 10.9 (34.8) 64.7
1995 1994 1993 Fixed maturities $405.2 $372.7 $354.8 Other 5.7 4.0 3.4 Total investment income 410.9 376.7 358.2 Investment expenses (5.4) (4.9) (4.9) Net investment income $405.5 $371.8 $353.3
Investment in affiliate (carrying value of $20.3 million at December 31, 1995) reflects AAG's 5% ownership (2.7 million shares) of the common stock of Chiquita Brands International ("Chiquita") which is accounted for under the equity method. AFG and its other subsidiaries owned an additional 39% interest in the common stock of Chiquita. Chiquita is a leading international marketer, processor and producer of quality food products. The market value of AAG's investment in Chiquita was approximately $36.7 million and $36.4 million at December 31, 1995 and 1994, and $41.8 million at February 29, 1996.
Included in AAG's retained earnings (deficit) at December 31, 1995, was approximately $5.8 million applicable to equity in undistributed net losses of Chiquita.
In the first two months of 1996, the Company repurchased $22.1 million principal amount of its 11-1/8% Senior Subordinated Notes realizing a pretax extraordinary loss of approximately $2.5 million.
During 1995, AAG repurchased $2.4 million principal amount of its 11-1/8% Notes and $2.5 million principal amount of its 9-1/2% Notes. As a result of the repurchases, AAG realized a pretax extraordinary loss of $231,000.
During 1994, AAG repurchased $21.1 million principal amount of its 11-1/8% Notes (including $3 million purchased by GALIC) and $56.0 million principal amount of its 9-1/2% Notes (including $11 million purchased by GALIC) in exchange for approximately $69 million in cash and 810,000 shares of its Common Stock. As a result of the repurchases, AAG realized a pretax extraordinary loss of $1.5 million ($1.0 million net of tax).
On March 31, 1994, AAG issued approximately 3.2 million shares of Common Stock to GAI in exchange for all of AAG's outstanding $7.00 Series A Preferred shares.
In 1994, AAG recorded a $4.0 million pretax charge for discontinued operations, primarily related to environmental liabilities. In 1993, the pretax loss from discontinued operations was $14.8 million which included charges for employee related obligations of approximately $9.7 million resulting primarily from a decrease in the discount rate used to calculate pension obligations. The remaining charges reflected additional write-downs and other estimated expenses associated with the Company's former manufacturing properties.
1995 1994 1993 Federal: Current $31.9 $21.2 $27.4 Deferred (1.7) (1.4) (7.4) Total $30.2 $19.8 $20.0
At December 31, 1995, AAG had net operating loss carryforwards for federal income tax purposes of approximately $131 million which are scheduled to expire as follows: $1 million in 1996; $130 million in 2001 through 2005.
aggregate cost of environmental work at all sites for which it has responsibility will range from $8.8 million to $13.6 million. The reserve for environmental work was $10.3 million at December 31, 1995.
In 1991, the Company identified possible deficiencies in procedures for reporting quality assurance information to the Defense Electronics Supply Center with respect to the Company's former manufacturing operations. Over the last several years, the Company has been engaged in negotiations with the United States Government with respect to the settlement of claims the Government might have arising out of the reporting deficiencies. In March 1995, the Company received notification of additional alleged reporting deficiencies and based on management's evaluations additional reserves were established. The Company believes it has sufficient reserves to cover the estimated settlement amount.
Insurance companies are required to file financial statements with state insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). Certain statutory amounts for GALIC, Prairie and Loyal were as follows (in millions):
Prairie Policyholders' surplus $ 24.4 $ 24.1 Asset valuation reserve 3.0 2.5 Interest maintenance reserve 2.6 1.8
The amount of dividends which can be paid by GALIC without prior approval of regulatory authorities is subject to restrictions relating to capital and surplus, statutory net gain from operations and statutory net income. GALIC has been approved by the Ohio Department of Insurance to account for its investments in Prairie and Loyal on the equity method. Accordingly, under Ohio insurance regulations, GALIC's dividends are not dependent upon dividends from Prairie and Loyal. Based on net gain from operations at December 31, 1995, GALIC may pay approximately $58.6 million in dividends in 1996 without prior approval, according to the most restrictive dividend requirements of GALIC's domiciliary states.
Fair Value of Financial Instruments The following table shows (in millions) the carrying value and estimated fair value of AAG's financial instruments at December 31.
(b) Carrying values are shown net of debt issue costs of $3.6 at December 31, 1995 and $4.1 million at December 31, 1994.
When available, fair values are based on prices quoted in the most active market for each security. If quoted prices are not available, fair value is estimated based on present values, discounted cash flows, fair value of comparable securities, or similar methods. The fair value of short-term investments, mortgage loans on real estate and policy loans approximate their carrying value. The fair value of the liability for annuities in the payout phase is assumed to be the present value of the anticipated cash flows, discounted at current interest rates. Fair value of annuities in the accumulation phase is assumed to be the policyholders' cash surrender amount.
Unrealized Gains (Losses) The components of the Consolidated Balance Sheet caption "Unrealized gains (losses) on marketable securities, net" in stockholders' equity are summarized as follows (in millions):
Fixed maturities - available for sale $1,326.4 ($67.8) $1,258.6 Equity securities 10.7 11.0 21.7 Unamortized insurance acquisition costs, net 61.9 3.2 65.1 Annuity benefits accumulated (4,627.2) 9.1 (4,618.1) Deferred income taxes on net unrealized losses - 15.5 15.5 Unrealized losses on marketable securities, net ($29.0)
Income from continuing operations 11.4 12.2 16.6 18.5 58.7 Discontinued operations - - - (3.2) (3.2) Extraordinary item - - - (0.2) (0.2) Net income 11.4 12.2 16.6 15.1 55.3
Earnings (loss) per common share(b) Continuing operations $0.29 $0.31 $0.41 $0.43 $1.45 Discontinued operations - - - (.08) (.08) Extraordinary item - - - - - Net income per common share $0.29 $0.31 $0.41 $0.35 $1.37
Realized gains (losses) $ 0.6 $ - $ 0.1 ($ 0.8) ($ 0.1) Total revenues(a) 93.4 94.3 92.3 92.7 372.7
Income from continuing operations 10.8 11.1 9.4 9.6 40.9 Discontinued operations - (2.6) - - (2.6) Extraordinary items (1.1) (0.3) (0.4) 0.1 (1.7) Accounting change (0.5) - - - (0.5) Net income 9.2 8.2 9.0 9.7 36.1
Earnings (loss) per common share: Continuing operations $0.28 $0.28 $0.24 $0.25 $1.05 Discontinued operations - (0.07) - - (0.07) Extraordinary items (0.03) (0.01) (0.01) - (0.05) Accounting change (0.01) - - - (0.01) Net income per common share $0.24 $0.20 $0.23 $0.25 $0.92
December 31, Assets: 1995 1994 Cash and short-term investments $ 1.4 $ 1.9 Investment in subsidiaries(a) 687.0 457.4 Other assets 20.0 19.4 $708.4 $478.7 Liabilities and Capital: Accounts payable, accrued expenses and other liabilities $ 49.4 $ 41.6 Payables to affiliates 52.3 40.8 Notes payable(b) 177.4 191.9 Stockholders' equity(a) 429.3 204.4 $708.4 $478.7
Discontinued operations, net of tax (3.2) (2.6) (9.6) Income before extraordinary items and cumulative effect of accounting change 55.5 38.3 43.4
(a) Includes unrealized gains (losses) of $89.3 million and ($29.0) million in 1995 and 1994, respectively, and includes advances to subsidiaries.
(b) Includes $14.0 million principal amount of notes payable owned by GALIC.
Operating Activities: Net income $55.3 $36.1 $40.0 Adjustments: Discontinued operations 3.2 2.6 9.6 Extraordinary items 0.2 1.7 3.4 Accounting change - 0.5 - Equity in net earnings of subsidiaries (77.0) (59.7) (77.6) Depreciation and amortization 0.9 0.8 1.2 Decrease in other assets 0.1 2.7 0.4 Increase in balances with affiliates 13.5 13.1 40.0 Decrease (increase) in other liabilities 2.5 (12.8) (10.7) Capital distributions from GALIC 54.2 44.0 18.2 Contributions to subsidiaries (33.0) - - Other, net - - (0.1) 19.9 29.0 24.4
Investing Activities: Purchase of Laurentian Capital Corporation, net of cash acquired (63.6) - - Additional investments in subsidiaries - (9.3) (13.0) Sale of AILIC to GALIC 6.5 - - (57.1) (9.3) (13.0)
Financing Activities: Additions to notes payable 33.5 30.0 225.0 Reductions of notes payable (48.1) (55.1) (230.0) Issuance of Common Stock 37.3 - - Issuance of Preferred Stock 17.0 - - Cash dividends paid (3.0) (3.1) (4.1) 36.7 (28.2) (9.1)
Net Increase (Decrease) in Cash and Short-term Investments (0.5) (8.5) 2.3
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.
99.1 Credit Agreement dated as of January 31, 1994 amended and restated as of November 10, 1995.
s/WILLIAM J. MANEY Senior Vice President, March 18, 1996 William J. Maney Treasurer and Chief Financial Officer (Principal Accounting Officer)