The remaining material properties of the Company's former manufacturing operations are listed below. Lease Interior Expiration Location Square Feet Use (if leased) North Adams, MA 154,000 Manufacturing facility Owned Hudson, NH 121,400 Manufacturing facility March 2003 Longwood, FL 60,000 Manufacturing facility Owned North Adams, MA 44,000 R&D Facility Owned
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 American Memorial and Loyal in November 1995 (in millions, except per share amounts).
Income Statement Data: 1996 1995 1994 1993 1992 Total revenues $577.3 $439.6 $372.7 $388.9 $ 3.6 Income (loss) from continuing operations 61.1 58.7 40.9 53.0 (9.0) Loss from discontinued operations - (3.2) (2.6) (9.6) (16.8) Extraordinary items (6.0) (0.2) (1.7) (3.4) - Changes in accounting principles - - (0.5) - (3.1) Net income (loss) $ 55.1 $ 55.3 $ 36.1 $ 40.0 ($28.9)
AAG and its subsidiary, AAG Holding Company, Inc., are organized as holding companies with nearly all of their operations being conducted by their subsidiaries. These companies, however, have continuing expenditures for administrative expenses, corporate services, satisfaction of liabilities in connection with discontinued operations and for the payment of interest and principal on borrowings and shareholder dividends.
The National Association of Insurance Commissioners' ("NAIC") risk-based capital ("RBC") formulas determine 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 each of AAG's insurance subsidiaries exceeded the RBC requirements by substantial amounts.
In November 1996, a wholly-owned subsidiary trust raised $75 million in cash from the issuance of TOPrS. The Company used $50 million of the proceeds to retire bank debt; the remainder is being used for general corporate purposes. In March 1997, AAG raised an additional $75 million from a private offering of preferred securities similar to the TOPrS.
Since year-end 1993, AAG has retired $160 million principal amount of its public debentures (including $14 million repurchased and held by GALIC), using cash on hand and borrowings under its bank lines. At year end 1996, AAG Holding had approximately $70 million available under its bank lines of credit. AAG Holding expects to expand and extend its credit lines in the near future.
AAG invests primarily in fixed income investments which, including loans and short-term investments, comprised over 98% of its investment portfolio at December 31, 1996. 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.
Management believes that the structure and discounted nature of the MBSs will minimize the effect of prepayments on earnings over the anticipated life of the MBS portfolio.
General The operations of American Memorial Life Insurance Company and Loyal American Life Insurance Company are included in AAG's financial statements from the date of their acquisition in November 1995. Accordingly, the 1996 income statement components are not comparable to 1995 and 1994.
Management believes the concept of net operating earnings (or "core" earnings) is helpful in comparing the operating performance of AAG with that of similar companies. Net operating earnings for 1996 and 1995 were up 27% and 13%, respectively, over the comparable prior years. However, net operating earnings should not be considered a substitute for net income as an indication of AAG's overall performance. The following table (in millions) compares the Company's net operating earnings over the past three years.
GALIC's principal products are Flexible Premium Deferred Annuities ("FPDAs") and Single Premium Deferred Annuities ("SPDAs"). The following table summarizes GALIC's annuity premiums (in millions).
1996 1995 1994 FPDAs - first year $ 35 $ 42 $ 39 FPDAs - renewal 182 196 208 SPDAs 319 219 196 $536 $457 $443
Life, Accident and Health Premiums and Benefits The increase in life, accident and health revenues and expenses in 1996 and 1995 reflects the acquisition of American Memorial and Loyal.
Net Investment Income Net investment income increased 15% in 1996 and 9% in 1995 due to an increase in the Company's average fixed maturity investment base. Investment income is reflected net of investment expenses of $6.5 million in 1996, $5.4 million in 1995 and $4.9 million in 1994.
Realized Gains Individual securities are sold from time to time as market opportunities appear to present optimal situations under AAG's investment strategies.
Other Income Other income increased in 1996 reflecting (i) policy fees, primarily at American Memorial and Loyal, and (ii) higher revenues at AAG's agency subsidiaries.
Interest and Other Debt Expenses Interest expense on borrowings decreased 19% in 1996 and 18% in 1995 due to repurchases of debt during 1996 and 1995 as well as the use of lower cost bank borrowings to finance purchases of higher cost debt.(See Note G.)
Other Expenses Other expenses increased 68% in 1996, reflecting (i) a full year of operating expenses of American Memorial and Loyal, (ii) pretax charges of $15.7 million related to pension and other liabilities of the Company's former manufacturing operations and (iii) operating expenses of AAG's agency subsidiaries. In 1995, other expenses increased 35%, reflecting (i) additional costs for Guaranty Association fees, (ii) expanded distribution networks and (iii) the operating and general expenses of American Memorial and Loyal.
Extraordinary Items Extraordinary items reflect AAG's losses, net of tax, on retirements of its debt as well as AAG's proportionate share of Chiquita's extraordinary loss on the retirement of certain of its debt.
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 for the projected future costs of providing certain benefits to employees of GALIC.
Consolidated Statement of Changes in Stockholders' Equity: Years Ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows: Years Ended December 31, 1996, 1995 and 1994
We have audited the accompanying consolidated balance sheets of American Annuity Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Annuity Group, Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. 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.
Cash 42.7 28.7 Accrued investment income 94.8 87.4 Unamortized insurance acquisition costs, net 194.7 149.8 Other assets 172.4 137.5 Assets held in separate accounts 247.6 238.5
Net income applicable to Common Stock $ 53.7 $ 55.3 $ 35.2
Earnings (loss) per common share: Continuing operations $1.39 $1.45 $1.05 Discontinued operations - (0.08) (0.07) Extraordinary items (0.14) - (0.05) Cumulative effect of accounting change - - (0.01) Net income $1.25 $1.37 $0.92
Common Stock: Balance at beginning of year $ 43.1 $ 39.1 $ 35.1 Issued during the year 0.2 4.0 4.0 Balance at end of year $ 43.3 $ 43.1 $ 39.1
Retained Earnings Since January 1, 1993: Retained earnings from January 1, 1993 to beginning of year $131.4 $ 76.1 $ 40.0 Net income 55.1 55.3 36.1 Balance at end of year $186.5 $131.4 $ 76.1
Beginning cash and short-term investments 169.4 62.7 72.0 Ending cash and short-term investments $ 84.1 $ 169.4 $ 62.7
American Annuity Group, Inc. ("AAG" or "the Company") markets (i) individual and group annuities nationwide to the savings and retirement markets, (ii) individual life insurance and annuity policies with the sponsorship of state associations of funeral directors as well as individual and large operators of funeral homes across the country and (iii) various forms of supplemental life and health insurance through payroll deduction plans and financial institutions.
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, 1996.
Basis of Presentation The accompanying consolidated financial statements include the accounts of AAG and its subsidiaries. Intercompany transactions and balances are eliminated in consolidation.
Assets Held In and Liabilities Related To Separate Accounts Investment annuity deposits and related liabilities primarily 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.
Earnings Per Share Earnings per share are calculated on the basis of the weighted average number of shares of common stock outstanding during the period. The effect of assumed exercise of common stock options in 1996 was not deemed dilutive and is therefore not reflected in the earnings per share presentation for that period. AAG had no stock options outstanding prior to 1996.
In November 1995, AAG acquired all of the outstanding shares of LCC. Its principal insurance subsidiaries were American Memorial Life Insurance Company (formerly known as Prairie States Life Insurance Company) and Loyal American Life Insurance Company.
AAG paid approximately $106 million for the outstanding common stock of LCC and repaid $45 million of LCC indebtedness concurrently with the acquisition. GALIC provided approximately $90 million of the purchase price in exchange for American Memorial and Loyal. AAG funded the balance of the cost of acquiring LCC with the proceeds from a Common Stock rights offering completed in August 1995, borrowings under its line of credit and cash on hand.
Available for Sale Amortized Market Gross Unrealized Cost Value Gains Losses U. S. Government and government agencies and authorities $ 184.6 $ 186.1 $ 3.4 ($ 1.9) Public utilities 175.2 180.0 5.9 (1.1) Mortgage-backed securities 1,222.0 1,234.7 24.1 (11.4) All other corporate 1,673.1 1,724.8 62.7 (11.0) $3,254.9 $3,325.6 $96.1 ($25.4)
The table below sets forth the scheduled maturities of AAG's fixed maturity investments based on carrying value as of December 31.
Issuer Amount Residential Funding MBS (21 different issues) $169.9 Prudential Home MBS (17 different issues) 112.3 General Electric Capital MBS (14 different issues) 100.9 Countrywide MBS (16 different issues) 78.0 Securitized Asset Sales, Inc. MBS (5 different issues) 55.0 Resolution Trust Corporation MBS (13 different issues) 53.3 Georgia-Pacific Corporation 52.0
Included in AAG's retained earnings at December 31, 1996, was approximately $8.3 million applicable to equity in undistributed net losses of Chiquita.
In 1996 and 1994, AAG recorded pretax extraordinary charges of $1.1 million representing its proportionate share of Chiquita's loss on the retirement of debt.
AAG Holding has a $75 million revolving credit agreement with four banks. Loans under the credit agreement mature in 1999 and bear interest at floating rates based on prime or Eurodollar rates and are collateralized by 25% of the Common Stock of GALIC. At December 31, 1996 and 1995, the weighted average interest rate on amounts borrowed under the bank credit line was 6.68% and 6.83%, respectively. In 1996, the Company obtained a short-term $40 million unsecured bank line of credit under terms similar to the $75 million credit agreement. There were no amounts outstanding under this line at December 31, 1996.
AAG AAG Holding Other Total 1997 $0.1 $ - $0.6 $ 0.7 1998 0.1 - 0.6 0.7 1999 0.1 44.7 0.7 45.5 2000 0.1 - 0.7 0.8 2001 0.1 40.8 0.5 41.4
In November 1996, a wholly-owned subsidiary trust issued three million units of 9-1/4% Trust Originated Preferred Securities ("TOPrS") for $75 million in cash. The Trust then purchased $75 million of newly issued AAG Holding 9- 1/4% Subordinated Debentures due 2026, which, along with related interest and principal payments received, will be the only assets of the Trust.
Holders of the TOPrS are entitled to receive quarterly cash distributions of $0.58 per unit. Payment dates and amounts for the TOPrS correspond to those on the Subordinated Debentures. The TOPrS are mandatorily redeemable upon maturity or redemption of the Subordinated Debentures. The Subordinated Debentures are redeemable by AAG Holding on or after November 7, 2001. AAG and AAG Holding effectively provide an unconditional guarantee of the Trust's obligations under its TOPrS.
AAG may grant up to 2 million options under its 1994 Stock Option Plan. In the fourth quarter of 1996, AAG issued to employees 174,241 shares of Common Stock and options to purchase 1.2 million shares of Common Stock at $13.25
In 1995, AAG recorded a $5.0 million pretax charge for discontinued operations. This charge represents primarily additional reserves related to possible deficiencies by AAG's predecessor in reporting quality assurance information in connection with certain military related sales prior to 1991. In 1994, AAG recorded a $4.0 million pretax charge for discontinued operations, primarily related to environmental liabilities.
1996 1995 1994 Income (loss) before income taxes: Continuing operations $78.5 $90.7 $63.2 Discontinued operations - (4.9) (4.0) Extraordinary items (9.2) (0.3) (2.6) Accounting change - - (0.7) Income before income taxes $69.3 $85.5 $55.9
Effect of: Reduction of valuation allowance (10.0) - - Other, net (0.1) 0.3 0.2 Total provision 14.2 30.2 19.8
Amounts applicable to: Discontinued operations - 1.7 1.4 Extraordinary items 3.2 0.1 0.9 Accounting change - - 0.2 Provision for income tax as shown on the Consolidated Income Statement $17.4 $32.0 $22.3
1996 1995 1994 Federal: Current $14.2 $31.9 $21.2 Deferred - (1.7) (1.4) Total $14.2 $30.2 $19.8
At December 31, 1996, AAG had net operating loss carryforwards for federal income tax purposes of approximately $136 million which are scheduled to expire from 2001 through 2007.
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, AAG's primary insurance subsidiary, were as follows (in millions):
Policyholders' surplus $285.0 $272.8 $255.9 Asset valuation reserve 91.4 90.2 79.5 Interest maintenance reserve 24.7 32.2 27.7
Pretax income from operations $ 87.1 $ 85.8 $ 83.4 Net income from operations 68.1 60.5 53.4 Net income 66.2 71.4 54.2
Summary Financial Information of AAG Holding AAG has guaranteed all of the outstanding debt of AAG Holding. (See Note G.) Summarized consolidated financial information for AAG Holding is as follows (in millions):
Investments $6,272 Unamortized insurance acquisition costs 195 Assets held in separate accounts 247 Other assets 278
Insurance reserves $5,942 Notes payable to parent 166 Long-term debt of AAG Holding 110 Liabilities related to separate accounts 247 Other liabilities 96
Revenues $ 91 Pretax income from operations 8 Net income 5
Net investment income includes approximately $1 million in 1996, 1995 and 1994 of payments from a subsidiary of AFG for the rental of an office building owned by GALIC.
1996 1995 Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value Assets Fixed maturity investments $5,821.3 $5,850.2 $5,423.8 $5,526.6 Equity securities 51.0 51.0 32.6 32.6 Investment in affiliate 16.5 34.1 20.3 36.7
(a) Carrying values do not reflect deferred policy acquisition costs of $110.5 million at December 31, 1996 and $72.7 million at December 31, 1995.
Unrealized Gains On Marketable Securities, Net The components of the Consolidated Balance Sheet caption "Unrealized gains on marketable securities, net" in stockholders' equity are summarized as follows (in millions):
Unadjusted Asset Effect of Reported (Liability) SFAS 115 Amount Fixed maturities - available for sale $3,254.9 $ 70.7 $3,325.6 Equity securities 16.1 34.9 51.0 Unamortized insurance acquisition costs, net 197.5 (2.8) 194.7 Annuity benefits accumulated (5,357.9) (7.7) (5,365.6) Deferred income taxes on net unrealized gains - (33.3) (33.3) Unrealized gains on marketable securities, net $ 61.8
Fixed maturities - available for sale $2,787.6 $139.0 $2,926.6 Equity securities 14.1 18.5 32.6 Unamortized insurance acquisition costs, net 155.0 (5.2) 149.8 Annuity benefits accumulated (5,037.0) (15.0) (5,052.0) Deferred income taxes on net unrealized gains - (48.0) (48.0) Unrealized gains on marketable securities, net $ 89.3
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, 1996 and 1995 (in millions, except per share data).
Income from continuing operations 14.7 16.3 17.1 13.0 61.1 Extraordinary items (1.6) (2.7) (1.7) - (6.0) Net income 13.1 13.6 15.4 13.0 55.1
Earnings (loss) per common share: Continuing operations $0.33 $0.37 $0.39 $0.30 $1.39 Extraordinary items (0.04) (0.06) (0.04) - (0.14) Net income per common share $0.29 $0.31 $0.35 $0.30 $1.25
Realized gains $ 0.1 $ - $ 6.9 $ 8.7 $ 15.7
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Discontinued operations, net of tax - (3.2) (2.6) Income before extraordinary items and cumulative effect of accounting change 61.1 55.5 38.3
Extraordinary items, net of tax (6.0) (0.2) (1.7) Cumulative effect of accounting change, net of tax - - (0.5) Net Income $ 55.1 $ 55.3 $ 36.1
(b) In 1996, AAG transferred certain assets and liabilities to AAG Holding Company, Inc. (See Note G to the Consolidated Financial Statements.)
(c) Includes $14.0 million principal amount of notes payable owned by GALIC in 1995.
AMERICAN ANNUITY GROUP, INC. - PARENT ONLY SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (In millions)
Operating Activities: Net income $55.1 $55.3 $36.1 Adjustments: Discontinued operations - 3.2 2.6 Extraordinary items 6.0 0.2 1.7 Accounting change - - 0.5 Equity in net earnings of subsidiaries (70.8) (77.0) (59.7) Depreciation and amortization 1.6 0.9 0.8 Decrease (increase) in other assets (8.5) 0.1 2.7 Increase (decrease) in balances with affiliates (26.5) 13.5 13.1 Increase (decrease) in other liabilities 0.1 2.5 (12.8) Capital distributions from subsidiaries 61.2 54.2 44.0 Contributions to subsidiaries (12.7) (33.0) - Other, net 1.3 - - 6.8 19.9 29.0
Financing Activities: Additions to notes payable 87.7 33.5 30.0 Reductions of notes payable (74.8) (48.1) (55.1) Issuance of Common Stock - 37.3 - Issuance of Preferred Stock 32.0 17.0 - Cash dividends paid (4.5) (3.0) (3.1) 40.4 36.7 (28.2)
Net Increase (Decrease) in Cash and Short-term Investments 0.5 (0.5) (8.5)
27.0 Financial Data Schedule for 1996 - included in Report filed electronically with the Securities and Exchange Commission.
Chairman of the Board March 25, 1997 Carl H. Lindner of Directors