GAPR rents office space in Puerto Rico totaling approximately 67,000 square feet under leases expiring primarily in 2004.
2000 1999 1998 1997 1996 Income Statement Data: Total revenues $824.3 $661.5 $746.4 $636.3 $579.5
Income from continuing operations $ 53.9 $ 63.5 $ 97.5 $ 71.4 $ 61.1 Extraordinary items - - (0.8) (1.5) (6.0) Cumulative effect of accounting changes 0.8 (4.7) - - - Net income $ 54.7 $ 58.8 $ 96.7 $ 69.9 $ 55.1
Basic earnings per common share: Continuing operations $1.27 $1.50 $2.27 $1.63 $1.39 Extraordinary items - - (0.02) (0.03 ) (0.14) Accounting changes 0.02 (0.11) - - - Net income $1.29 $1.39 $2.25 $1.60 $1.25
Balance Sheet Data at year-end: Total assets $7,975.9 $7,530.7 $7,190.4 $7,710.3 $7,024.1 Notes payable 151.9 201.3 131.0 135.8 114.9 Mandatorily redeemable preferred securities of subsidiary trusts 217.9 219.6 225.0 225.0 75.0 Net unrealized gains (losses) included in stockholders' equity 43.9 (52.9) 160.1 133.2 61.8 Total stockholders' equity 671.7 525.7 688.7 583.9 486.5
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, 2000, the capital ratio of each of GAFRI's principal insurance subsidiaries was at least 4.2 times its authorized control level RBC.
During 1999, GAFRI and its subsidiaries used bank borrowings and cash on hand to make acquisitions totalling approximately $130 million and to repurchase $5 million of its preferred securities and $5 million of Common Stock.
In 1998, GAFRI and AAG Holding retired $128 million of debt (including $24 million held by affiliates) and $15 million of Common Stock using proceeds from a public debt offering and cash on hand.
At December 31, 2000, GAFRI's mortgage-backed securities ("MBSs") portfolio represented approximately one-third of its fixed maturity investments. GAFRI invests primarily in MBSs which have a lower risk of prepayment. In addition, the majority of MBSs held by GAFRI were purchased at a discount. Management believes that the structure and discounted nature of the MBSs will reduce the effect of prepayments on earnings over the anticipated life of the MBS portfolio.
Fixed Maturity Portfolio The fair value of GAFRI's fixed maturity portfolio is directly impacted by changes in market interest rates. GAFRI's fixed maturity portfolio is comprised of substantially all fixed rate investments with primarily short-term and intermediate-term maturities. This practice allows flexibility in reacting to fluctuations of interest rates. GAFRI's portfolio is managed with an attempt to achieve an adequate risk-adjusted return while maintaining sufficient liquidity to meet policyholder obligations. GAFRI uses various actuarial models in an attempt to align the duration of invested assets to the projected cash flows of policyholder liabilities.
The following table provides information about GAFRI's fixed maturity investments at December 31, 2000 and 1999, that are sensitive to interest rate risk. These tables show (dollars in millions) principal cash flows and related weighted-average interest rates by expected maturity date for each of the five subsequent years and for all years thereafter. Callable bonds and notes are included based on call date or maturity date depending upon which date produces the most conservative yield. MBSs and sinking fund issues are included based on maturity year adjusted for expected payment patterns. Actual cash flows may differ from those expected.
Annuity Contracts Substantially all of GAFRI's fixed rate annuity contracts permit GAFRI to change crediting rates (subject to minimum interest rate guarantees of 3% to 4% per annum) enabling management to react to changes in market interest rates and maintain an adequate spread. Projected payments in each of the next five years and for all years thereafter on GAFRI's fixed annuity liabilities at December 31 are as follows (dollars in millions):
Nearly half of GAFRI's fixed annuity liabilities at December 31, 2000, were two-tier in nature in that policyholders can receive a higher amount if they annuitize rather than surrender their policy, even if the surrender period has expired. Current stated crediting rates on GAFRI's principal fixed annuity products range from 3% on equity-indexed annuities (before any equity participation) to over 8% on certain new policies (including first year bonus amounts). GAFRI estimates that its effective weighted-average crediting rate over the next five years will approximate 5%. This rate reflects actuarial assumptions as to: (i) deaths; (ii) the number of policyholders who annuitize and receive higher credited amounts and (iii) the number of policyholders who surrender. Actual experience and changes in actuarial assumptions may result in different effective crediting rates than those above.
GAFRI's equity-indexed fixed annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market index. GAFRI attempts to mitigate the risk in the equity-based component of these products through the purchase of call options on the appropriate index. The Company's strategy is designed so that an increase in the liabilities due to an increase in the market index will be substantially offset by unrealized gains on the call options. Under SFAS No. 133, both the equity-based component of the annuities and the related call options are considered derivatives and marked to market through current earnings as annuity benefits. Annuity benefits includes a charge of $0.2 million during the fourth quarter of 2000 to adjust these derivatives to market at December 31, 2000.
Under the terms of the Company's new bank credit facility entered into in January 2001, GAFRI and its subsidiaries have no variable-rate debt maturing until December 2004. The weighted-average interest rate on GAFRI's variable-rate debt
Expenses per income statement 743.2 569.5 602.5 Less provision for litigation costs (32.5) - - Less provision for realignment expenses - (10.0) - Core operating expenses 710.7 559.5 602.5
Core operating earnings before-tax 105.8 109.1 118.3 Income tax expense 29.7 32.5 37.7 Net core operating earnings $ 76.1 $ 76.6 $ 80.6 Net core operating earnings per common share (basic) $ 1.80 $ 1.81 $ 1.87
Net core operating earnings per common share (diluted) $ 1.78 $ 1.78 $ 1.84
Annuity Premiums: Single premium fixed rate annuities $277 $230 $260 Flexible premium fixed rate annuities 150 153 172 Single premium variable annuities 242 158 67 Flexible premium variable annuities 78 47 22 $747 $588 $521
Sales of annuity products linked to the performance of the stock market (variable and equity-indexed annuities) have continued to increase since 1998. In 1999, this increase helped offset a decrease in sales of traditional fixed rate annuities.
Premiums 2000 1999 1998 Life and annuity products $ 29 $ 22 $ 11 Supplemental insurance products 152 50 31 GA Life of Puerto Rico 49 47 46 230 119 88 Funeral Services Division - - 78 $230 $119 $166
Benefits Life and annuity products $ 23 $ 20 $ 8 Supplemental insurance products 128 42 29 GA Life of Puerto Rico 24 24 22 175 86 59 Funeral Services Division - - 73 $175 $ 86 $132
Life, accident and health premiums and benefits increased in 2000 and 1999 (excluding Funeral Services Division sold in 1998) due primarily to the acquisition of United Teacher Associates ("UTA") in October 1999 and increased sales of traditional life insurance by GALIC's Life Operations.
Net Investment Income Net investment income decreased 2% in 1999, resulting primarily from a decrease in invested assets due to the sale of the Funeral Services Division.
Realized Gains Individual securities are sold from time to time as market opportunities appear to present optimal situations under GAFRI's investment strategies. Results for 2000 include a pretax gain of $27.2 million resulting from the sale of GAFRI's investment in a company engaged in the production of ethanol. GAFRI's investment was repurchased by the ethanol company which, following the repurchase, became wholly-owned by GAFRI's Chairman.
Other Income The increase in other income in 2000 reflects primarily increases in revenues from real estate operations, fees earned on GAFRI's growing variable annuity and life business, increased surrender fees, revenue from companies acquired in the second half of 1999 and higher revenues from GAFRI's brokerage subsidiaries.
Insurance Acquisition Expenses Insurance acquisition expenses include amortization of deferred policy acquisition costs ("DPAC") as well as commissions on sales of life insurance products. Insurance acquisition expenses also include amortization of the present value of future profits of businesses acquired amounting to $10.8 million in 2000, $7.7 million in 1999 and $10.6 million in 1998. The increase in insurance acquisition expenses in 2000 is due primarily to the October 1999 acquisition of UTA and increased sales of traditional life insurance by GALIC's Life Operations. The decrease in 1999 reflects the sale of the Funeral Services Division.
Interest and Other Debt Expenses The increase in interest and other debt expenses in 2000 compared to 1999 and 1998 is due primarily to higher average amounts outstanding as well as higher interest rates on GAFRI's bank credit line.
Provision for Realignment Expenses In the fourth quarter of 1999, GAFRI recorded a charge for expenses related to realignment within the Company's operating units. The charge was primarily the result of the Company's decision to replace a number of its current computer operating systems with a single system. The charge also included various expenses associated with the elimination in 1999 of redundant positions.
Other Expenses Other expenses increased 20% in 2000 reflecting primarily the expenses of subsidiaries acquired in the second half of 1999 and an increase in expenses from real estate operations. Other expenses increased 14% in 1999, reflecting: (i) higher personnel costs and consulting expenses (related primarily to expanded year 2000 testing and other system costs); (ii) increased costs associated with new business initiatives and acquisitions and (iii) operating expenses of subsidiaries acquired. These increases were partially offset by the absence of expenses resulting from the sale of the Funeral Services Division.
Income Taxes GAFRI's effective tax rate reflects reductions of the valuation allowance associated with certain deferred tax assets (See Note K).
Chiquita's results for 2000 include $20 million in charges and writedowns of production and sourcing assets in its Fresh Produce operations.
Chiquita's results for 1998 included pretax writedowns and costs of $74 million as a result of significant damage in Honduras and Guatemala caused by Hurricane Mitch.
Extraordinary Item The extraordinary item represents GAFRI's loss, net of tax, on retirements of its debt.
Cumulative Effect of Accounting Changes In the fourth quarter of 2000, GAFRI implemented Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires all derivatives to be recognized in the balance sheet at fair value and that the initial effect of recognizing derivatives at fair value be reported as a cumulative effect of a change in accounting principle. Accordingly, GAFRI recorded income of $0.8 million (net of taxes) reflecting the adoption of SFAS No. 133 in the fourth quarter of 2000.
Recent Accounting Standards The following accounting standards have been implemented by GAFRI in 1999 or 2000. The implementation of these standards is discussed under various subheadings of Note B to the Financial Statements (segment information is discussed in Note D); effects of each are shown in the relevant Notes.
Cash 38.0 39.4 Accrued investment income 99.2 98.0 Unamortized insurance acquisition costs, net 487.9 406.2 Other assets 269.8 214.4 Variable annuity assets (separate accounts) 533.7 354.4
Liabilities and Capital Annuity benefits accumulated $5,543.7 $5,519.5 Life, accident and health reserves 599.4 520.6 Notes payable 151.9 201.3 Payable to affiliates, net 85.8 69.8 Deferred taxes on unrealized gains (losses) 22.6 (27.2) Accounts payable, accrued expenses and other liabilities 149.2 147.0 Variable annuity liabilities (separate accounts) 533.7 354.4 Total liabilities 7,086.3 6,785.4
Stockholders' Equity: Common Stock, $1 par value -100,000,000 shares authorized - 42,302,788 and 42,374,086 shares outstanding 42.3 42.4 Capital surplus 348.5 349.7 Retained earnings 237.0 186.5 Unrealized gains (losses) on marketable securities, net 43.9 (52.9) Total stockholders' equity 671.7 525.7
Extraordinary item, net of tax - - (0.8) Cumulative effect of accounting changes, net of tax 0.8 (4.7) -
Year ended December 31, 2000 1999 1998 Common Stock: Balance at beginning of year $ 42.4 $ 42.6 $ 43.2 Common Stock issued 0.1 - - Common Stock retired (0.2) (0.2) (0.6) Balance at end of year $ 42.3 $ 42.4 $ 42.6
Capital Surplus: Balance at beginning of year $349.7 $354.1 $368.0 Common Stock issued 1.0 0.6 0.4 Common Stock retired (2.2) (5.0) (14.3) Balance at end of year $348.5 $349.7 $354.1
Unrealized Gains (Losses), Net: Balance at beginning of year ($ 52.9) $160.1 $133.2 Change during year 96.8 (213.0) 26.9 Balance at end of year $ 43.9 ($ 52.9) $160.1
Comprehensive Income (Loss): Net Income $ 54.7 $ 58.8 $ 96.7 Other comprehensive income (loss) - change in net unrealized gains (losses) on marketable securities 96.8 (213.0) 26.9 Comprehensive income (loss) $151.5 ($154.2) $123.6
American Financial Group, Inc. ("AFG") and its subsidiaries owned 83% of GAFRI's Common Stock at December 31, 2000.
Investments All fixed maturity securities are considered "available for sale" and reported at fair value with unrealized gains and losses reported as a separate component of stockholders' equity. Short-term investments are carried at cost; mortgage loans on real estate are generally carried at amortized cost; policy loans are stated at the aggregate unpaid balance. Premiums and discounts on mortgage-backed securities are amortized over their expected average lives using the interest method.
Investment in Affiliate GAFRI's investments in equity securities of companies that are 20% to 50% owned by AFG and its subsidiaries are generally carried at cost, adjusted for a proportionate share of their undistributed earnings or losses. Changes in GAFRI's equity in its affiliate caused by issuances of the affiliate's stock are recognized in earnings when such issuances are not part of a broader reorganization.
Due to Chiquita's announced intention to pursue a plan to restructure its public debt, GAFRI wrote down its investment in Chiquita common stock to market value at December 31, 2000, and may suspend accounting for Chiquita on the equity method pending resolution of the current uncertainty.
Income Taxes GAFRI and its principal subsidiary, Great American Life Insurance Company ("GALIC"), have separate tax allocation agreements with American Financial Corporation ("AFC"), a subsidiary of AFG, 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. If GALIC's taxable income (computed on a statutory accounting basis) exceeds a current period net operating loss of GAFRI, the taxes payable by GALIC associated with the excess are payable to AFC. If the AFC tax group utilizes any of GAFRI's net operating losses or deductions that originated prior to GAFRI's entering AFC's consolidated tax group, AFC will pay to GAFRI an amount equal to the benefit received.
Benefit Plans GAFRI sponsors an Employee Stock Ownership Retirement Plan ("ESORP") covering all employees who are qualified as to age and length of service. The ESORP, which invests primarily in securities of GAFRI, is a trusteed, noncontributory plan for the benefit of the employees of GAFRI and its subsidiaries. Contributions are discretionary by the directors of GAFRI and are charged against earnings in the year for which they are declared. Qualified employees having vested rights in the plan are entitled to benefit payments at age 60.
Derivatives included in GAFRI's balance sheet consist primarily of the equity-based component of certain annuity products (included in annuity benefits accumulated) and call options (included in other assets) used to mitigate the risk imbedded in the equity-indexed annuity products.
Start-Up Costs Prior to 1999, certain costs associated with introducing new products and distribution channels were deferred and amortized on a straight-line basis over five years. In 1999, GAFRI implemented Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." The SOP required that (i) costs of start-up activities be expensed as incurred and (ii) 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) or $0.11 per diluted share, effective January 1, 1999.
Earnings Per Share Basic earnings per share is calculated using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share include the effect of the assumed exercise of dilutive common stock options.
Fair Value of Financial Instruments Methods and assumptions used in estimating fair values are described in Note P to the financial statements. These fair values represent point-in-time estimates of value that might not be particularly relevant in predicting GAFRI's future earnings or cash flows.
GAFRI's supplemental insurance businesses (UTA and Loyal) offer a variety of supplemental health and life products. Loyal's marketing strategy emphasizes third- party sponsorship, including employers ("worksite") and credit unions, while UTA offers its products through independent agents.
GA Life of Puerto Rico sells in-home life and supplemental health products through a network of company-employed agents. Sales in Puerto Rico accounted for more than 20% of GAFRI's life, accident and health premiums in 2000.
The following tables show GAFRI's assets, revenues and operating profit by significant business segment (in millions):
Assets 2000 1999 1998 Life and annuity products $6,957.2 $6,600.5 $6,469.8 Supplemental insurance products(a) 719.6 649.3 376.7 GA Life of Puerto Rico 212.2 183.2 181.1 Corporate and other 84.2 85.4 146.9 Investment in affiliate 2.7 12.3 15.9 Total assets per balance sheet $7,975.9 $7,530.7 $7,190.4
Realized gains (losses)(d) 7.8 (7.1) 25.6 Provision for litigation costs(e) (32.5) - - Provision for realignment expenses(f) - (10.0) - Total pretax income per income statement $ 81.1 $ 92.0 $143.9
Fixed maturities: U. S. Government and government agencies and authorities $ 222.9 $ 230.6 $ 8.7 ($ 1.0) States, municipalities and political subdivisions 136.9 140.4 4.2 (0.7) Foreign governments 25.6 26.7 1.1 - Public utilities 332.9 332.5 5.2 (5.6) Mortgage-backed securities 2,031.6 2,085.1 65.4 (11.9) All other corporate 3,321.9 3,287.4 52.8 (87.3) Redeemable preferred stocks 16.2 14.4 - (1.8) $6,088.0 $6,117.1 $137.4 ($108.3)
"Investing activities" related to fixed maturity investments included in GAFRI's Consolidated Statement of Cash Flows consisted of the following (in millions):
2000 1999 1998 Purchases ($794.1)($1,435.7)($1,121.9) Maturities and paydowns 392.4 617.6 673.0 Sales 374.8 750.4 369.5 Gross gains 9.1 21.0 12.3 Gross losses (21.9) (29.8) (9.7)
Maturity 2000 One year or less 3% After one year through five years 25 After five years through ten years 21 After ten years 17 Mortgage-backed securities 34 100%
GAFRI's investment portfolio is managed by a subsidiary of AFG. Investment expenses included investment management charges from this subsidiary amounting to $1.4 million in 2000, $2.9 million in 1999 and $3.3 million in 1998.
Investment in affiliate reflects GAFRI's 4% ownership (2.7 million shares) of the common stock of Chiquita Brands International. AFG and its other subsidiaries own an additional 32% interest in the common stock of Chiquita. Chiquita is a leading international marketer, producer and distributor of quality fresh fruits and vegetables and processed foods.
The market value of GAFRI's investment in Chiquita was approximately $2.7 million and $13 million at December 31, 2000 and 1999, respectively.
Chiquita's results for 2000 include $20 million in charges and writedowns of production and sourcing assets; 1999 results include a $9 million charge resulting from a workforce reduction program. Operating results for 1998 included $74 million of fourth quarter write-offs and costs resulting from widespread flooding in Honduras and Guatemala caused by Hurricane Mitch.
In January 2001, Chiquita announced a restructuring initiative that included discontinuing all interest and principal payments on its public debt. If successful, the restructuring would result in the conversion of a significant portion of Chiquita's $862 million in public debt into common equity. As a result, GAFRI recorded a fourth quarter pretax charge of $5.1 million to write down its investment in Chiquita to quoted market value of $1.00 per share at the end of 2000.
Included in GAFRI's retained earnings at December 31, 2000, was $17.3 million applicable to equity in undistributed net losses of Chiquita.
Unamortized insurance acquisition costs consisted of the following at December 31, (in millions): 2000 1999 Deferred policy acquisition costs $536.9 $435.7 Present value of future profits acquired 93.4 115.1 Unearned revenues (142.4) (144.6) $487.9 $406.2
A progression of GAFRI's present value of future profits acquired ("PVFP") is as follows (in millions): 2000 1999 1998 Beginning balance $115.1 $ 59.9 $102.0 Addition due to acquisitions - 62.9 3.6 Reduction due to sale - - (32.0) Interest accrued 8.3 5.4 6.4 Amortization (19.0) (13.1) (17.0) Other (a) (11.0) - (3.1) $ 93.4 $115.1 $ 59.9
In January 2001, AAG Holding replaced its existing bank line with a $155 million unsecured credit agreement. Loans under the credit agreement mature on December 31, 2004. At March 1, 2001, the weighted-average interest rate on amounts borrowed under its credit line was 6.31%.
Cash interest payments were $13.2 million in 2000, $11.2 million in 1999 and $10.9 million in 1998.
Date of Issuance Issue Optional November (Maturity Date) 12/31/00 12/31/99 Redemption Dates 1996 9-1/4% TOPrS* (2026) $72,912,500 $74,600,000 On or after 11/7/2001 March 1997 8-7/8% Preferred Securities (2027) 70,000,000 70,000,000 On or after 3/1/2007 May 1997 7-1/4% ROPES** (2041) 75,000,000 75,000,000 After 9/28/2001
Pretax Taxes Net Unrealized holding gains (losses) on securities arising during the period ($332.3) $114.2 ($218.1) Reclassification adjustment for investment losses (gains) realized in net income and unrealized gains of subsidiaries sold 7.8 (2.7) 5.1 Unrealized gain on securities transferred from held to maturity - - - Change in net unrealized gains (losses) on marketable securities ($324.5) $111.5 ($213.0)
At December 31, 2000, there were 4.0 million shares of GAFRI Common Stock reserved for issuance under GAFRI's stock option plans. Under the plans, the exercise price of each option equals the market price of GAFRI Common Stock at the date of grant. Options generally become exercisable at the rate of 20% per year commencing one year after grant. All options expire ten years after the date of grant.
Average Exercise Shares Price Outstanding at beginning of year 2,464,080 $16.42 Granted 247,474 $22.81 Forfeited (159,045) $16.24 Exercised (31,394) $13.25
GAFRI's net income (in millions) and earnings per share would have been lower by the following amounts: 2000 1999 1998 Net income ($ 2.5) ($ 3.3) ($ 3.5) Earnings per share ($0.06) ($0.07) ($0.09)
Effect of: Reduction of valuation allowance (7.0) (5.3) (6.6) Book basis over tax basis of subsidiaries sold - - 2.3 Other, net (0.3) (0.3) 0.1 Total provision (all current) 18.2 23.0 45.6
December 31, 2000 1999 Deferred tax assets: Net operating loss carryforwards $37.7 $32.1 Accrued expenses 14.0 10.0 Investment securities, including affiliate 42.7 43.4 Valuation allowance for deferred tax assets (20.4) (27.4)
statutory carryforward periods and (ii) the likelihood of generating larger amounts of taxable income in the future. The likelihood of realizing this asset is reviewed periodically.
The number of common shares outstanding used in calculating diluted earnings per share in 2000, 1999 and 1998 include 0.4 million shares, 0.6 million shares and 0.7 million shares, respectively, for the effect of the assumed exercise of GAFRI's stock options.
In 1999, GALIC was named a defendant in purported class action lawsuits seeking unspecified money damages. The settlement of these cases received court approval in November 2000. The cost of this settlement was included in the litigation charge recorded in the second quarter of 2000.
Pretax income from operations $ 78.0 $ 42.4 $111.2 Net income from operations 55.2 33.8 99.9 Net income 52.1 34.6 35.6
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 and statutory net income. Based on net income at December 31, 2000, GALIC may pay $52.1 million in dividends in 2001 without prior approval.
Related Party Transactions In September 2000, GAFRI's minority ownership in a company engaged in the production of ethanol was repurchased by that company for $7.5 million in cash and $21.9 million liquidation value of non- voting redeemable preferred stock. Following the repurchase, GAFRI's Chairman beneficially owned 100% of the ethanol company. In December 2000, the ethanol company retired $3 million of the preferred stock at liquidation value plus accrued dividends and issued an $18.9 million subordinated note in exchange for the remaining preferred stock. The subordinated note bears interest at 12-1/4% with scheduled repayments through 2005. During 1998, the ethanol company borrowed $4.0 million from GAFRI under a subordinated note bearing interest at 14% and paid $6.3 million capital distribution, including $3.1 million to GAFRI.
Fair Value of Financial Instruments The following table shows the carrying value and estimated fair value of GAFRI's financial instruments at December 31 (in millions):
Liabilities Annuity benefits accumulated $5,543.7 $5,425.9 $5,519.5 $5,370.6 Notes payable 151.9 143.4 201.3 191.4
Unrealized Gains (Losses) on Marketable Securities, Net In addition to adjusting equity securities considered available for sale to fair value, SFAS 115 requires that certain other balance sheet amounts be adjusted to the extent that unrealized gains and losses from securities would result in adjustments had these gains or losses actually been realized. The components of the Consolidated Balance Sheet caption "Unrealized gains (losses) on marketable securities, net" in stockholders' equity are summarized as follows (in millions):
Unadjusted Effect Adjusted Asset of Asset (Liability) SFAS 115 (Liability) Fixed maturities $6,088.0 $29.1 $6,117.1 Equity securities 30.5 37.4 67.9 Unamortized insurance acquisition costs, net 487.9 - 487.9 Annuity benefits accumulated (5,543.7) - (5,543.7) Deferred taxes on unrealized gains - (22.6) (22.6) Unrealized gains (losses) $43.9
Pension Plan The Company has a defined benefit pension plan (the "Plan") covering former U.S. employees of its discontinued manufacturing operations. Pension benefits are based upon past service with the Company and compensation levels. Contributions are made by the Company in amounts necessary to satisfy requirements of ERISA. Effective December 31, 1997, the Plan was merged with two other defined benefit plans which had been sponsored by affiliates of the Company.
Basic earnings (loss) per common share: Income before accounting changes $0.41 ($0.04)* $0.72 $0.18 $1.27 Accounting changes - - - 0.02 0.02 Net income (loss) $0.41 ($0.04)* $0.72 $0.20 $1.29
Income before accounting changes 22.4 18.4 15.4 7.3** 63.5 Accounting changes (4.7) - - - (4.7) Net Income 17.7 18.4 15.4 7.3** 58.8
Basic earnings (loss) per common share: Income before accounting changes $0.53 $0.43 $0.36 $0.17** $1.50 Accounting changes (0.11) - - - (0.11) Net income $0.42 $0.43 $0.36 $0.17** $1.39
Average common shares outstanding Basic 42.5 42.4 42.4 42.4 42.4 Diluted 43.2 43.1 43.1 42.8 43.0
* In the second quarter of 2000, GAFRI recorded a $32.5 million ($21.1 million after-tax) litigation charge. Excluding this charge, second quarter 2000 basic and diluted earnings per share would have been $0.50 higher.
GREAT AMERICAN FINANCIAL RESOURCES, INC. - PARENT ONLY SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (In millions)
Year ended December 31, 2000 1999 1998 Revenues: Net investment income and other income $ 31.3 $ 32.9 $ 37.5 Realized gains (losses) on sales of: Investments 27.6 1.7 (1.5) Subsidiaries - - 4.6 Equity in undistributed earnings of subsidiaries (1.4) 27.9 72.7 Capital distributions from subsidiaries 42.6 43.7 50.6 100.1 106.2 163.9 Costs and Expenses: Interest and other financing expenses 0.1 0.1 0.1 Provision for litigation costs (c) 1.0 - - Provision for realignment expenses (c) - 2.8 - Other expenses 17.9 11.3 15.9 19.0 14.2 16.0
Equity in losses of affiliate, net of tax (6.2) (2.0) (2.9)
(a) Includes unrealized gains (losses) of $45.3 million and ($51.3) million in 2000 and 1999, respectively. (b) Includes unrealized gains (losses) of $43.9 million and ($52.9) million in 2000 and 1999, respectively. (c) Parent only portion of litigation costs in 2000 and realignment expenses in 1999.
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 net earnings of subsidiaries (18.7) (44.2) (76.6) Realized (gains) losses (27.6) (1.7) 1.5 Gain on sale of subsidiaries - - (4.6) Depreciation and amortization 0.9 1.0 1.4 Decrease (increase) in other assets (5.0) (9.6) 1.1 Increase (decrease) in balances with affiliates 6.7 3.4 (5.1) Increase (decrease) in other liabilities 3.4 5.0 (3.4) Capital distributions from subsidiaries 42.6 44.1 8.9 Contributions to subsidiaries (103.5) (51.3) (61.6) Other, net 1.0 (0.1) 6.2 (46.3) 10.1 (34.7)
Cash Flows from Investing Activities: Purchase of investments (2.5) (47.6) (59.9) Decrease (increase) in intercompany notes receivable (0.3) 11.3 13.3 Purchase of subsidiaries - (22.2) - Maturities and redemptions of fixed maturity investments 0.6 3.9 51.4 Sales of investments 35.9 55.3 38.2 Sale of subsidiaries (a) 20.4 - 10.6 54.1 0.7 53.6
(a) 2000 amount reflects sale of Consolidated Financial Corporation to GALIC; 1998 amount reflects sale of Funeral Services Division.
s/CARL H. LINDNER Chairman of the Board March 28, 2001 Carl H. Lindner of Directors
s/S. CRAIG LINDNER Director and Chief S. Craig Lindner Executive Officer March 28, 2001
s/JOHN T. LAWRENCE, III Director* March 28, 2001 John T. Lawrence, III
s/WILLIAM J. MANEY Executive Vice President, March 28, 2001 William J. Maney Treasurer and Chief Financial Officer (Principal Accounting Officer)