AFC and subsidiaries own several buildings in downtown Cincinnati. AFC and its affiliates occupy about three-fifths of the aggregate 580,000 square feet of commercial and office space. American Premier and Citicasters lease their headquarters in one of these buildings.
Citicasters owns three of its studio buildings and eight of its transmission sites.
(A) Fixed charges are computed on a "total enterprise" basis. For purposes of calculating the ratios, "earnings" have been computed by adding to pretax earnings (excluding discontinued operations) the fixed charges and the minority interest in earnings of subsidiaries having fixed charges and deducting (adding) the undistributed equity in earnings (losses) of investees. Fixed charges include interest (excluding interest on annuity policyholders' funds), amortization of debt discount and expense, preferred dividend requirements of subsidiaries and a portion of rental expense deemed to be representative of the interest factor.
AFC is organized as a holding company with almost all of its operations being conducted by subsidiaries and investees. The parent corporation, however, has continuing expenditures for administrative expenses and corporate services and, most importantly, for the payment of principal and interest on borrowings and dividends on AFC Preferred Stock. Therefore, certain analyses are best done on a parent only basis while others are best done on a total enterprise basis. In addition, since many of its businesses are financial in nature, AFC does not prepare its consolidated financial statements using a current-noncurrent format. Consequently, certain traditional ratios and financial analysis tests are not meaningful.
The ratio of AFC's (parent only) long-term debt to equity (excluding Capital Subject to Mandatory Redemption) was 1.24, 1.06 and 1.99 at December 31, 1994, 1993, and 1992, respectively. Ratios of earnings to fixed charges, excluding and including preferred dividends, for the three years ended December 31, 1994, are shown below.
AFC and certain subsidiaries have arrangements among themselves under which they may borrow from each other from time to time for short-term working capital needs. Certain AFC subsidiaries have revolving credit facilities with banks (including those mentioned herein) which may be used for various corporate purposes. These facilities aggregated approximately $370 million of which $164 million was available at December 31, 1994.
dividends payable (without prior approval) in 1995 from GAI based on its 1994 policyholders' surplus is approximately $95 million.
For statutory accounting purposes, equity securities are generally carried at market value with changes in aggregate market value directly affecting policy-holders' surplus. At December 31, 1994, AFC's insurance companies owned publicly traded equity securities of affiliates with a market value of $914 million, including equity securities of AFC subsidiaries of $485 million. Since significant amounts of affiliated investments are concentrated in a relatively small number of companies, volatility in the market prices of these stocks could adversely affect the insurance group's policyholders' surplus, potentially impacting the amount of dividends available or necessitating a capital contribution.
Great American's liability for unpaid losses and loss adjustment expenses includes amounts for various liability coverages related to environmental and hazardous product claims. The insurance industry typically includes only claims relating to polluted waste sites and asbestos in defining environmental exposures, whereas Great American extends this definition to include claims relating to breast implants, repetitive stress on keyboards, DES (a drug used in pregnancies years ago alleged to cause cancer and birth defects), and other latent injuries. At December 31, 1994, Great American had recorded $227 million (net of reinsurance recoverables of $155 million) for environmental pollution and hazardous products claims on policies written many years ago where, in most cases, coverage was never intended. Due to inconsistent court decisions on many coverage issues and the difficulty in determining standards acceptable for cleaning up pollution sites, significant uncertainties exist which are not likely to be resolved in the near future.
Capital Requirements AFC is not heavily engaged in capital-intensive businesses and therefore does not have substantial capital resource requirements to the same extent that other companies might. Cash expenditures for property, plant and equipment were $16 million, $32 million and $53 million in 1994, 1993 and 1992, respectively.
Following its merger with a newly formed subsidiary of New American Premier in 1995, AFC intends to repay or redeem substantial amounts of its debt with proceeds of up to $625 million of borrowings from American Premier under long-term subordinated notes payable. Interest payments on parent company debt afterwards are expected to approximate $50 million to $55 million annually through 1999, a significant portion of which will be payable to American Premier. Dividend payments on preferred stock are expected to be $25 million annually for the same period.
Investments Approximately three-fifths of AFC's consolidated assets are invested in marketable securities (excluding investment in equity securities of investee corporations). AFC's investment philosophy is briefly summarized in the following paragraphs.
Significant portions of equity and, to a lesser extent, fixed income investments are concentrated in a relatively limited number of major positions. This approach allows management to more closely monitor these companies and the industries in which they operate. Some of the investments, because of their size, may not be as readily marketable as the typical small investment position. Alternatively, a large equity position may be attractive to persons seeking to control or influence the policies of a company. While management believes this investment philosophy will produce higher overall returns, such concentrations subject the portfolio to greater risk in the event one of the companies invested in becomes financially distressed.
The realization of capital gains, primarily through sales of equity securities, has been an integral part of AFC's investment program. Individual securities are sold creating gains or losses as market opportunities exist. Pretax capital gains (losses) recognized upon disposition of securities, including investees, during the past five years have been: 1994 - $50 million; 1993 - $165 million; 1992 - $104 million; 1991 - $38 million and 1990 - ($89 million.)
Operating difficulties at two major investees caused significant losses for AFC in 1992, partially offset by the benefit from the effect of the accounting change as required by SFAS No. 109 and a gain on the sale of Kings Island.
Property and Casualty Insurance - Underwriting Underwriting profitability is measured by the combined ratio which is a sum of the ratio of underwriting expenses to premiums written and the ratio of losses and loss adjustment expenses to premiums earned. When the combined ratio is under 100%, underwriting results are generally considered profitable; when the ratio is over 100%, underwriting results are generally considered unprofitable. The combined ratio does not reflect investment income, other income or federal income taxes.
The combined underwriting ratio (statutory basis, after policyholders' dividends) of GAI and its property and casualty insurance subsidiaries ("Great American") was 103.6% in 1994, 103.9% in 1993 and 105.0% in 1992. Total net losses to AFC's insurance operations from catastrophes (natural disasters and other incidents of major loss) were $51 million in 1994, $26 million in 1993 and $42 million in 1992. The 1994 catastrophes included $20.0 million ($20.2 million before reinsurance) related to winter storms and $19 million ($41 million before reinsurance) related to the Northridge, California earthquake. These losses represented 1.5% and 1.4% of Great American's combined ratio. The 1994 ratio does not reflect Great American's charge for California's Proposition 103.
In 1994, Great American's underwriting results significantly outperformed the industry average for the ninth consecutive year. Great American has been able to exceed the industry's results by focusing on highly specialized niche products, supplemented by commercial lines coverages and personal automobile products.
1994 compared to 1993 Property and casualty premiums decreased $116 million (8%) in 1994 reflecting the deconsolidation of American Premier's insurance operations. Insurance premiums for the remainder of AFC's insurance group increased $138 million due to an increase in sales of specialized niche products and workers' compensation and an increase in the percentage of business retained in specialty lines.
1993 compared to 1992 Property and casualty insurance premiums decreased $657 million (31%) in 1993 reflecting the deconsolidation of American Premier. Premiums for the remainder of AFC's insurance group were virtually unchanged.
1993 compared to 1992 Investment income decreased $87 million (13%) in 1993 reflecting the deconsolidation of American Premier in 1993, partially offset by an increase in average investments held.
1994 compared to 1993 AFC's equity in net earnings (losses) of investee corporations in 1994 includes its share ($28 million) of American Premier's loss on the sale of General Cable notes and its share ($52 million) of American Premier's tax benefit in 1993. Chiquita's loss before extraordinary items was comparable in 1994 and 1993 as improvements in Meat Division operations and banana pricing were offset by charges and losses relating to farm closings and banana cultivation write-downs in Honduras and a substantial reduction of Chiquita's Japanese banana trading operations.
Gains on Sales of Investees The gain on sale of investees in 1994 represents a pretax gain on the sale of General Cable common stock.
The gains on sales of investees in 1993 include (i) a pretax gain of $52 million in the first quarter on the sale of Spelling and (ii) a pretax gain of $28 million in the third quarter on the public sale by AFEI of 4.5 million shares of American Premier common stock.
Sales of Other Products and Services Sales shown below (in millions) include those of American Premier (from January 1992 to March 1993), Spelling Entertainment Group (through June 1992), Spelling Entertainment Inc. (through June 1992) and Kings Island Theme Park (through September 1992).
The deconsolidation of American Premier and Spelling and the sale of Kings Island accounted for the decrease in revenues from sales of other products and services in 1993 compared to 1992.
Benefits to Annuity Policyholders For GAAP financial reporting purposes, GALIC's annuity receipts are accounted for as interest-bearing deposits ("annuity policyholders' funds accumulated") rather than as revenues. Under these contracts, policyholders' funds are credited with interest on a tax-deferred basis until withdrawn by the policyholder. The rate at which GALIC credits interest on annuity policyholders' funds is subject to change based on management's judgment of market conditions.
1994 compared to 1993 Benefits to annuity policyholders increased $13 million (6%) primarily due to an increase in average annuity policyholder funds accumulated.
Interest expense included in AFC's consolidated Statement of Operations was comprised of (in millions):
AFC Parent's interest expense decreased in 1994 due to (i) the issuance of $204 million of 9-3/4% Debentures in exchange for higher rate debt and (ii) the repurchase of $79 million principal amount of debentures. GAHC's interest expense decreased in 1993 due to repayments of bank borrowings in 1992 and 1993. American Annuity borrowed approximately $230 million in December 1992 to acquire GALIC. The decrease in other companies' interest expense is due primarily to the sale of a subsidiary in 1992 and repayments of borrowings in 1993.
Other Operating and General Expenses Operating and general expenses included the following charges (credits) (in millions):
In 1992, AFC implemented SFAS No. 109, "Accounting for Income Taxes". The cumulative effect of implementing this statement resulted in a benefit of $85.4 million to net earnings for the recognition of previously unrecognized tax benefits. The 1993 provision for income tax includes a $15 million first quarter benefit due to American Premier's revision of estimated future taxable income likely to be generated during the company's tax loss carryforward period.