GAFRI, GALIC and Loyal rent office space in Cincinnati, Ohio totaling approximately 180,000 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.
GAPR rents office space in Puerto Rico totaling approximately 84,000 square feet under leases expiring primarily in 2004.
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 UTA in October 1999 and GAPR in December 1997 and the sale of the Funeral Services Division in September 1998 (in millions, except per share amounts).
GAFRI 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 and for the payment of interest and principal on borrowings and stockholder dividends.
GAFRI's consolidated debt to capital ratio was 22% and 23% in 2001 and 2000, respectively. For purposes of the calculations of consolidated debt to capital, consolidated debt includes the Company's notes payable, and in 2000 its Remarketed Par Securities ("ROPES"), which were redeemed in September 2001. Capital represents the sum of consolidated debt, redeemable preferred securities of subsidiary trusts and stockholders' equity (excluding unrealized gains (losses) on marketable securities).
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, 2001, the capital ratio of GAFRI's principal insurance subsidiary was 5.9 times its authorized control level RBC.
In 2001, GAFRI used borrowings under its bank credit line to redeem $75 million of its ROPES at par.
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 March 1, 2002, GAFRI had over $33 million available under its bank credit line.
$5 million of its preferred securities and $5 million of Common Stock.
When a decline in the value of a specific investment is considered to be "other than temporary," a provision for impairment is charged to earnings (accounted for as a realized loss) and the cost basis of that investment is reduced.
The determination of whether unrealized losses are "other than temporary" requires judgment based on subjective as well as objective factors. Factors considered and resources used by management include:
Does not include $8.4 million writedown of certain collateralized debt obligation, which was recorded as the cumulative effect of an adoption of an accounting change at April 1, 2001.
The following table provides information about GAFRI's fixed maturity investments at December 31, 2001 and 2000, 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.
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. The spread could be at risk, however, if yields available on newly invested funds fell significantly from current yields and remained lower for a longer period. 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, 2001, 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 charge period has expired. Current stated crediting rates on GAFRI's principal fixed annuity products average 5% and range from 3% on equity-indexed annuities (before any equity participation) to 7% 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 purchased by the Company. 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 include charges of $0.4 million and $0.2 million in 2001 and 2000, respectively, to adjust these derivatives to year-end market values.
The following table shows scheduled principal payments on fixed rate long-term debt of GAFRI and related weighted-average interest rates for the next five years and for all years thereafter (in millions):
Under the terms of the Company's 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 was 2.6% at March 1, 2002, 2.9% at December 31, 2001, and 7.3% at December 31, 2000. There were $143 million and $218 million of subsidiary trust preferred securities outstanding at December 31, 2001, and 2000, respectively, 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 December 31, 2001, and 2000 was 9.1% and 8.4%, respectively.
Sales of fixed rate annuity products were up substantially in 2001 compared to 2000, and were offset by a decrease in the sale of variable annuities. Sales of variable annuity products increased in 2000 compared to 1999. Management attributes these trends to the volatile equity markets, as well as the introduction of several new fixed rate products.
Life, accident and health premiums and benefits increased in 2001 and 2000 due primarily to the effect of the November 2000 acquisition of a block of accident and health insurance business and the October 1999 acquisition of United Teacher Associates ("UTA").
GAFRI is engaged in a variety of real estate operations including hotels and a marina; GAFRI also owns various 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).
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 annuitizations and surrenders, the Company's persistency rate remains approximately 90%.
The increase in 2001 is due primarily to (i) increased lapses and increased sales of traditional life insurance by GALIC's Life Operations and (ii) increased DPAC amortization on variable annuities due to decreases in the stock market and changes in actuarial assumptions. The increase in 2000 reflects the October 1999 acquisition of UTA and increased sales of traditional life insurance by GALIC's Life Operations.
Other expenses decreased 14% in 2001 primarily due to the absence of a litigation charge that was recorded in 2000. Other expenses increased 34% in 2000, reflecting: (i) expenses of subsidiaries acquired in the second half of 1999;(ii) an increase in expenses from real estate operations and (iii) a charge recorded in the second quarter of 2000 related to various litigation in which the Company or one of its subsidiaries was a defendant (See MD&A - Results of Operations "General").
GAFRI's effective tax rate in 2001 reflects a lower tax rate at GA Life of Puerto Rico and the absence of valuation allowance reductions which were recorded in both 2000 and 1999. GAFRI's effective tax rate in 2000 and 1999
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.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 141, business combinations initiated after June 30, 2001 are required to be accounted for using the purchase method of accounting, which is the method GAFRI has used for acquisitions historically. Under SFAS No. 142, goodwill will no longer be amortized beginning January 1, 2002, but will be subject to an impairment test at least annually. A transitional test for impairment is required to be completed in 2002 with any resulting writedown reported as of the first quarter as a cumulative effect of a change in accounting principle. GAFRI had approximately $40 million of unamortized
goodwill recorded at December 31, 2001; based on this amount, goodwill amortization in 2002 would have been less than $2 million.
Due to Chiquita Brands International'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. In 2001, GAFRI suspended accounting for the investment under the equity method due to the expected restructuring, and reclassified the investment to "equity securities."
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.
Separate accounts related to variable annuities represent deposits invested in underlying investment funds on which GAFRI earns a fee. Investment funds are selected and may be changed only by the policyholder, who retains all investment risk. Accordingly, GAFRI's liability for these accounts equals the value of the account assets.
Effective October 1, 2000, GAFRI implemented SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments (including derivative instruments that are embedded in other contracts) and for hedging activities. Prior year financial statements were not restated. SFAS No. 133 generally requires that derivatives (both assets and liabilities) be recognized in the balance sheet at fair value with changes in fair value included in current income. The cumulative effect of implementing SFAS No. 133, which resulted from the initial recognition of GAFRI's derivatives at fair value, was income of $0.8 million or $0.02 per diluted share in 2000.
The following tables show (in millions) GAFRI's assets, revenues and operating profit by significant business segment.
Reflects realignment expenses for "Life and annuity products" ($1.5 million), "Supplemental insurance products" ($0.4 million) and "Corporate and other" ($8.1 million).
At December 31, 2001, GAFRI had no single investment in excess of 10% of stockholders' equity except for certain investments guaranteed by the U.S. Government or government agencies.
GAFRI's investment portfolio is managed by a subsidiary of AFG. Investment expenses included investment management charges from this subsidiary amounting to $1.9 million in 2001, $1.4 million in 2000 and $2.9 million in 1999.
Investment in affiliate at December 31, 2000 reflects GAFRI's 4% ownership (2.7 million shares) of the common stock of Chiquita Brands International. The market value of this investment was $2.7 million at December 31, 2000. At that time, AFG and its other subsidiaries owned 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 interest accrual rates used range primarily from 5% to 7%. During each of the next five years, the PVFP is expected to decrease at a rate of approximately 10% of the balance at the beginning of each respective year.
In 2000, GAFRI repurchased $1.7 million of its preferred securities for $1.4 million in cash.
The Company is authorized to issue 25,000,000 shares of Preferred Stock, par value $1.00 per share.
The change in net unrealized gains (losses) on marketable securities included the following (in millions):
Included in its consolidated tax provision is tax expense of $0.4 million, $3.4 million and $3.2 million in 2001, 2000 and 1999, respectively, related to GAFRI's operations in Puerto Rico.
The significant components of deferred tax assets and liabilities, excluding the effects of unrealized gains and losses on marketable securities, included in the Consolidated Balance Sheet were as follows (in millions):
The number of common shares outstanding used in calculating diluted earnings per share in both 2001 and 2000 include 0.4 million shares and in 1999 include 0.6 million shares, for the effect of the assumed exercise of GAFRI's stock options.
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 former agents had alleged that their agency agreement with GALIC had been wrongfully terminated. The Company believes that the verdict was contrary to both the facts and the law and expects to prevail on appeal. Oral arguments on the appeal were heard in November 2001 and a decision is expected in 2002. 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, 2001, 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 $5 million to $23 million. The Company's reserve for environmental costs was $5.2 million at December 31, 2001, and $4.6 million at December 31, 2000.
Dividends, which can be paid by GAFRI's insurance subsidiaries without prior approval of regulatory authorities, are subject to restrictions relating to capital and surplus and statutory net income. Based on capital and surplus at December 31, 2001, GALIC and GA Life of Puerto Rico may pay $38.8 million and $24.6 million, respectively, in dividends in 2002 without prior approval. In 2001, GALIC paid $18.0 million in dividends and GAFRI made capital contributions to GALIC of $27.5 million.
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. GAFRI recorded a pretax gain of $27.2 million on the transaction. 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 outstanding balance of the subordinated note at December 31, 2001, was $12.9 million. The subordinated note bears interest at 12-1/4% with scheduled repayments through 2005.
Other income includes approximately $0.4 million in 2001 and approximately $1 million in 2000, and 1999 of payments from a subsidiary of AFG for the rental of an office building owned by GALIC. This building was sold in 2001 to an unaffiliated party.
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.
Realignment Expenses In 1999, GAFRI recorded a $10 million charge for expenses related to realignment within the Company's operating units. Included in this charge were: (i)
In the second quarter of 2000, GAFRI recorded $21.1 million (after-tax) in litigation charges. Excluding these charges, second quarter 2000 basic and diluted earnings per share would have been $0.50 higher.
On March 14, 2002, GAFRI reached an agreement to acquire Manhattan National Life Insurance Company ("MNL") from a subsidiary of Conseco, Inc. for $48.5 million in cash. GAFRI expects to close on this transaction in the second quarter of 2002 and to fund this acquisition with cash on hand and through reinsurance of up to 90% of the business in force. While MNL is not currently writing new policies, the company reported over $43 million of statutory renewal premiums in 2001. MNL has approximately 90,000 policies in force (primarily term life) representing over $12 billion in face amount of insurance. Following is a summary of certain statutory information for MNL at December 31, 2001 (in millions):
(a) Includes net unrealized gains on marketable securities of $89.7 million and