Ratios The ratio of AAG's long-term debt to equity was .90 at December 31, ______ 1993, compared to 1.24 at December 31, 1992. AAG's ratio of earnings to fixed charges was 4.7 in 1993; the ratio of earnings to fixed charges and preferred dividends was 3.8 for the same period.
Sources and Uses of Funds In connection with the GALIC acquisition, AAG _________________________ sold common and preferred stock to GALIC's parent, Great American Insurance Company, for $156 million in cash. The proceeds of those stock sales together with $230 million in new borrowings and most of the accumulated cash funds of the Company were used to purchase GALIC. The total cost to acquire GALIC was approximately $486 million, including transaction costs and fees of $17.4 million.
The borrowings used to fund the GALIC acquisition were repaid during 1993 from the sales of $125 million of 11-1/8% Senior Subordinated Notes due 2003 and $100 million of 9-1/2% Senior Notes due 2001. As a result of the refinancings, AAG has no scheduled principal maturities until the year 2001. Annual interest and dividend payments on AAG's debt and preferred stock are approximately $26.6 million.
GALIC invests primarily in fixed income investments which approximated 98% of its investment portfolio at December 31, 1993. GALIC generally invests in securities with intermediate term maturities with an objective of optimizing interest yields while maintaining an appropriate relationship of maturities between GALIC's assets and expected liabilities. GALIC's fixed maturity portfolio is classified into two categories: "held to maturity" and "available for sale". (See Note A to the financial statements.) At December 31, 1993, GALIC had approximately $206 million in net unrealized gains on its fixed maturity portfolio compared to $117 million at December 31, 1992.
At December 31, 1993, none of the Company's fixed maturity investments were non-performing. In addition, GALIC has little exposure to mortgage loans and real estate. As of December 31, 1993, these investments represented only 1.6% of total assets. The majority of mortgage loans and real estate was purchased in the latter half of 1993.
At December 31, 1993, collateralized mortgage obligations ("CMOs") represented approximately 35% of fixed maturity investments compared to 42% at December 31, 1992. As of December 31, 1993, interest only (I/O), principal only (P/O) and other "high risk" CMOs represented approximately 0.2% of total CMOs. GALIC invests primarily in CMOs which are structured to minimize prepayment risk. In addition, the majority of CMOs held by GALIC were purchased at a discount to par value. Management believes that the structure and discounted nature of the CMOs will minimize the effect of prepayments on earnings over the anticipated life of the CMO portfolio.
Substantially all of GALIC's CMOs are AAA-rated by Standard & Poor's Corporation and are collateralized by GNMA, FNMA and FHLMC single-family residential pass-through certificates. The market in which these securities trade is highly liquid. Aside from interest rate risk, AAG does not believe a material risk (relative to earnings or liquidity) is inherent in holding such investments.
The Ohio Insurance Code contains rules restricting the types and amounts of investments which are permissible for an Ohio life insurer, including GALIC. These rules are designed to ensure the safety and liquidity of the insurer's investment portfolio. The NAIC is considering the formulation of a model investment law which, if adopted, would have to be considered by Ohio for adoption. The formulation is in the preliminary stages and management believes its impact on GALIC's operations will not be material.
Net Earnings and General Net earnings were $40.0 million or $1.04 per ________________________ common share in 1993. GALIC was acquired by AAG on December 31, 1992; accordingly, its results are not included in the Company's statement of operations prior to 1993. All of GALIC's products are fixed rate annuities which permit GALIC 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 interest rates and maintain a desired interest rate "spread" with little or no effect on persistency.
Realized Gains Individual securities are sold from time to time as market ______________ opportunities appear to present optimal situations under AAG's investment strategies.
Equity in Net Loss of Affiliate Equity in net loss of affiliate represents _______________________________ AAG's proportionate share of Chiquita's losses in 1993. Chiquita reported a net loss for 1993 of $51 million compared to a net loss of $284 million for 1992. The improvement in 1993 was attributed primarily to a multi-year investment spending program and the ongoing impact of its restructuring and cost reduction efforts.
Interest on Annuity Policyholders' Funds GALIC's interest on annuity ________________________________________ policyholders' funds decreased 5% from its comparable 1992 period. The average crediting rate on funds held by GALIC has decreased from 7.2% at December 31, 1991, to 6.2% at December 31, 1992 and to 5.3% at December 31, 1993. The rate at which GALIC credits interest on annuity policyholders' funds is subject to change based on management's judgment of market conditions.
Provision for Relocation Expenses In 1993, GALIC relocated its corporate _________________________________ offices from Los Angeles to Cincinnati; the estimated cost of this move ($8.0 million) was included in 1993 continuing operations.
Also in 1993, AAG relocated its corporate offices from Stamford to Cincinnati; the estimated cost of this relocation and related shutdown and severance costs ($5.0 million) was provided for in discontinued operations in 1992.
New Accounting Standard to be Implemented The FASB has issued SFAS No. 112, _________________________________________ "Employers' Accounting for Postemployment Benefits", which became effective in 1994. The FASB has also issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which is scheduled to become effective in 1995. Implementation of these standards is not expected to have a material effect on AAG.
Consolidated Statement of Operations: Years Ended December 31, 1993, 1992 and 1991
Consolidated Statement of Cash Flows: Years Ended December 31, 1993, 1992 and 1991