The material properties of the Company's former manufacturing operations are listed below. Lease
Based on the costs incurred by the Company over the past several years and discussions with its independent environmental consultants, management believes that reserves recorded are sufficient in all material respects to satisfy the known liabilities. However, the regulatory standards for clean- up are continually evolving toward more stringent requirements. In addition, many of the environmental investigations at the Company's former operating locations and third-party sites are still preliminary, and where clean-up plans have been proposed, they have not yet received full approval from the relevant regulatory agencies. Further, the presence of Company- generated wastes at third-party disposal sites exposes the Company to joint and several liability for the potential additional costs of cleaning up wastes generated by others. Accordingly, there can be no assurance that the costs of environmental clean-up for the Company may not be significantly higher in future years, possibly necessitating additional charges.
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 (in millions, except per share amounts).
Ratios AAG's ratio of earnings to fixed charges was 4.0 in 1994 and 4.7 in 1993. The ratio of AAG's consolidated debt to equity excluding the effects of unrealized gains and losses on stockholders' equity was .79, 1.17 and 1.46 at December 31, 1994, 1993 and 1992, respectively. These same ratios including the effects of unrealized gains and losses were .90, .90 and 1.24, respectively.
principal on its debt and other holding company costs is dependent on payments from GALIC in the form of capital distributions and income tax payments. In 1994, AAG received $26.6 million in tax allocation payments and $44.0 million in capital distributions from GALIC.
AAG has a $50 million revolving bank line under which $30.0 million was outstanding at December 31, 1994 and $25.5 million at March 1, 1995. Amounts outstanding under this agreement bear interest at variable rates tied to either Prime or LIBOR, at the discretion of the Company. Borrowings thereunder may be used for general corporate purposes. AAG has used the amounts borrowed under the bank line primarily to repurchase its outstanding debt.
AAG's revolving line of credit matures in 1998. The Company has no other scheduled principal maturities until 2001. Assuming no further prepayments of its debt, AAG's annual interest payments will be approximately $17.8 million in 1995, $17.7 million in 1996, 1997, 1998 and $15.5 million in 1999.
Investments The Ohio Insurance Code contains rules restricting the types and amounts of investments which are permissible for Ohio life insurers. These rules are designed to ensure the safety and liquidity of insurers' investment portfolios. 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 AAG's operations will not be material.
During 1994, none of the Company's fixed maturity investments were non- performing. In addition, AAG has little exposure to mortgage loans and real estate, which represented only 1.5% of total assets at December 31, 1994. The majority of mortgage loans and real estate was purchased within the last two years.
the majority of CMOs held by AAG 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.
1994 1993 Operating revenues $371.3 $351.7 Operating expenses: Benefits to annuity policyholders (241.9) (228.6) Interest and other debt expenses (21.4) (22.6) Amortization of DPAC (7.1) (14.7) Other expenses (37.6) (33.3) (308.0) (299.2) Operating earnings before taxes 63.3 52.5 Income tax expense 22.3 17.4 Net operating earnings $ 41.0 $ 35.1
to net income as an indication of AAG's overall performance, management believes that it is helpful in comparing the operating performance of AAG and other similar companies.
GALIC's annuity receipts in 1994 increased 10.6% over 1993 due to strong growth in sales of single premium products.
Equity in Net Loss of Affiliate Equity in net loss of affiliate represents AAG's proportionate share of Chiquita's losses. Chiquita reported a loss before extraordinary item for 1994 of $49 million compared to a loss of $51 million for 1993. The loss in 1994 reflected higher costs and charges related to (i) farm closings and write-downs of banana cultivations following an unusually severe strike in Honduras, and (ii) a substantial reduction of Chiquita's banana trading operations in Japan. These charges were partially offset by improved results from Chiquita's meat operations as well as a higher average worldwide price for bananas. Chiquita's loss in 1993 was attributed primarily to a multi-year investment spending program and the ongoing impact of its restructuring and cost reduction efforts.
Benefits to Annuity Policyholders Benefits to annuity policyholders increased 6% in 1994 over 1993 primarily due to an increase in average annuity policyholder funds accumulated. The rate at which GALIC credits interest on annuity policyholders' funds is subject to change based on management's judgment of market conditions.
Interest on Borrowings and Other Debt Expenses Interest on borrowings decreased 5% in 1994 from 1993 due to repurchases of debt during 1994. (See Note E to the financial statements.)
Also in 1993, AAG relocated its corporate offices from Stamford, Connecticut 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.
Other Operating and General Expenses Other operating and general expenses increased 13% in 1994 compared to 1993. Additional costs for information systems, communications, rent and new distribution networks were partially offset by lower employee costs. The 1993 employee costs were unusually high due to the temporary staff required for the relocation of operations from Los Angeles to Cincinnati.
The Company has certain obligations related to its former business activities. Among these obligations are the funding of pension plans, environmental costs, settlement of government claims, lease payments for two former plant sites, certain retiree medical benefits, and certain obligations associated with the sales of the Company's manufacturing operations. (See Note G to the financial statements.)
In 1993, AAG prepaid its bank term loan and wrote off $5.2 million ($3.4 million net of tax) of related unamortized debt issuance costs.
Accounting Changes 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 ($481,000, net of tax) for the projected future costs of providing certain benefits to employees of GALIC.
New Accounting Standard to be Implemented The Financial Accounting Standards Board ("FASB") has issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which is scheduled to become effective in 1995. Implementation of this standard is not expected to have a material effect on AAG.
Consolidated Statement of Changes in Stockholders' Equity: Years Ended December 31, 1994, 1993 and 1992
Consolidated Statement of Cash Flows: Years Ended December 31, 1994, 1993 and 1992
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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, 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.
Basis of Presentation The accompanying consolidated financial statements include the accounts of American Annuity Group, Inc. and its subsidiaries ("AAG" or "the Company"). Intercompany transactions and balances are eliminated in consolidation. Certain reclassifications have been made to prior periods to conform to the current year's presentation.
The acquisition of Great American Life Insurance Company ("GALIC"), a subsidiary of AFC, on December 31, 1992, was recorded as a transfer of net assets between companies under common control. As a result, the net assets of GALIC were recorded by AAG at AFC's historical basis and the excess consideration paid over AFC's historical basis was treated as a reduction of common stockholders' equity. The results of GALIC's operations have been included in AAG's consolidated financial statements since its acquisition.
Deferred Policy Acquisition Costs ("DPAC") DPAC (principally commissions, advertising, underwriting, policy issuance and sales expenses that vary with and are primarily related to the production of new business) is deferred and amortized, with interest, in relation to the present value of expected gross profits on the policies. These gross profits consist principally of net investment income and future surrender charges, less interest on policyholders' funds and future policy administration expenses. DPAC is reported net of unearned revenue relating to certain policy charges that represent compensation for future services. These unearned revenues are recognized as income using the same assumptions and factors used to amortize DPAC.
Annuity Policyholders' Funds Accumulated Annuity receipts and benefit payments are generally recorded as increases or decreases in "annuity policyholders' funds accumulated" rather than as revenue and expense. Increases in this liability for interest credited are charged to expense and decreases for surrender charges are credited to other income.
Effective January 1, 1992, the Company implemented SFAS No. 109, "Accounting for Income Taxes". As permitted under the Statement, AAG's prior year financial statements have not been restated and no adjustment was necessary for the cumulative effect of the change. Under SFAS No. 109, the liability method used in accounting for income taxes is less restrictive than the liability method under SFAS No. 96, previously used by the Company. The provisions of SFAS No. 109 allow AAG to recognize deferred tax assets if it is more likely than not that a benefit will be realized.
Benefit Plans AAG 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 AAG, is a trusteed, noncontributory plan for the benefit of the employees of AAG and its participating subsidiaries. Contributions are discretionary by the directors of AAG 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.
Effective January 1, 1994, AAG implemented SFAS No. 112, "Employers' Accounting for Postemployment Benefits" which covers benefits provided to former or inactive employees (primarily those on disability) who were not deemed retired under other company plans. This standard requires companies to accrue the projected future cost of providing postemployment benefits instead of recognizing an expense for these benefits when paid. The implementation of SFAS No. 112 did not have a material effect on AAG's financial position or results of operations.
Fixed maturity investments at December 31, consisted of the following (in millions): Held to Maturity Amortized Market Gross Unrealized Cost Value Gains Losses U. S. Government and government agencies and authorities $ - $ - $ - $ - Public utilities 461.2 424.0 0.8 (38.0) Mortgage-backed securities 721.0 657.9 0.1 (63.2) All other corporate 2,091.5 1,980.5 6.7 (117.7) $3,273.7 $3,062.4 $ 7.6 ($218.9)
Held to Maturity Amortized Market Gross Unrealized Cost Value Gains Losses U. S. Government and government agencies and authorities $ - $ - $ - $ - Public utilities 412.4 425.5 16.8 (3.7) Mortgage-backed securities 487.8 496.3 11.5 (3.0) All other corporate 1,733.0 1,830.1 100.9 (3.8) $2,633.2 $2,751.9 $129.2 ($10.5)
Available for Sale Amortized Market Gross Unrealized Cost Value Gains Losses U. S. Government and government agencies and authorities $ 54.5 $ 56.0 $ 1.5 $ - Public utilities 123.9 128.8 4.9 - Mortgage-backed securities 1,014.5 1,062.0 47.5 - All other corporate 474.1 507.7 33.6 - $1,667.0 $1,754.5 $87.5 $ -
Certain securities classified as "held to maturity" were sold for a loss of $0.6 million in 1994 due to deterioration in the issuer's creditworthiness. Gross gains of $45.3 million and gross losses of $11.0 million were realized on sales of fixed maturity investments during 1993.
The table below sets forth the scheduled maturities of AAG's fixed maturity investments based on carrying value as of December 31:
Distribution based on market value is generally the same. Mortgage-backed securities had an expected average life of approximately 8-1/2 years at December 31, 1994.
Fixed Maturities Issuer Amount Issuer Amount General Electric Capital MBS $58.3 Cargill Inc ESOP Series $25.0 Prudential Home MBS 46.1 Philadelphia Electric 25.0 Residential Funding MBS 45.3 American Stores 24.6 Georgia Pacific 44.3 Harcourt General 24.1 Countrywide MBS 43.7 Occidental Petroleum 24.0 CNA Financial 37.3 FMC 23.5 Houston Industries 37.3 Nerco International 23.2 GTE 35.8 VF Corporation 22.9 Ashland Oil 32.3 Whitman 22.9 Anschutz Ranch 31.1 Phillips Petroleum 22.8 Federal Express 31.0 Duquesne Light 22.6 SCE Capital 29.3 Ohio Edison 22.5 Conagra 28.0 Resolution Trust Corp MBS 22.4 Hotel First Mortgage 27.8 Texas Utilities 22.2 Coastal 27.6 Marriott International 22.0 Philip Morris 26.5 First Union 21.9 Time Warner Entertainment 26.5 Praxair 21.6 Omega Healthcare 26.4 The Dial Corporation 20.9 Citicorp MBS 25.4 Bank of New York 20.8 Commonwealth Edison 25.2 Owens Corning 20.7
At December 31, 1994, gross unrealized gains on marketable equity securities were $11.1 million and gross unrealized losses were $0.1 million. Realized gains and changes in unrealized appreciation on fixed maturity and equity security investments are summarized as follows (in millions):
1994 1993 Fixed maturities $372.7 $354.8 Other* 4.0 3.4 Total investment income $376.7 358.2 Investment expenses (4.9) (4.9) Net investment income $371.8 $353.3 [FN] * Both years include $1.0 million in payments from a subsidiary of AFC for the rental of an office building owned by GALIC.
AAG's investment portfolio is managed by a subsidiary of AFC. Investment expenses in each year included investment management charges of $4.4 million, which represented approximately one-tenth of one percent of AAG's invested assets.
Investment in affiliate reflects AAG's 5% ownership (2.7 million shares) of the common stock of Chiquita Brands International ("Chiquita") which is accounted for under the equity method. AFC and its other subsidiaries owned an additional 41% interest in the common stock of Chiquita. Chiquita is a leading international marketer, processor and producer of quality food products. The market value of AAG's investment in Chiquita was approximately $36.4 million and $30.7 million at December 31, 1994 and 1993, and $36.1 million at March 1, 1995.
In 1994, AAG entered into a $50 million revolving credit agreement with three banks. Loans under the credit agreement bear interest at floating rates based on prime or Eurodollar rates and are collateralized by 20% of the Common Stock of GALIC. At December 31, 1994, the average rate on these borrowings was 7.35%.
On December 31, 1992, AAG acquired GALIC from Great American Insurance Company ("GAI"), a wholly owned subsidiary of AFC. In connection with the acquisition, GAI purchased from AAG 17,076,923 shares of AAG's Common Stock at $6.50 per share, and 450,000 shares of its Series A Preferred Stock at $100 per share. The preferred shares issued were recorded at $29.4 million (imputed dividend rate of 12% through 2007) with the excess proceeds of $15.6 million credited to capital surplus. On March 31, 1994, AAG issued approximately 3.2 million shares of Common Stock in exchange for the Series A Preferred shares. The Series A Preferred Stock had a redemption value of $100 per share and paid dividends at the rate of $7.00 per share per annum.
The Company has a noncontributory defined benefit pension plan covering former U.S. employees of its discontinued manufacturing operations. The former employees in this plan generally receive pension benefits that are based upon formulas that reflect all past service with the Company and the employee's compensation during employment. Contributions are made on an actuarial basis in amounts necessary to satisfy requirements of ERISA. At December 31, 1994, the actuarial value of the benefit obligations, which are being discounted at 8.0%, exceeded the plan assets by $10.5 million, which has been included in accrued expenses in the financial statements.
1994 1993 1992 Federal: Current $21.2 $27.4 $ - Deferred (1.4) (7.4) (8.9) State - - 0.5 Total $19.8 $20.0 ($8.4)
The principal items accounting for the difference in taxes on earnings computed at the federal statutory rate (35% in 1994 and 1993 and 34% in 1992) and as recorded were as follows (in millions):
1994 1993 1992 Income (loss) before income taxes: Continuing operations $63.2 $80.0 ($ 8.5) Discontinued operations (4.0) (14.8) (25.7) Extraordinary items (2.6) (5.2) - Accounting changes (0.7) - (3.1) Income (loss) before income taxes $55.9 $60.0 ($37.3)
Tax (benefit) computed at statutory rate $19.6 $21.0 ($12.7) Effect of: Net operating loss for which no benefit has been recognized - - 4.0 Other, net 0.2 (1.0) 0.3 Total $19.8 $20.0 ($ 8.4)
The significant components of deferred tax assets and liabilities included in the Consolidated Balance Sheet were as follows (in millions):
In 1991, the Company identified possible deficiencies in procedures for reporting quality assurance information to the Defense Electronics Supply Center ("DESC") with respect to the Company's former manufacturing operations. Over the last several years, the Company has been engaged in negotiations with the United States Government with respect to the settlement of claims the Government might have arising out of the reporting deficiencies. Based on these negotiations, the Company believed it had sufficient reserves to cover the estimated settlement amount. In March 1995, the Company received notification from the Government indicating additional reporting deficiencies. The Company is in the process of evaluating this information and is unable to ascertain the validity of these new claims or the amounts involved. It is impossible to determine the impact, if any, of these alleged claims on the Company and its financial condition.
1994 1993 Policyholders' surplus $255.9 $251.3 Asset valuation reserve 79.5 70.3 Interest maintenance reserve 27.7 35.7 Net earnings 54.2 44.0
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 earned surplus at December 31, 1994, GALIC may pay approximately $49.7 million in dividends in 1995 without prior approval.
The following table represents quarterly results of operations for the years ended December 31, 1994 and 1993 (in millions, except per share data).
Selected Quarterly Financial Data is included in Note L to the Consolidated Financial Statements.
December 31, Assets: 1994 1993 Cash and short-term investments $ 1.9 $ 10.4 Investment in subsidiaries 457.4(a) 519.6(a) Other assets 19.4 24.7 $478.7 $554.7 Liabilities and Capital: Accounts payable, accrued expenses and other liabilities $ 41.6 $ 50.3 Payables to affiliates 40.8 29.1 Notes payable 191.9(b) 225.0 Stockholders' equity 204.4(a) 250.3(a) $478.7 $554.7
1994 1993 Revenues: Equity in undistributed earnings of subsidiaries $ 47.3 $ 97.2 Dividends from GALIC 44.0 18.2 Net investment income 0.4 0.5 91.7 115.9 Costs and Expenses: Interest on borrowings and other debt expenses 21.9 22.5 Provision for GALIC relocation expenses - 8.0 Other operating and general expenses 6.6 5.4 28.5 35.9 Income from continuing operations before income taxes 63.2 80.0 Provision for income taxes 22.3 27.0 Income from continuing operations 40.9 53.0
Discontinued operations, net of tax (2.6) (9.6) Income before extraordinary items and cumulative effect of accounting changes 38.3 43.4
Extraordinary items, net of tax (1.7) (3.4) Cumulative effect of accounting changes, net of tax (0.5) - Net Income $ 36.1 $40.0
[FN] (a) Includes unrealized gains (losses) of ($29.0) million in 1994 and $56.9 million in 1993.
Operating Activities: Net income $36.1 $40.0 Adjustments: Discontinued operations 2.6 9.6 Extraordinary items 1.7 3.4 Accounting change 0.5 - Equity in net earnings of subsidiaries (59.7) (77.6)
10.3 Agreement for the Allocation of Federal Income Taxes dated May 13, 1974, between American Financial Corporation and Great American Life Insurance Company, as supplemented on January 1, 1987 incorporated herein by reference to Exhibit 10.16 to the Registrant's Registration Statement on Form S-2 dated January 7, 1993.
10.7 American Annuity Group's 1993 Stock Appreciation Rights Plan, incorporated herein by reference to Exhibit 10.8 to the Registrant's Form 10-K for 1993.
99.1 Credit Agreement dated as of January 31, 1994 amended and restated as of December 7, 1994. E-1
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-55189) pertaining to the Employee Stock Purchase Plan of American Annuity Group, Inc. of our report dated March 13, 1995, with respect to the consolidated financial statements and schedules of American Annuity Group, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1994.