The NSA Group's principal offices are leased facilities located in Birmingham, Alabama (68,000 square feet), Atlanta (81,000 square feet) and Norcross (147,000 square feet), Georgia and Independence, Ohio (43,000 square feet). These leases expire in 2005, 1998, 2000 and 1998, respectively.
The Company and a subsidiary own fee interests in approximately 161,000 acres of coal properties in Illinois, Ohio and Pennsylvania. Approximately
Subsidiaries of the Company own GCT and rights to develop floor space in the Grand Central Terminal area of New York City, as discussed under Item 1 - -"Description of Business--Non- Insurance Assets--GCT and Related Development Rights."
All of the Company's oil and gas properties are located in the United States. As of December 31, 1994, the Company had interests in 56 gross (27 net) producing oil wells and 4 gross (1 net) producing gas wells and 4,800 gross (2,238 net) developed and 12,007 gross (2,929 net) undeveloped acres.
Management's Discussion and Analysis discusses the Company's financial condition and results of operations for each of the three years in the period ended December 31, 1994. The following is a description of the Company's Insurance segment and other operations. Amounts presented in the discussion and analysis relate only to continuing operations unless otherwise indicated. On March 23, 1995, the Company's shareholders approved the acquisition of all of the common stock of American Financial Corporation ("AFC"). Consummation of the acquisition is pending receipt of a private letter ruling from the Internal Revenue Service regarding the continuation of the Company's federal income tax consolidated group. Upon consummation of the acquisition, the Company will become a wholly owned subsidiary of American Premier Group, Inc. ("New American Premier"), a new corporation formed by the Company for the purpose of acquiring all of the common stock of AFC. As part of such acquisition (the "Acquisition"), (a) each outstanding share of Company Common Stock will be converted into one share of New American Premier common stock and each outstanding share of AFC common stock will be converted into 1.435 shares of New American Premier common stock and (b) the Company and AFC will become subsidiaries of New American Premier. See Note 2 of Notes to Financial Statements.
INSURANCE The Insurance segment consists primarily of a group of non-standard private passenger automobile insurance companies (the "NSA Group") and a business which sells workers' compensation insurance principally in California ("Republic Indemnity"). The non-standard automobile insurance companies insure risks not typically accepted for standard automobile insurance coverage because of the applicant's driving record, type of vehicle, age or other criteria.
During each of the three years in the period ended December 31, 1994, the Company's continuing operations provided significant financial resources and sufficient cash flow to meet its operating requirements. Management expects that the Company's operating cash flow and financial resources will continue to be adequate to meet its operating needs in the short-term and long-term (i.e., more than twelve months) future. If funds generated from operations, including dividends from subsidiaries, are insufficient to meet debt service charges and other corporate expenses in any period, the Company would be required to meet such charges through short- term bank borrowings or sales of assets. Cash flows of the Company may be influenced by a variety of factors, including changes in the property and casualty insurance industry, the insurance regulatory environment and general economic conditions. Operating cash flow of the insurance operations is dependent primarily on the growth of written premiums, the requirements for claim payments and the rate of return achieved on the insurance investment portfolio. Cash provided by operating activities in 1994 was $3.5 million higher than in 1993. This increase resulted primarily from an increase of $13.8 million in the insurance operations' operating cash flow. While the NSA Group and Republic Indemnity continued to experience growth in written premiums during 1994, the favorable impact of such growth on the operating cash flow has been partially offset by an increase in claims payments at the NSA Group resulting from business expansion in previous periods and by an increase in policyholder dividend payments at Republic Indemnity resulting from favorable loss development. Also contributing to the favorable operating cash flow comparison are higher interest receipts on the Parent Company investment portfolio and lower interest payments due to debt reductions in 1993. In addition, in connection with the Company's sale of its General Cable Notes and common stock, the Company received a $19.2 million payment from Wassall in consideration of assuming responsibility for certain actual and potential liabilities. For further information regarding such liabilities, see Note 11 of Notes to Financial Statements. These favorable variances were partially offset by lower operating cash flow from the Company's non-insurance operations. Operating cash flow for 1993 also included net proceeds of $15.6 million resulting from the settlement of certain litigation relating to a previously owned subsidiary which was included in the Company's 1992 spin-off to its shareholders of substantially all of the Company's General Cable stock (the "General Cable Spin-off") and $26.0 million from payment of a note relating to the prior sale of an offshore drilling rig. During 1994 and 1993, the insurance operations generated operating cash flow of $341.6 million and $327.8 million, respectively, of which approximately 92 percent and 66 percent, respectively, was reinvested in the insurance operations to support underwriting activities. The remaining amount, net of capital contributions 27PAGE
Because of the Company's balances of cash and short-term investments and its positive cash flow from operating activities, the current borrowing requirements for the Company's existing businesses are not significant. At December 31, 1994, the Company's total debt to total capital ratio was 25 percent as compared with 23 percent at year-end 1993. After taking into consideration the Company's purchases of its Common Stock which have been made subsequent to December 31, 1994, the Company's total debt to total capital ratio at December 31, 1994 would be 26 percent. Total capital as defined for this ratio consists of debt, minority interests in subsidiaries and common shareholders' equity. The Company is in compliance with all of its debt covenants, none of which are materially restrictive. Under certain circumstances, the holders of the Company's outstanding subordinated notes (see Note 6 of Notes to Financial Statements) can require the Company to purchase all or part of such notes at par plus accrued interest (the "Put Right"). The Acquisition of AFC, if followed by a ratings downgrade by either of two rating agencies, would trigger the Put Right. Both agencies have placed the notes under review for possible ratings downgrade as a result of the Acquisition. The Company is unable to predict whether either or both of these agencies will in fact downgrade the notes or to what extent, if any, holders of the notes would exercise their Put Right.
During 1994, 1993 and 1992, the Company increased its accruals for its net probable liability for claims and contingencies arising from events and circumstances preceding the Company's 1978 reorganization. In 1994, the Company accrued $52.0 million consisting of pre-reorganization environmental and occupational injury and disease claims and related expenses offset by a credit representing the net present value of installment payments to be paid by Chicago Union Station ("CUSCO") to the Company resulting from a judgment against CUSCO in favor of the Company. The environmental claims consist of a number of proceedings and claims seeking to impose responsibility on the Company for hazardous waste remediation costs at certain railroad sites formerly owned by the Company's railroad predecessor, Penn Central Transportation Company ("PCTC"), and at certain other sites where hazardous waste was allegedly generated by PCTC's railroad operations. The occupational injury and disease claims include pending and expected claims by former employees of PCTC of injury or disease allegedly caused by exposure to excessive noise or asbestos in the railroad workplace. In 1993, the Company accrued $14.0 million for pre-reorganization environmental claims and related expenses. In 1992, the Company accrued $15.0 million for pre-reorganization occupational injury and disease and environmental claims and related expenses. Consistent with the Company's reorganization accounting policy, such amounts were charged to capital surplus rather than income. See Notes 1, 11 and 12 to Notes of Financial Statements. There are a number of factors which affect the Company's estimate of its liability for future environmental remediation costs, including the number and financial resources of potentially responsible parties at a given site, the varying availability of evidence by which to allocate responsibility among such parties, the wide range of costs for possible remediation alternatives, changing technology and the period of time over which these matters develop. Although it is difficult to estimate future environmental liabilities, the Company believes that the accruals for potential pre-reorganization environmental liabilities at December 31, 1994 are adequate based on the Company's estimates of remediation costs and related expenses as well as its estimates of the portions of those costs that will be borne by other parties. The net probable liabilities for pre-reorganization occupational injury and disease claims and related expenses are based on the accumulation of estimates for reported claims, estimates of unreported claims based on past experience, estimates of probable recoveries from insurance carriers and estimates of expenses for investigating such claims. These liabilities are subject to the impact of changes in amounts required to settle claims and frequency and other factors. The Company believes that the amounts recorded at December 31, 1994 are adequate for pre- reorganization occupational injury and disease liabilities. The Company's estimates for environmental and occupational injury and disease liabilities are based on information currently available to the Company and are subject to change in future periods as additional information becomes available. 30PAGE
The Company reported income from continuing operations for 1994 of $.8 million, or $.02 per share, which includes a net realized capital loss of $1.53 per share, principally comprised of a $75.8 million loss from the disposal of the General Cable Notes which were previously owned by the Company. Income from continuing operations for 1993 was $242.7 million, or $5.03 per share, which includes tax benefits of $132.0 million, or $2.74 per share, attributable to increases in the Company's net deferred tax asset and a net realized capital gain of $43.6 million, or $.90 per share, which included gains from the Company's sales of its Tejas shares and Buckeye Units and provisions for losses on the sales of certain non-insurance operations. Income from continuing operations for 1992 was $50.9 million, or $1.08 per share, which included a net realized capital gain of $12.3 million, or $.26 per share. The Company's 1994 after-tax results increased to $74.5 million, or $1.55 per share, excluding the net realized capital loss, from $67.1 million, or $1.39 per share, for 1993, excluding the unusual deferred tax benefits and net realized capital gain. This increase primarily resulted from higher investment income from the insurance operations' investment portfolio and lower interest expense, partially offset by a reduction in interest and dividend income from the Parent Company investment portfolio and lower underwriting results. In 1993, the Company recognized approximately $25.4 million of interest income on the General Cable Notes. The Company's 1994 earnings do not include any interest income on the General Cable Notes. The 1993 income from continuing operations of $67.1 million, or $1.39 per share, increased from $38.6 million, or $.82 per share, reported in 1992, excluding the net realized capital gain. The increase was principally due to improved operating results in the Company's insurance operations and higher interest and dividend income generated from the Parent Company investment portfolio. In 1992, the Company recognized approximately $12.7 million of interest income on the General Cable Notes.
Earned premiums of the insurance operations increased to $1,557.9 million in 1994 as compared with $1,273.6 million for 1993. The increase was primarily due to an increase in earned premiums at the NSA Group and, to a lesser extent, at Republic Indemnity. Investment income before realized gains and losses on sales of investments also increased due to higher average investment balances primarily due to increased written premiums, partially offset by a decrease in the average yield on the insurance operations' investment portfolio. Operating income in 1994 was $165.4 million as compared with $167.4 million in 1993. The 1993 results include net realized gains from sales of investment securities of $17.5 million. There were no realized gains from such sales in 1994. See Note 4 of Notes to Financial Statements for further information regarding gross realized and unrealized investment gains and losses. Excluding such gains, the insurance operations experienced an increase in operating income of $15.5 million primarily due to an increase in underwriting profit at Republic Indemnity and higher investment income, partially offset by lower underwriting profit at the NSA Group. 31PAGE
Republic Indemnity's workers' compensation insurance operations are highly regulated by California state authorities. In July 1993, California enacted significant changes in the workers' compensation insurance system (the "Reform Legislation") which have affected Republic Indemnity's results of operations. In addition, these insurance operations are affected by employment trends in their markets, litigation activities, legal and medical costs, use of vocational rehabilitation programs and the provision of benefits for traditionally non-occupational injuries, such as stress and trauma claims. While changes in claims costs are ultimately reflected in premium rates, there historically has been a time lag of varying periods between the incurrence of higher or lower claims costs and premium rate adjustments, which may result in periods of unfavorable or favorable underwriting results. Management believes that Republic Indemnity's stringent underwriting standards, disciplined claims philosophy, expense containment and reputation with insureds have combined to produce superior underwriting results as compared to the industry in general. The Reform Legislation effected an immediate overall 7 percent reduction in workers' compensation insurance premium rates and replaced the workers' compensation insurance minimum rate law, effective January 1, 1995, with a procedure permitting insurers to use any rate within 30 days after filing it with the Insurance Commissioner unless the rate is disapproved by the Insurance Commissioner. On December 1, 1993, the Insurance Commissioner ordered an additional 12.7 percent minimum premium rate decrease effective January 1, 1994 for new and renewal policies entered into on or after January 1, 1994. On September 21, 1994, the Insurance Commissioner approved an additional 16 percent minimum premium rate decrease effective October 1, 1994 for all new and renewal policies with anniversary dates on or after October 1, 1994 as well as the unexpired portion of policies incepting on or after January 1, 1994. The mandated premium rate reductions have already impacted Republic Indemnity's results of operations. In addition, Republic Indemnity has encountered extremely competitive pricing in the marketplace as a result of the repeal of the 34PAGE
(1) Industry information was derived from Best Week Property/Casualty Supplement (January 11, 1995 edition). 35PAGE
Interest and debt expense for 1994 decreased $9.6 million, compared with 1993, due primarily to the Company's redemption of all $133.3 million principal amount of its 11 percent subordinated debentures during the 1993 third quarter. Interest and debt expense for 1993 decreased $6.8 million compared with 1992 due primarily to the above-mentioned redemption.
The component, "Settlement of claims and contingencies, net", in the above table includes expense in 1993 which was primarily attributable to a $2 million provision for environmental costs relating to the Company's previously-owned petroleum products pipeline operations and to certain litigation settlements. The expense reported in such component in 1992 was primarily attributable to a $4 million provision recorded in connection with the settlement of post-reorganization environmental claims relating to a previously-owned battery manufacturing facility.
For 1994, the Company recorded income tax expense of $40.4 million as compared with an income tax benefit of $52.6 million for 1993 and income tax expense of $33.2 million for 1992. The 1993 benefit was attributable to an increase of $132.0 million in the Company's net deferred tax asset due to revisions to the estimated future taxable income during the Company's tax loss carryforward period. For more information concerning these adjustments, see Note 7 of Notes to Financial Statements. As of December 31, 1994, the Company's gross deferred tax asset was $481.2 million, which after a valuation allowance of $213.5 million resulted in a net deferred tax asset of $267.7 million. The net deferred tax asset represents the portion of the gross deferred tax asset which management believes is more likely than not to be realized consistent with the recognition criteria as set forth in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Management believes that it is more likely than not that the net deferred tax asset at December 31, 1994 will be realized primarily through the generation of taxable income during the loss carryforward period. This belief derives from an analysis of estimated future taxable income based on certain assumptions concerning future events during the loss carryforward period. The estimate of future taxable 37PAGE
The consolidated financial statements of the Company and its subsidiaries and an index thereto are included on pages through of this Report. Selected quarterly financial data is included in Note 16 of the Notes to Financial Statements.