ITEM 1
Business
Introduction
American Financial Corporation ("AFC") was incorporated as an Ohio Corporation in 1955. Its address is One East Fourth Street, Cincinnati, Ohio, 45202; its phone number is (513) 579-2121. Carl H. Lindner and certain members of the Lindner family own all of the outstanding common stock of AFC.
AFC is a holding company operating through wholly-owned and majority-owned subsidiaries and other companies in which it holds significant minority ownership interests. These companies operate in a variety of financial businesses, including property and casualty insurance, annuities, and portfolio investing. In non-financial areas, these companies have substantial operations in the food products industry, television and radio station operations and industrial manufacturing.
The following table shows AFC's percentage ownership of voting securities of the significant companies over the past several years:
Ownership at December 31, 1993 1992 1991 1990 1989
Great American Insurance Group 100% 100% 100% 100% 100% Great American Life Insurance Company (a) (a) 100% 100% 100% American Annuity Group 80% 82% 39% 32% 32% American Premier Underwriters 41% 51% 50%+ 42% 34% (formerly Penn Central Corporation) Chiquita Brands International 46% 46% 48% 54% 82% Great American Communications 20% 40% 40% 65% 62% General Cable (b) 45% 45% - - - Spelling Entertainment Group (c) 48% 53% 53% 51% (formerly The Charter Company)
(a) Sold to American Annuity Group in December 1992. (b) 100%-owned by American Premier prior to spin-off in July 1992. Ownership percentage excludes shares held by American Premier for future distribution aggregating 12%. (c) Sold on March 31, 1993. (d) Generally, companies have been included in AFC's consolidated financial statements when AFC's ownership of voting securities has exceeded 50%; for investments below that level but above 20%, AFC has accounted for the investments as investees. (See Note E to AFC's financial statements.)
The following summarizes the more significant changes in ownership percentages shown in the above table.
American Annuity Group American Annuity is the successor to STI Group, Inc., formerly known as Sprague Technologies, Inc. ("STI"). Between 1990 and 1992, American Annuity disposed of substantially all of its operations and on December 31, 1992, purchased Great American Life Insurance Company ("GALIC") from Great American Insurance Company ("GAI"). In connection with the acquisition, GAI purchased 5.1 million shares of American Annuity's common stock pursuant to a cash tender offer and 17.1 million additional shares directly from American Annuity.
American Premier Underwriters Between 1989 and 1991, American Premier repurchased and retired approximately 26 million shares of its common stock, resulting in AFC's ownership being increased. During 1991, AFC purchased an additional 1.6 million shares of American Premier common. In August 1993, American Financial Enterprises, Inc., an 83%-owned subsidiary of AFC, whose assets consist primarily of investments in American Annuity Group, American Premier and General Cable, sold 4.5 million shares of American Premier common stock in a secondary public offering.
Chiquita Brands International In 1988 and 1990, Great American Communications sold 5.25 million and 2.2 million shares of Chiquita to Chiquita and an additional 5 million shares in a secondary public offering in 1990. In 1990 and 1991, Chiquita sold 5.3 million and 5 million shares of its stock in public offerings. Also in 1990, Chiquita issued 1.7 million shares upon conversion of debentures.
Great American Communications In 1991, GACC issued 21.6 million shares in connection with debt restructurings. In December 1993, GACC completed a joint prepackaged plan of reorganization. Under the terms of the restructuring, GACC's outstanding stock was reduced in a 1-for-300 reverse split. In the restructuring, AFC's previous holdings of GACC stock and debt were exchanged for 20% of the new common stock.
General Cable In July 1992, American Premier distributed to its shareholders approximately 88% of the stock of General Cable Corporation, which was formed to own certain of American Premier's manufacturing businesses. American Premier retained the remaining shares of General Cable for distribution under American Premier's 1978 Plan of Reorganization and to reserve for potential option and convertible preference stock exercises. AFC and its subsidiaries, excluding American Premier, received approximately 45% of General Cable in the spin-off.
Spelling Entertainment Group During 1992, The Charter Company issued 5.8 million shares of its common stock in a merger with Spelling Entertainment Inc., resulting in AFC's ownership of Charter being decreased below 50%. Subsequent to the merger, Charter changed its name to Spelling Entertainment Group Inc. ("Spelling") to reflect the nature of its business. In March 1993, AFC sold its common stock investment in Spelling to Blockbuster Entertainment Corporation.
General
The following discussion concerning AFC's businesses is organized along the lines of the major company investments as shown in the table above. Reference to the table and to AFC's consolidated financial statements is recommended for a better understanding of this section and Item 6 - "Selected Financial Data".
Great American Insurance Group
AFC's primary insurance business is multi-line property and casualty insurance, headed by Great American Insurance Company ("GAI"). Hereafter, GAI and its property and casualty insurance subsidiaries will be referred to collectively as "Great American". They employ approximately 3,300 persons.
According to the most recent ranking published in "Best's Review", Great American was the 42nd largest among all property and casualty insurance groups operating in the United States on the basis of total net premiums written in 1992. GAI is rated "A" (Excellent) by A.M. Best Company, Inc. This rating is given to companies that "have a strong ability to meet their obligations to policyholders over a long period of time."
On December 31, 1990, GAI sold its non-standard automobile insurance group ("NSA group") to American Premier. The NSA group accounted for approximately one-fourth of Great American's earned premiums and had a 1990 statutory combined ratio of 95.5%. Data in this section includes the NSA Group for the periods it was owned by GAI.
In February 1994, American Premier announced that it was considering a proposal from AFC to purchase GAI's personal lines business (primarily insurance of private passenger automobiles and residential
property) for $380 million. These operations had earned premiums of $342 million in 1993 and represented approximately 25% of the premiums earned by all of Great American's insurance operations. GAI has estimated that the accident year statutory combined ratio for the personal lines business was about 99% in each of the last two years. The purchase would include the transfer of a portfolio of principally investment grade securities with a market value of approximately $450 million. GAI has estimated the net book value, based on generally accepted accounting principles ("GAAP"), of the business to be transferred would be approximately $200 million.
Unless otherwise indicated, all tables concerning insurance are presented on the statutory basis prescribed by the National Association of Insurance Commis-sioners and each insurer's domiciliary state. In general, this method results in lower capital surplus and net earnings than result from application of GAAP which are utilized in preparing the financial statements found elsewhere herein. These differences include charging policy acquisition costs to expense as incurred rather than spreading the costs over the periods covered by the policies, requiring additional loss reserves, establishing valuation reserves for investments held by life insurance subsidiaries and charging to surplus certain assets, such as furniture and fixtures and agents' balances over 90 days old.
The following table shows (in millions) the performance of Great American in various categories. While financial data is reported on a statutory basis for insurance regulatory purposes, it is reported in accordance with GAAP for shareholder and other investment purposes.
Underwriting
The profitability of a property and casualty insurance company depends on two main areas of operation: underwriting of insurance and investment of assets. 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 following table shows certain underwriting data of Great American (dollars in millions):
As shown in the table above, Great American's underwriting results, although not profitable, have been significantly better than the industry's. Great American's results reflect an emphasis on writing commercial lines coverages of specialized niche products where company personnel are experts in particular lines of business. During 1993, approximately half of Great American's premiums were written in these specialized niche product areas. Great American's combined ratio (after policyholder dividends) for 1993 excluding its personal lines business (which may be sold to American Premier) was 104.7%.
Certain natural disasters (hurricanes, tornados, forest fires, etc.) and other incidents of major loss (explosions, civil disorder, fires, etc.) are classified as catastrophes by industry associations. Losses from these incidents are usually tracked separately from other business of insurers because of their sizable effects on overall operations. Major catastrophes in recent years included flooding in the Midwest in 1993; Hurricanes Andrew and Iniki, Chicago flooding, and Los Angeles civil disorder in 1992; Oakland fires in 1991; and Hurricane Hugo and the San Francisco earthquake in 1989. Total net losses to AFC's insurance operations from catastrophes were $26 million in 1993; $42 million in 1992; $22 million in 1991; $13 million in 1990; and $32 million in 1989. These amounts are included in the tables herein.
Insurance regulations in various states require prior approval of premium rate increases on approximately 85% of Great American's personal lines business. The commercial business generally does not require prior approval, although a number of states impose some degree of review of commercial rates.
Information for the major classes of business written by Great American is as follows (dollars in millions). Losses incurred and loss ratios exclude loss adjustment expenses. Combined ratios are stated before policyholders' dividends.
1993 1992 1991 1990 1989 Auto Liability and Physical Damage (A) Premiums Written $424 $397 $364 $820 $687
Premiums Earned 403 389 362 785 670 Losses Incurred 249 259 187 504 423 Loss Ratio 61.8% 66.6% 51.5% 64.1% 63.1% Combined Ratio 103.4% 107.7% 92.2% 102.5% 101.6%
Property and Multiple Peril (B) Premiums Written $349 $329 $368 $387 $353 Premiums Earned 337 347 378 374 351 Losses Incurred 189 228 235 203 208 Loss Ratio 56.0% 65.6% 62.3% 54.3% 59.3% Combined Ratio 103.9% 117.3% 110.6% 102.4% 104.4%
Workers' Compensation and Other Liability (C) Premiums Written $340 $349 $349 $390 $352 Premiums Earned 338 349 357 369 374 Losses Incurred 216 173 235 267 252 Loss Ratio 64.2% 49.6% 65.7% 72.6% 67.4% Combined Ratio 108.6% 92.7% 109.9% 114.8% 111.6%
All Other (D) Premiums Written $174 $149 $121 $115 $ 95 Premiums Earned 165 135 117 107 93 Losses Incurred 75 64 46 47 40 Loss Ratio 45.6% 47.6% 38.8% 43.9% 43.0% Combined Ratio 95.3% 93.1% 82.0% 87.8% 92.6%
(A) Includes related bodily injury, property damage and physical damage. Unusually low Combined Ratio in 1991 generally reflects the effects of a program to reduce exposure to certain commercial "bad risk" groups while retaining previous pricing, followed by reductions in pricing in later years.
(B) Includes extended coverage, tornado, windstorm, cyclone, hail on growing crops, personal multiple peril, riot and civil commotion, vandalism and malicious mischief, and sprinkler leakage and water damage. Unusually high Combined Ratio in 1992 generally reflects the effects of Hurricanes Andrew and Iniki.
(C) Includes other bodily injury, property damage and directors and officers' liability. Unusually low Combined Ratio in 1992 generally reflects reductions in redundant reserves on certain matured lines of commercial liability coverages written in the late 1980s.
(D) Includes accident and health, credit, burglary, glass, earthquake, aircraft physical damage and boiler and machinery. Unusually low Combined Ratio in 1991 generally reflects especially good operations for the Inland Marine and Surety operations.
The table above includes the results of GAI's personal lines business which AFC has proposed to sell to American Premier. Information for this business for 1993 follows (dollars in millions):
Automobile Homeowners Other Total Premiums Written $250 $80 $21 $351 Premiums Earned 242 79 21 342 Losses Incurred 150 51 8 209 Loss Ratio 61.8% 64.7% 38.2% 61.1%
Combined Ratio 100.8% 111.3% 74.6% 101.6%
The following table shows the ratio of net premiums written to policy-holders' surplus for Great American and the industry on a consolidated basis. Increases in this ratio beyond the informal industry standard of 3:1 may cause insurance commissioners to require companies to reduce underwriting activities or obtain additional capitalization.
1993 1992 1991 1990 1989
Great American 1.45 1.44 1.43 2.49 2.24 Industry (stock companies) (*) 1.24 1.30 1.33 1.53 1.51
(*) Source: Conning & Company, Property and Casualty Model and Forecast Service, March 1994.
Great American is represented by several thousand agents and brokers who are paid on a commission basis; most also represent other insurance companies. The geographical distribution of direct premiums written in 1993 compared to 1989, before giving effect to reinsurance, was as follows (dollars in millions):
1993 1989 Location Premiums % Premiums %
California $ 216 13.6% $ 188 11.4% New York 135 8.5 79 4.8 Connecticut 114 7.2 112 6.8 New Jersey 90 5.7 74 4.5 North Carolina 81 5.1 95 5.8 Pennsylvania 78 4.9 40 2.4 Texas 75 4.7 49 3.0 Florida 68 4.3 103 6.3 Illinois 56 3.5 69 4.2 Ohio 56 3.5 63 3.8 Oklahoma 53 3.3 85 5.2 Massachusetts 52 3.3 37 2.3 Michigan 49 3.1 61 3.7 Maryland 36 2.3 * * Washington 35 2.2 32 2.0 Kentucky 32 2.0 * * Georgia * * 96 5.9 Virginia * * 46 2.8 Tennessee * * 37 2.3 All others, including foreign, each less than 2% 359 22.8 375 22.8
$1,585 100.0% $1,641 100.0% (*) Less than 2%.
In 1988, a California ballot initiative, Proposition 103, was passed by a very small margin of voters. The consumer-sponsored initiative sought to (i) increase rate regulation, (ii) mandate rate rollbacks and freezes for most lines of property and casualty insurance and (iii) make changes in antitrust laws applicable to the insurance industry. The California Supreme Court upheld the validity of most of the major portions of the initiative but permitted insurers to seek exemptions from the rate rollback if such a rollback would not enable them to make a fair and
reasonable profit. In 1991, the newly elected Insurance Commissioner of California promulgated a new set of regulations on rate rollbacks and prior approval of rates, replacing those adopted by the former Insurance Commissioner under Proposition 103. Although these regulations are not finalized, there have been some company specific hearings and there are ongoing appellate proceedings challenging the regulations. Great American has not received a notice of the Insurance Department's assessment of its rollback liability or a hearing date, although it is exploring settlement possibilities. Since, at present, there is no finalized regulatory arrangement, Great American cannot determine the actual amount of the liability, if any, for a refund pursuant to the rollback provision of Proposition 103. By its terms, Proposition 103 does not affect workers' compensation insurance.
Loss and Loss Adjustment Expense Reserves
The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses ("LAE") of Great American. This liability represents estimates of the ultimate net cost of all unpaid losses and LAE and is determined by using case-basis evaluations and statistical projections. These estimates are subject to the effects of claim amounts and frequency and are continually reviewed and adjusted as additional information becomes known. In accordance with industry practices, such adjustments are reflected in current year operations.
Increases in claim payments are caused by a number of factors that vary with the individual types of policies written. Future costs of claims are projected based on historical trends adjusted for changes in underwriting standards, policy provisions, the anticipated effect of inflation and general economic trends. These anticipated trends are monitored based on actual development and are reflected in estimates of ultimate claim costs.
The liability for losses and LAE for certain long-term scheduled payments under workers' compensation, auto liability and other liability insurance has been discounted at rates ranging from 3.5% to 8%. As a result, the total liability for losses and LAE at December 31, 1993, 1992 and 1991 has been reduced by $56 million, $51 million and $51 million, respectively.
The limits on risks retained vary by type of policy and risks in excess of certain retention limits are reinsured. Each insurance company within the group establishes its own retention limits based on the individual company's surplus.
Generally, reserves for reinsurance and involuntary pools and associations are reflected in Great American's results at the amounts reported by those entities.
The following table provides an analysis of changes in the liability for losses and LAE, net of reinsurance (and grossed up), over the past three years on a GAAP basis (in millions):
Major components of the net decrease in the provision for claims occurring in prior years as reflected in the table above were as follows (dollars in millions):
The following table presents the development of the liability for losses and LAE, net of reinsurance, on a GAAP basis for the last ten years. The top line of the table shows the estimated liability (in millions) for unpaid losses and LAE recorded at the balance sheet date for the indicated years. The remainder of the table presents development as percentages of the estimated liability. The development results from additional information and experience in subsequent years. The middle line shows a cumulative deficiency (redundancy) which represents the aggregate percentage
increase (decrease) in the liability initially estimated. The lower portion of the table indicates the cumulative amounts paid as of successive periods as a percentage of the original loss reserve liability.
This table does not present accident or policy year development data. Further-more, in evaluating the re-estimated liability and cumulative deficiency (redundancy), it should be noted that each percentage includes the effects of changes in amounts for prior periods. For example, a deficiency related to losses settled in 1993, but incurred in 1983, would be included in the re-estimated liability and cumulative deficiency percentage for each of the years 1983 through 1992. Conditions and trends that have affected development of the liability in the past may not necessarily exist in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.
Management believes that Great American's development is similar to that of companies with similar mixes of business. The adverse development in earlier years in the table above was partially caused by the effect of higher than projected inflation on medical, hospitalization, material, repair and replacement costs. Additionally, changes in the legal environment have influenced the development patterns over the past ten years. Two significant changes in the early to mid-1980s were the trend towards an adverse litigious climate and the change from contributory to comparative negligence.
The adverse litigious climate is evidenced by an increase in lawsuits and damage awards, changes in judicial interpretation of legal liability and of the scope of policy coverage, and a lengthening of time it takes to settle cases. In addition, a trend has developed in the manner and timeliness of first claim notices. Historically, the first notification of claim came directly from the claimant; in recent years, however, there has been a gradual increase in the number of notifications in the form of direct legal action. Not only has this notification been less timely, it has been more adversarial in nature.
The change in rules of negligence governing tort claims has also influenced the loss development trend. During the early to mid-1980s, most states changed from contributory to comparative negligence rules. When contributory negligence rules control, a plaintiff seeking damages is barred from recovering damages for a loss if it can be demonstrated that the plaintiff's own negligence contributed in any way to the cause of the injury.
When comparative negligence rules control, a plaintiff's negligence is no longer a bar to recovery. Instead, the degree of plaintiff's negligence is compared to the negligence of any other party.
Generally, if the plaintiff's negligence is 50% or less of the cause of the injury, the plaintiff can recover damages, but in an amount reduced by the portion of damage attributable to the plaintiff's own negligence.
Many claims which would have been successfully defended under contributory negligence rules now result in an award of damages or a settlement during suit under the comparative negligence rules.
The differences between the liability for losses and LAE reported in the annual statements filed with the state insurance departments in accordance with statutory accounting principles ("SAP") and that reported in the accompanying consolidated financial statements in accordance with GAAP at December 31, 1993, are as follows (in millions):
Liability reported on a SAP basis $2,144
Additional discounting of GAAP reserves in excess of the statutory limitation for SAP reserves (11) Estimated salvage and subrogation recoveries recorded on a cash basis for SAP and on an accrual basis for GAAP (1) Reinsurance reserve included in other liabilities (19) Reinsurance recoverables 611
Liability reported on a GAAP basis $2,724
Environmental
Property and casualty insurers have experienced a significant increase in the number of claims and legal actions related to hazardous products and environmental pollution. Ensuing litigation extends to issues of when the loss occurred and what policies provide coverage, what claims are covered, extent of coverage, whether there is an insured obligation to defend and other policy provisions. To date, court decisions have been inconsistent on several coverage issues; these issues are not likely to be resolved in the near future.
Great American's liability for loss and loss adjustment expenses includes amounts for various liability coverages related to environmental and hazardous product claims. Establishing reserves for those types of claims is subject to uncertainties that are greater than those represented by other types of claims. Factors contributing to those uncertainties include a lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and the extent and timing of any such contractual liability. Management believes that its reserves are adequate to cover the claims reported.
Although Great American establishes reserves for reported environmental claims, it does not establish reserves for unreported claims and related litigation expenses because such amounts cannot be reasonably estimated. Although future results may be adversely affected, management does not believe any such effect is likely to be material to AFC's financial condition or results of operations.
Following is an analysis (in millions) of net reported environmental pollution and hazardous products claims for those subsidiaries capable of retrieving such data. These companies accounted for over 95% of AFC's insurance claims and reserves at December 31, 1993. 1993 1992 1991 Reserves at beginning of year $51.2 $51.3 $40.0 Incurred losses and LAE 18.5 25.8 28.0 Paid losses and LAE (24.6) (25.9) (16.7) Reserves at end of year $45.1 $51.2 $51.3
Figures above do not include asbestos abatement and underground storage tank coverage written by certain AFC subsidiaries in recent years. The table above includes exposures where Great American has been held liable for coverage on general liability policies written years ago where environmental coverage was not intended. In contrast, asbestos abatement and underground storage tank coverage is written with the intent of covering environmental-related losses. Net loss reserves on this coverage totaled
$53 million, $51 million and $42 million at December 31, 1993, 1992 and 1991, respectively.
Reinsurance
In accordance with industry practice, Great American reinsures a portion of its business with other insurance companies and assumes reinsurance from other insurers. Ceding reinsurance permits diversification of risks and limits maximum loss arising from large or unusually hazardous risks or a localized catastrophe. Although reinsurance does not legally discharge the original insurer from primary liability, risks that are reinsured are, in practice, treated as though they were transferred to the reinsurers.
Reinsurance is provided on one of two bases: the facultative basis or the treaty basis. Facultative reinsurance is generally provided on a risk by risk basis. Individual risks are ceded and assumed based on an offer and acceptance of risk by each party to the transaction. Treaty reinsurance provides for risks to be automatically ceded and assumed according to contract provisions.
In addition to various facultative reinsurance coverages, GAI has current treaty reinsurance programs which generally provide for retention maximums. For workers' compensation policies, the retention maximum is $5 million per loss occurrence with reinsurance coverage for the next $45 million. For all other casualty policies, the retention maximum is $5 million per loss occurrence with reinsurance coverage for the next $15 million. For property coverages, the retention is $5 million per risk with reinsurance coverage for the next $25 million; for catastrophe coverage on property risks, the retention is $20 million with reinsurance covering 89% of the next $110 million in losses. Contracts relating to reinsurance are subject to periodic renegotiation and no assurance can be given concerning the future terms of such reinsurance.
Great American's major reinsurers include American Re-Insurance Company, Employers Reinsurance Corporation, General Reinsurance, Mitsui Marine and Fire Insurance Company, Ltd. and Taisho Marine & Fire Insurance Company. Great American regularly monitors the financial strength of its reinsurers. This process periodically results in the transfer of risks to more financially stable reinsurers. Management believes that its present group of reinsurers is financially sound. However, market conditions over the past few years have forced many reinsurers into financial difficulties or liquidation proceedings. At December 31, 1993, Great American had an allowance of approximately $56 million for doubtful collection of reinsurance recoverables. The collectibility of a reinsurance balance is based upon the financial condition of a reinsurer as well as individual claim considerations. Included in "recoverables from reinsurers and prepaid reinsurance premiums" were $80 million on paid losses and LAE and $611 million on unpaid losses and LAE at December 31, 1993.
Premiums written for reinsurance ceded and assumed are presented in the following table (in millions):
1993 1992 1991 1990 1989
Reinsurance ceded $422 $328 $284 $219 $214 Reinsurance assumed:
From companies under management contract 63 17 8 8 6 Other, primarily non-voluntary pools and associations 61 71 55 71 54
Investment Results
The following table, prepared on a GAAP basis, shows the performance of Great American's investment portfolio, excluding equity investments in affiliates (dollars in millions):
1993 1992 1991 1990 1989
Average Cash and Investments at Cost $2,822 $2,743 $2,538 $2,445 $2,300 Investment Income 205 222 217 236 245 Net Realized Gains (Losses) 77 (56) 14 29 9 Credit (Provision) for Impairment on Investments (2) 32 (33) (69) (22) Percentage Earned: Excluding Realized Gains (Losses) (A) 7.3% 8.1% 8.5% 9.7% 10.7% Including Realized Gains (Losses) (A)10.0% 6.1% 9.1% 10.9% 11.0% Including Realized Gains (Losses) and Credit (Provision) for Impairment on Investments 10.0% 7.3% 7.8% 8.0% 10.1% Increase (Decrease) in Unrealized Gains on Marketable Securities (Net of Realized Gains) $68 $61 ($110) ($41) $103
(A) Excludes provision for losses on investments.
American Annuity Group and Great American Life Insurance Company
Data in this section relating to the period following the sale of GALIC to STI generally has been taken from the 1993 Form 10-K of American Annuity.
General
American Annuity is a holding company whose only significant asset is the capital stock of GALIC which it acquired from GAI on December 31, 1992. GALIC is engaged principally in the sale of tax-deferred annuities to employees of qualified not-for-profit organizations. GALIC is currently rated "A" (Excellent) by A.M. Best. American Annuity and GALIC employ approximately 440 persons.
The following table (in millions) presents information concerning GALIC on a GAAP basis, unless otherwise noted.
Annuity Products
Annuities are long-term retirement savings plans that benefit from interest accruing on a tax-deferred basis. Certain employees of educational institutions and other not-for-profit groups are eligible to save for retirement through contributions made on a before-tax basis to purchase annuities. Contributions are made at the discretion of the participants, generally through payroll deductions. Federal income taxes are not payable on contributions or earnings until amounts are withdrawn.
GALIC's principal products are Flexible Premium Deferred Annuities ("FPDAs") and Single Premium Deferred Annuities ("SPDAs"). FPDAs are characterized by premium payments that are flexible in amount and timing as determined by the policyholder. SPDAs require a one-time lump sum premium payment. Since January 1, 1988, approximately three-fourths of GALIC's SPDA receipts have resulted from rollovers of tax-deferred funds previously maintained by policyholders with other insurers. In 1993, FPDAs accounted for approximately two-thirds of GALIC's total annuity receipts, with SPDAs accounting for the remainder.
Annuity contracts can be either variable rate or fixed rate. With a variable rate annuity, the rate at which interest is credited to the contract is tied to an underlying securities portfolio or other performance index. With a fixed rate annuity, an interest crediting rate is set by the issuer, periodically reviewed by the issuer, and changed from time to time as determined to be appropriate. GALIC has issued only fixed rate annuities and its products offer minimum interest rate guarantees of 3% to 4%.
All of GALIC's annuity policies permit GALIC to change the crediting rate at any time (subject to the minimum guaranteed interest rate). In determining the frequency and extent of changes in the crediting rate, GALIC takes into account the profitability of its annuity business and the relative competitive position of its products. The average rate being
credited on funds held by GALIC was approximately 5.3%, 6.2% and 7.2% at December 31, 1993, 1992 and 1991, respectively.
GALIC seeks to maintain a desired spread between the yield on its investment portfolio and the rate it credits to its policies. GALIC accomplishes this by (i) offering flexible crediting rates, (ii) designing annuity products that encourage persistency and (iii) maintaining an
appropriate matching of assets and liabilities. Such incentives typically take the form of "two-tier" annuities which, in general, reward persistency by offering higher effective interest rates or lower "upfront" fees to policyholders who annuitize than are offered on prematurely withdrawn funds.
Over the past five years, the annual persistency rate of GALIC's annuity products has averaged 92%. Policyholders maintain access to their funds without incurring penalties through a provision in the contract which allows policy loans.
At December 31, 1993, GALIC had approximately 230,000 annuity policies in force, nearly all of which were individual contracts. GALIC's policyholders are employees of over 8,300 institutions nationwide. Of the $4.3 billion in total statutory reserves held by GALIC as of December 31, 1993, approximately 95% were attributable to policies in the accumulation phase. Annuity surrender payments represented 6.9%, 7.8% and 9.4%, of average statutory reserves in 1993, 1992 and 1991, respectively.
Marketing and Distribution
GALIC markets its annuities principally to employees of educational institutions in the kindergarten through high school segment. GALIC's management believes that this market segment is attractive because of the growth potential and persistency rate it has demonstrated. In 1993, written premiums from this market segment represented 90% of GALIC's total tax-qualified premiums, with sales of annuities to other not-for-profit groups accounting for the balance.
GALIC markets its annuity products through approximately 55 managing general agents ("MGAs") who, in turn, direct more than 1,000 actively producing independent agents. GALIC has developed its business since 1980 on the basis of its relationships with MGAs and independent agents primarily through a consistent marketing approach and responsive service.
GALIC is licensed to sell its products in all states (except Kansas and New York) and the District of Columbia. The geographical distribution of GALIC's annuity premiums written in 1993 compared to 1989 was as follows (dollars in millions): 1993 1989 Location Premiums % Premiums %
California $ 87 21.8% $ 98 26.7% Florida 39 9.8 22 6.0 Michigan 34 8.5 39 10.6 Massachusetts 32 8.0 30 8.2 New Jersey 22 5.5 27 7.4 Ohio 22 5.5 * * Connecticut 21 5.2 31 8.4 Illinois 13 3.3 10 2.7 North Carolina 13 3.3 * * Texas 13 3.3 12 3.3 Washington 10 2.4 10 2.7 Rhode Island 9 2.2 12 3.3
All others, each less than 2% 85 21.2 76 20.7
$400 100.0% $367 100.0%
(*) Less than 2%.
Sales of annuities are affected by many factors, including: (i) competitive rates and products; (ii) the general level of interest rates; (iii) the favorable tax treatment of annuities; (iv) commissions paid to agents; (v) services offered; (vi) ratings from independent insurance rating agencies; and (vii) general economic conditions.
Investment Results
GALIC's annuity products are structured to generate a stable flow of investable funds. GALIC earns a spread by investing these funds at an investment earnings rate in excess of the crediting rate payable to its policyholders.
Investments comprise approximately 96% of GALIC's assets and are the principal source of its income. The following table shows the performance of GALIC's investment portfolio, excluding equity investments in affiliates (dollars in millions): 1993 1992 1991 1990 1989
Average Cash and Investments at Cost $4,455 $4,078 $3,828 $3,278 $2,796 Investment Income 358 334 340 304 295 Net Realized Gains (Losses) 35 27 4 (32) (13) Credit (Provision) for Impairment on Investments - - 51 (23) (47) Percentage Earned: Excluding Realized Gains (Losses) (A) 8.0% 8.2% 8.9% 9.3% 10.5% Including Realized Gains (Losses) (A) 8.8% 8.9% 9.0% 8.3% 10.1% Including Realized Gains (Losses) and Credit (Provision) for Impairment on Investments 8.8% 8.9% 10.4% 7.6% 8.4% Increase (Decrease) in Unrealized Gains on Marketable Securities (Net of Realized Gains) $58 $51 $22 ($27) $7
(A) Excludes provision for losses on investments.
American Premier
Data in this section generally has been taken from the 1993 Form 10-K of American Premier.
American Premier's principal operations are conducted by a group of insurance subsidiaries which write non-standard automobile insurance and workers' compensation coverage. In March 1994, American Premier changed its name from The Penn Central Corporation to reflect its identity as a property and casualty insurance company. American Premier employs approximately 5,400 persons.
Insurance
American Premier acquired Republic Indemnity Company of America in March 1989. Republic writes workers' compensation and employers' liability insurance coverage in California. In addition to highly regulating the industry, the State of California establishes minimum premium levels and is a major competitor in providing coverage. Republic
successfully competes by emphasizing service to customers and brokers. Management believes that Republic Indemnity's record and reputation for paying relatively high policyholder dividends have enhanced its competitive position. Republic reported a statutory combined ratio (after policyholders' dividends) of 88.1% for 1993.
American Premier purchased Great American's non-standard
automobile insurance companies on December 31, 1990, and Leader National Insurance Company in May 1993. These companies (collectively the "NSA Group") write auto insurance coverage for physical damage and personal liability for (i) individuals perceived to be higher than normal risks due to factors such as age, prior driving violations, occupation or type of vehicle driven, or (ii) those who have been cancelled or rejected by another insurance company. Because of the risk, such policies are issued at greater than normal premiums. The NSA Group has been successful in profitably underwriting this specialty insurance niche, reporting a statutory combined ratio of 96.9% in 1993.
In February 1994, American Premier announced that it was considering a proposal to purchase GAI's personal lines insurance business for $380 million. Refer to Item 1 - "Great American Insurance Group" for a discussion of these operations.
Unless otherwise indicated, data in this section is presented on the statutory basis prescribed by the NAIC and each insurer's domiciliary state.
The profitability of a property and casualty insurance company depends on both the underwriting of insurance and investment of assets. When the combined ratio is under 100%, underwriting results are generally considered profitable; conversely, a ratio over 100% generally indicates unprofitable underwriting results. The statutory ratios for the major classes of business written by American Premier's Insurance Group are as follows.
Republic's favorable loss and expense ratio record has been attributable to strict underwriting standards, loss control services, a disciplined claims philosophy and expense containment. These factors, as well as Republic's favorable reputation with insureds for paying
policyholder dividends, have contributed to a high policy renewal rate. From 1991 through 1993, the percentage of Republic's policies renewed increased from 73% to 84% and the percentage of premiums represented by policy renewals increased from 77% to 89% of the premiums eligible for renewal.
The NSA Group has achieved underwriting profits over the past several years as a result of refinement of various risk profiles, thereby dividing the consumer market into more defined segments which can either be excluded from coverage or surcharged adequately. Effective cost control measures, both in the underwriting and claims handling areas, have further contributed to the underwriting profitability of the NSA Group. In addition, the NSA Group generally writes policies of short duration, allowing more frequent evaluation of the rates on individual risks.
American Premier's Insurance Group writes business throughout the United States. The geographical distribution of gross premiums written in 1993 compared to 1992, was as follows (dollars in millions):
1993 1992 Premiums % Premiums % Workers' Compensation California $469 100.0% $402 100.0%
Non-standard Automobile Florida $121 13.3% $132 19.8% Georgia 111 12.2 91 13.7 Texas 96 10.6 37 5.6 California 54 5.9 52 7.9 Arizona 54 5.9 39 5.9 Tennessee 41 4.6 31 4.7 Alabama 34 3.8 27 4.1 Connecticut 33 3.7 23 3.5 Missouri 31 3.4 15 2.2 Indiana 29 3.2 23 3.4 All others 304 33.4 194 29.2 $908 100.0% $664 100.0%
The withdrawal from the Southern California market by several large workers' compensation carriers due to continuing underwriting losses contributed to Republic's 1993 premium growth.
The NSA Group attributes its premium growth in recent years primarily to the overall growth in the non-standard market, entry into new states, increased market penetration in its existing states and the 1993 purchase of Leader National. The non-standard market has experienced significant growth in recent years as standard insurers have become more restrictive in the types of risks they will write.
Loss and Loss Adjustment Expense Reserves
The following table provides an analysis of changes in American Premier's liability for losses and LAE, net of reinsurance (and grossed up), over the past three years on a GAAP basis (in millions):
The following table presents the development of American Premier's liability for losses and LAE (in millions), net of reinsurance, on a GAAP basis since 1989 (the year American Premier acquired its first insurance subsidiary).
1989 1990 1991 1992 1993 Liability for Unpaid Losses and Loss Adjustment Expenses$369 $602 $664 $764 $916
Liability Re-estimated as of: One year later 97.0% 96.5% 97.0% 92.4% Two years later 89.7% 93.0% 93.4% Three years later 85.7% 91.0% Four years later 85.5%
Cumulative Redundancy (14.5%)( 9.0%)( 6.6%)( 7.6%) N/A
Cumulative Paid as of: One year later 19.5% 43.0% 44.1% 40.6% Two years later 49.1% 64.4% 64.5% Three years later 64.6% 75.2% Four years later 71.4%
Other
In December 1992, American Premier announced its intention to pursue the sale of all of its non-insurance operating businesses. The sale of these businesses is intended to further implement American Premier's strategy of concentrating on its property and casualty businesses.
In August 1993, American Premier sold its defense services operations for approximately $94 million in cash, subject to post-closing working capital adjustments. In May and November 1993, American Premier sold securities of investees in public offerings for approximately $178 million in cash. At December 31, 1993, the aggregate book value of businesses remaining to be sold was $36.1 million.
Chiquita Brands International
Data in this section generally has been taken from the 1993 Form 10-K of Chiquita.
Chiquita is a leading international marketer, processor and producer of quality fresh and processed food products. Chiquita employs approximately 45,000 persons in its continuing operations, 39,000 of whom are employed in Central and South America. In recent years, the Company has capitalized on its "Chiquita" and other premium brand names by building on its worldwide leadership position in the marketing, distribution and sourcing of bananas; by expanding its quality fresh fruit and vegetable operations; and by further developing its business in value-added processed foods.
Chiquita's fresh foods products include:
* Bananas, grapefruit, kiwi, mangos and pineapples sold under the "Chiquita" brand name;
* Bananas, citrus and other quality fresh fruit including apples, grapes, papaya, peaches, pears, plums, strawberries and tomatoes sold under the "Consul," "Chico," "Amigo," "Frupac" and other brand names; and
* A wide variety of fresh vegetables including asparagus, beans, broccoli, carrots, celery, lettuce, onions and potatoes sold under the "Premium" and various other brand names.
The core of Chiquita's fresh foods operations is the marketing, distribution and sourcing of bananas. Approximately 60% of Chiquita's consolidated net sales comes from the sale of bananas.
Chiquita's sales of bananas in 1993 in its principal markets, as a percent of its total banana revenues, were: Europe, 45%; North America, 34%; and Other (principally the Far East and Middle East), 21%. Chiquita has generally been able to obtain a premium price for its bananas due to its
reputation for quality and its innovative marketing techniques.
Chiquita has a greater number and geographic diversity of sources of bananas than any of its competitors. During 1993, approximately 30% of all bananas sold by Chiquita were sourced from Panama. Bananas were also sourced from Colombia, Costa Rica, Guatemala, Honduras, Mexico and the Philippines. Approximately two-thirds of the bananas sourced by Chiquita were produced by subsidiaries and the remainder were purchased under arrangements from suppliers. Chiquita's low concentration of sources in individual producing locations reduces its overall risk of business interruption from localized weather conditions and crop disease as well as from political changes.
Transportation expenses comprise approximately one-fourth of the total costs incurred by Chiquita in its sale of tropical fruit. Chiquita ships its tropical fruit in vessels it owns or charters. All of Chiquita's
tropical fruit shipments into the North American market are delivered using pallets or containers that minimize damage to the product by eliminating the need to handle individual boxes. As a result of a multi-year investment program, now nearly completed, and the elimination of a substantial amount of chartered ship capacity under its restructuring program, Chiquita now owns or controls through long-term lease approximately 60% of its aggregate shipping capacity. Most of the remaining capacity is operated under
contractual arrangements having terms of three years or less. Chiquita also operates loading and unloading facilities which it owns or leases in Central and South America and various ports of destination.
Chiquita's processed foods products include:
* Fruit and vegetable juices and other processed fruits and vegetables, including banana puree, marketed under the "Chiquita," "Friday" and other brands;
* Wet and dry salads sold under the "Club Chef" and "Chef Classic" brands; and
* Margarine, shortening and other consumer packaged foods sold under the "Numar," "Clover" and various regional brand names.
Chiquita's branded juices are available throughout most of the United States and are manufactured by others to the Company's specifications. Chiquita also sells banana puree, sliced bananas and other specialty banana products to producers of baby food, fruit beverages and baked goods and to others. Chiquita manufactures and markets shortening, margarine and vegetable oil products primarily in Costa Rica and Honduras from oil palm grown on the Company's plantations located in these countries. Chiquita owns one of the largest private-label vegetable processors in the U.S. which markets a full line of over twenty-five types of processed vegetables to retail and food service customers throughout the U.S. and other countries.
During the fourth quarter of 1992, after evaluation of reorganization plans announced earlier that year and completion of other preparatory actions, Chiquita adopted a plan of disposal for its Meat Division operations. Pursuant to the plan, Chiquita sold a component of its Meat Division in December 1992 and has made significant progress since, including: (i) successful ongoing cost reduction efforts resulting in breakeven operating results for 1993; (ii) progress toward obtaining substantial cost reductions relating to retiree medical costs; (iii) grants of subsidies and concessions from state and local governments; (iv) stand alone working capital financing; and (v) sale of the Division's specialty meat operations in February 1994 for approximately $50 million in cash. Chiquita expects to complete the divestures of these operations by the end of 1994.
Chiquita's Meat Division is engaged in the processing and marketing primarily of fresh pork and processed meat products which are sold principally in the U.S. and for export to Japan, Mexico, Canada and other Central American and Pacific Rim countries.
The operations of the Meat Division involve supplying a consistent quality product to a broad market, including large food chains. Profit margins in the fresh meat business are low, and the availability of adequate supplies and cost of livestock is significant to the profitability of the Meat Division's fresh meat operations.
Great American Communications
Data in this section generally has been taken from the 1993 Form 10-K of GACC.
GACC is engaged in the ownership and operation of television and radio stations; its operations are conducted through Great American
Television and Radio Company, Inc. ("GATR"). At December 31, 1993, GATR and its subsidiaries employed approximately 1,300 full-time employees and 250 part-time employees.
Following its acquisition of Taft Broadcasting in 1987, GACC was highly leveraged. In the ensuing years, GACC restructured substantial amounts of its debt and sold assets to meet debt maturities. However, the downturn in the per-formance and values of the TV and radio businesses caused GACC's cash flow from operations to be insufficient to meet all of its obligations as they came due.
In December 1993, GACC completed a comprehensive financial restructuring which included a joint prepackaged plan of reorganization under Chapter 11 of the Bankruptcy Code for GACC and two of its non- operating subsidiaries. GACC also negotiated a new credit facility with its bank lenders. Through the reorgani-zation, GACC reduced its total outstanding debt and preferred stock from $910 million to $433 million and lowered its annual fixed charges (interest and preferred stock dividends) from more than $94 million to approximately $41 million.
Under GACC's restructuring, AFC exchanged its investment in GACC stock and debt for approximately 2.3 million shares of new GACC common stock. In addition, AFC contributed $7.5 million of new capital to GACC in exchange for additional common stock and 14% notes. At December 31, 1993, AFC owned 20% of GACC's voting common stock; AFC's Chairman owned an additional 12% of the stock.
At December 31, 1993, GATR owned and/or operated six network- affiliated television stations, twelve FM radio stations and five AM radio stations. The following tables give the location, network affiliation and market information for these stations.
The source of all television stations' market information is the Nielsen Station Index, November 1993.
Substantially all of GATR's broadcast revenues come from the sale of advertising time to local and national advertisers. Local advertisements are sold by each station's sales personnel and national spots are sold by independent national sales representatives.
GATR's television stations receive a significant portion of their programming from their respective networks; the networks sell commercial advertising time within such programming. The competitive position of the stations is directly affected by viewer acceptance of network programs. In recent years, the national audience shares obtained by the networks have declined as a result of increased competition from cable television networks and other competing program sources. As of 1991, these declines began to diminish and it is expected that significant declines will not occur during the next several years. The non-network programs broadcast by the stations are either produced by the stations or acquired from other sources. Locally originated programs include a wide range of show types such as entertainment, news, sports, public affairs and religious programs.
Because most radio programming originates locally, network affiliation has little effect upon the station's competitive position within the market. GATR's AM radio stations offer their listeners a wide range of programs including news, music, discussion, commentary and sports. GATR's FM radio stations offer primarily album oriented rock, classic rock and contemporary hit music programming, designed to appeal to a more youthful audience.
Federal Communication Commission ("FCC") rules permitting ownership of two FM and/or two AM radio stations in certain markets (a "duopoly") have created opportunities for GATR to increase advertising revenues and may reduce operating expenses. GATR expects in the near future to purchase, sell or exchange radio stations in order to take advantage of the considerable operating opportunities presented from the duopoly rules.
General Cable
Data in this section generally has been taken from the 1993 Form 10-K of General Cable.
General Cable Corporation was formed in 1992 to hold American Premier's wire and cable and heavy equipment manufacturing businesses. In July 1992, American Premier distributed approximately 88% of all the outstanding shares of General Cable common stock to American Premier shareholders. In February 1994, General Cable sold the equipment manufacturing businesses in order to concentrate on the wire and cable business. General Cable employs approximately 4,600 persons.
General Cable is comprised of (i) the Electrical Group which manufactures and sells electrical wire and cable for industrial, commercial and residential uses; (ii) the Telecommunications & Electronics Group which manufacturers and markets telecommunications and electronic wire and cable for a variety of voice and data communications applications; and (iii) the Consumer Products Group which manufactures and sells wire and cable products to consumers and original equipment manufacturers.
Spelling Entertainment Group
AFC was engaged in the distribution and production of filmed entertainment programming through its subsidiary Spelling Entertainment Group. In March 1993, AFC sold its common stock investment in Spelling to Blockbuster Entertainment Corporation in exchange for 7.6 million shares of Blockbuster common stock and warrants to purchase an additional two million Blockbuster shares at $25 per share.
Other Companies
Through subsidiaries, AFC is engaged in a variety of other businesses, including The Golf Center at Kings Island (golf and tennis facility) and Provident Travel Agency, both in the Greater Cincinnati area;
commercial real estate operations in Cincinnati (offices and hotel), Louisiana (hotel), Florida (resort) and Massachusetts (resort) and apartments in Alabama, Florida, Kentucky, Louisiana, Minnesota, Oklahoma and Texas; and Financial World Magazine. These operations employ approximately 500 full-time employees.
In October 1993, AFC sold its insurance brokerage operation, American Business Insurance, Inc., to Acordia, Inc., an Indianapolis-based insurance broker. In the sale, AFC received approximately $50 million in cash, 800,000 shares of Acordia common stock and warrants to purchase an additional 1.5 million Acordia shares at $25 per share.
AFC was engaged in the theme park business through its wholly- owned subsidiary, Kings Island, one of the top ten theme parks in the United States based on attendance. In October 1992, AFC sold Kings Island to an unaffiliated party for approximately $210 million in cash.
Investment Portfolio
General
A breakdown of AFC's December 31, 1993, investment portfolio by business segment follows (excluding investment in equity securities of investee corporations) (in millions).
The following tables present the percentage distribution and yields of AFC's investment portfolio (excluding investment in equity securities of investee corporations) as reflected in its financial statements.
Unlike most insurance groups which have portfolios that are invested heavily in tax-exempt bonds, AFC has historically invested substantial amounts in taxable corporate bonds. In addition, AFC has generally followed a practice of concentrating its investments in a relatively limited number of issues rather than maintaining relatively limited positions in a larger number of issues, although this practice has moderated in recent years.
The NAIC assigns quality ratings to publicly traded as well as privately placed securities. These ratings range from Class 1 (highest quality) to Class 6 (lowest quality). The following table shows AFC's bonds and redeemable preferred stocks, by NAIC designation (and comparable Standard & Poor's Corporation rating) as of December 31, 1993 (dollars in millions).
Risks inherent in connection with fixed income securities include loss upon default and market price volatility. Factors which can affect the market price of securities include: credit worthiness, changes in interest rates and economic growth, fewer market makers and investors, defaults by major issuers of securities and public concern about concentrations in certain types of securities by institutions.
AFC's primary investment objective for bonds and redeemable preferred stocks is interest and dividend income rather than realization of capital gains. AFC invests in bonds and redeemable preferred stocks that have primarily short-term and intermediate-term maturities. This practice allows additional flexibility in reacting to fluctuations of interest rates.
AFC's practice permits concentration of attention on a relatively limited number of companies in relatively few industries, principally insurance, utilities, financial services, food products, energy and communications. 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 and AFC's concentration in a relatively small number of companies and industries may permit it to
identify investments with above average potential to increase in value. This concentration of size is less prominent in fixed income security investments than in equity investments.
Seasonality
The operations of certain of AFC's business segments are
seasonal in nature. While insurance premiums are recognized on a relatively level basis, claim losses related to adverse weather (snow, hail, flooding, hurricanes, tornados, etc.) may be seasonal. The banana portion of the food products segment is affected by variations in consumer demand based on the availability of other fruits. The resulting seasonal pricing generally produces the strongest period during the first six months of the year. Television broadcast revenues tend to be higher in the second and fourth quarters.
Competition
Most areas of AFC's operations are highly competitive, with competition coming from a variety of sources, many of which are larger and have financial resources greater than AFC or its subsidiaries.
The Insurance Groups and GALIC compete with other insurers primarily in service and price. Since they sell policies through independent agents, they must also compete for agents. Such competition is based on service to policyholders and agents, product design, commissions and profit sharing. No single insurer dominates the marketplace. Competitors include individual insurers and insurance groups of varying sizes, some of which are mutual companies possessing competitive advantages in that all their profits inure to their policyholders, and many of which possess financial resources in excess of those available to the Insurance Groups and GALIC. In a broader sense, GALIC competes for retirement savings with a variety of financial institutions offering a full range of financial services.
Chiquita's principal competitors consist of a limited number of large international companies. In order to compete successfully, Chiquita must be able to source bananas of uniformly high quality and distribute them in worldwide markets on a timely basis. Chiquita believes that it sells more bananas than any of its competitors, accounting for approximately one- fourth of all bananas imported into its principal markets throughout the world.
GACC's television and radio stations compete for revenues with other stations in their respective signal coverage areas as well as with all other advertising media. The broadcast stations also compete for audience with other forms of home entertainment, such as cable television, pay television systems of various types and home video and audio recordings.
General Cable's electrical group competes against numerous building wire suppliers. General Cable believes it is one of the three leaders in this market, each of which has at least a 20% market share. Its telecommunications and electronics group is in a highly competitive market which is dominated by AT&T Technologies, Inc.
Regulation
AFC's insurance subsidiaries are regulated under the insurance and insurance holding company laws of their states of domicile and other states in which they operate. These laws, in general, require approval of the particular insurance regulators prior to certain actions by the insurance companies, such as the payment of dividends in excess of statutory
limitations and certain transactions and continuing service arrangements with affiliates. Regulation and supervision of each insurance subsidiary is administered by a state insurance commissioner who has broad statutory powers with respect to the granting and revoking of licenses, approvals of premium rates, forms of insurance contracts and types and amounts of business which may be conducted in light of the policyholders' surplus of the particular company. AFC's largest insurance subsidiaries, GAI and
GALIC, are Ohio domiciled insurers. State insurance departments conduct periodic financial examinations of insurance companies, with GAI's and GALIC's most recent such examinations being as of December 31, 1990. Insurance departments also perform market conduct examinations to determine compliance with rate and form filings and to monitor treatment of policyholders and claimants. State insurance laws also regulate the character of each insurance company's investments, reinsurance and security deposits. The statutes of most states provide for the filing of premium rate schedules and other information with the insurance commissioner, either directly or through rating organizations, and the commissioner generally has powers to disapprove such filings or make changes to the rates if they are found to be excessive, inadequate or unfairly discriminatory. The determination of rates is based on various factors, including loss and loss adjustment expense experience.
The National Association of Insurance Commissioners ("NAIC") is an organization which is comprised of the chief insurance regulator for each of the 50 states and the District of Columbia. In 1990, the NAIC began an accreditation program to ensure that states have adequate procedures in place for effective insurance regulation, especially with respect to financial solvency. The accreditation program requires that a state meet specific minimum standards in over 15 regulatory areas to be considered for accreditation. The accreditation program is an ongoing process and once accredited, a state must enact any new or modified standards approved by the NAIC within two years following adoption. As of December 1993, 32 states were accredited, including Ohio.
In December 1993, the NAIC adopted the Risk Based Capital For Insurers Model Act which applies to both life and property and casualty companies. The risk-based capital formulas determine the amount of capital that an insurance company needs to ensure that it has an acceptably low expectation of becoming financially impaired. The act provides for increasing levels of regulatory intervention as the ratio of an insurer's total adjusted capital and surplus decreases relative to its risk-based capital, culminating with mandatory control of the operations of the insurer by the domiciliary insurance department at the so-called "mandatory control level". The risk-based capital formulas became effective in 1993 for life companies and will become effective with the filing of the 1994 Annual Statement for property and casualty companies. Based on the 1993 results of AFC's insurance companies, all such companies are adequately capitalized.
The NAIC's state accreditation criteria require that a state adopt the NAIC model law governing extraordinary dividends or a law substantially similar to the model. The current NAIC model for extraordinary dividends requires prior regulatory approval of any dividend that exceeds the "lesser of" 10% of statutory surplus or 100% of the prior year's net income (net gain from operations for life insurance companies), subject in either case to the existence of sufficient earned statutory surplus from which such dividends may be paid. The NAIC has adopted a variety of alternative provisions which may be considered "substantially similar" to its model, one of which includes the "greater of" rather than "lesser of" standard with other restrictions. In October 1993, Ohio revised its dividend law to adopt one of the alternatives. The maximum amount of dividends which may be paid without (i) prior approval or (ii) expiration of a 30 day waiting period without disapproval is the greater of statutory net
income or 10% of policyholders' surplus as of the preceding December 31, but only to the extent of earned surplus as of the preceding December 31. The Ohio Insurance Department has broad discretion to limit the payment of dividends by insurance companies domiciled in Ohio.
The NAIC has been considering the adoption of a model investment law for several years. The current projection for adoption of a model law
is the end of 1994, at the earliest. It is not yet determined whether the model law would be added to the NAIC accreditation standards so that consideration of the model for adoption in states would be required for the achievement or continuation of any state's accreditation. It is not possible to predict the impact of these activities on AFC's insurance subsidiaries.
There can be no assurance that existing insurance-related laws and regulations will not become more restrictive in the future and thereby have a material adverse effect on the operations of AFC's insurance subsidiaries and on their ability to pay dividends.
Chiquita is subject to a variety of governmental regulations in certain countries where it sources and markets its products, including import quotas and tariffs, currency exchange controls and taxes. In July 1993, the European Union ("EU") implemented a new quota effectively restricting the volume of Latin American bananas imported into the EU to approximately 80% of prior levels. Challenges to the quota and many matters regarding implementation and administration of the quota remain to be resolved. In May 1993, the principles underlying the new regulation that discriminate against Latin American banana exporting countries were ruled illegal under the General Agreement on Tariffs and Trade ("GATT") by a GATT dispute settlement panel. In January 1994, a GATT dispute settlement panel ruled on a second lawsuit against the current EU regulation in favor of the Latin American countries. GATT rulings in favor of the Latin American countries could result in an increase in the total volume of Latin American bananas, including banana volume of Chiquita, which could be imported under the quota. However, there can be no assurance that the EU will comply, or the manner in which it would comply, with such rulings.
GACC's television and radio broadcasting operations are subject to the jurisdiction of the FCC. FCC regulations govern issuance, term, renewal, transfer and cross-ownership of licenses which are necessary for operation of television and radio stations.
ITEM 2
ITEM 2
Properties
AFC and subsidiaries own several buildings located in downtown Cincinnati, Ohio. These buildings are situated on one block of land owned by AFC and contain approximately 570,000 square feet of commercial and office space, one-half of which is occupied by AFC and affiliates.
GAI and its subsidiaries own office and storage facilities in Cincinnati, Dallas, Tulsa and Oklahoma City. In addition, Great American leases approximately 204,000 square feet of space for its home office in a
downtown Cincinnati building under leases expiring in 1994 thru 1997. Great American also leases office space in approximately 75 cities throughout the United States for its regional and service offices.
In connection with the acquisition of a majority ownership of American Annuity by AFC, American Annuity relocated its corporate offices to
Cincinnati where it leases approximately 100,000 square feet. In addition, American Annuity leases office space totaling approximately 60,000 square feet in Los Angeles under a lease which expires in December 1994 and is not expected to be renewed. American Annuity also owns approximately 650,000 square feet and leases approximately 150,000 square feet of manufacturing facilities related to its discontinued operations. American Annuity is actively engaged in efforts to sell these remaining facilities or extend
existing leases on the properties.
American Premier's insurance subsidiaries lease an aggregate of approximately 360,000 square feet in nine cities under leases with expirations ranging from 1994 to 2001.
Chiquita owns about three-fourths of the 178,000 acres (located primarily in Central America) that it uses for its banana and oil palm operations. In addition, Chiquita owns power plants, packing stations, warehouses, irrigation systems and loading and unloading facilities. Chiquita owns, controls under bareboat leases or uses under time-charter agreements over 40 ocean-going refrigerated vessels.
GACC owns all of its television station studios and buildings and all but one of its transmission sites. GACC owns three of its radio studios and buildings, four of its FM transmission sites and all but one of its AM transmission sites.
General Cable operates 22 manufacturing facilities in the United States. Four-fifths of those facilities, consisting of 4.1 million square feet, are owned. In addition, General Cable owns its Northern Kentucky headquarters building, consisting of 66,000 square feet of office space and 100,000 square feet of warehouse capacity.
AFC and its subsidiaries own approximately 600 acres northeast of Cincinnati on which are located The Golf Center at Kings Island and a campground.
ITEM 3
ITEM 3
Legal Proceedings
AFC and its subsidiaries are involved in various litigation, most of which arose in the ordinary course of business. Except for the following, management believes that none of the litigation meets the threshold for disclosure under this Item.
For several years AFC had an ownership interest of less than 50% in Mission Insurance Group, Inc. That company experienced financial difficulties culminating in bankruptcy and receivership proceedings in 1985 and 1986. AFC wrote off its investment in Mission in 1986 and sold its ownership position in 1987. Under the receivership proceedings, the Insurance Commissioner of California sued numerous reinsurers who had done business with Mission's insurance subsidiaries in two suits brought in Superior Court, Los Angeles County, California, styled Insurance Commissioner of the State of California v. Mission Insurance Company and Gillespie v. Abeille-Paix et al. During 1989, AFC, Carl H. Lindner and Ronald F. Walker ("AFC Defendants"), along with other directors of Mission
("Mission Directors"), were added as cross-defendants to that litigation by both the Commissioner and the reinsurance companies. The trials began in late 1991 and continue as of March 1, 1994. The Commissioner's cross-complaint against the AFC Defendants and the Mission Directors alleges breach of fiduciary duty and seeks indemnity in the event the reinsurers are
not required to pay as a result of any finding of fraud, negligence or breach of duty. The actions brought by the reinsurers against the AFC Defendants and Mission Directors were dismissed. The Commissioner has entered into a Partial Settlement Agreement (which became final in 1990) with the AFC Defendants and certain of the Mission Directors ("Settling Parties"). The settlement provides that the Commissioner release the Settling Parties from all claims except that the Settling Parties may still
be liable in the event that the Commissioner does not recover the full amount sought from the reinsurers and it is determined that such failure to recover resulted from misconduct by one or more Settling Parties. The liability of any Settling Party must be determined on an individual comparative fault basis. The Settling Parties have denied all material allegations. Management believes there is little likelihood that this litigation will have a material impact on AFC's financial statements.
PART II
ITEM 5
Market for Registrant's Common Equity and Related Stockholder Matters
Not applicable - Registrant's Common Stock is owned by fewer than 20 share-holders. See the Consolidated Financial Statements for information regarding dividends. ITEM 6
Selected Financial Data
The following table sets forth certain data for the periods indicated (dollars in millions).
ITEM 7
Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL
Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of AFC's financial condition and results of operations. This discussion should be read in conjunction with the financial statements beginning on page.
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 redemption of 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.
LIQUIDITY AND CAPITAL RESOURCES
Ratios The following ratios may be considered relevant indicators of AFC's liquidity and are typically presented by AFC in its prospectuses and similar documents. Management believes that balance sheet ratios (debt-to-equity) are more meaningful on a parent only basis. On the other hand, earnings statement ratios (fixed charges) are more meaningful on a total enterprise basis since the parent only ratio is dependent, to a great degree, on the discretionary nature of dividend payments from subsidiaries.
Ratios of AFC's (parent only) long-term debt to equity (i) excluding Capital Subject to Mandatory Redemption, or (ii) including it as either (a) debt or (b) equity at December 31, 1993, 1992 and 1991 are shown below. Ratios of earnings to fixed charges, excluding and including preferred dividends, for the three years ended December 31, 1993 are also shown below.
1993 1992 1991 Debt to equity 1.06 1.99 2.13 Debt (plus redeemable capital) to equity 1.16 2.09 2.45 Debt to equity (plus redeemable capital) .98 1.81 1.63
Earnings to fixed charges 2.62 2.15 1.54 Earnings to fixed charges plus preferred dividends 2.26 1.94 1.42
Sources of Funds A wholly-owned subsidiary, Great American Holding Corporation ("GAHC"), has a revolving credit agreement with several banks under which it can borrow up to $300 million. The credit line converts to a four-year term loan with scheduled principal payments to begin in March 1997. Borrowings under the credit line are made by GAHC and are advanced to AFC. The line is guaranteed by AFC and secured by 50% of the stock of Great American Insurance Company ("GAI"). Borrowings, repayments and interest payments on the line are included in "net advances from (to) subsidiaries" in the following table. At December 31, 1993, GAHC had no outstanding borrowings under the agreement.
Funds to meet the parent company's expenditures have been provided from a variety of sources within the holding company, from subsidiaries and directly from outside sources, as detailed in the following table (in millions):
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 $320 million of which $305 million was available at December 31, 1993.
Generally, over 90% of the dividends (including non-cash dividends) received from subsidiaries have been from GAI. Payments of dividends by GAI are subject to various laws and regulations which limit the amount of dividends that can be paid without regulatory approval. During 1993, the State of Ohio revised its dividend law for Ohio-domiciled insurers. Under the new law, the maximum amount of dividends which may be paid without (i) prior approval or (ii) expiration of a 30 day waiting period without disapproval is the greater of statutory net income or 10% of policyholders' surplus as of the preceding December 31, but only to the extent of earned surplus as of the preceding December 31. While the new law is generally more restrictive than the prior law regarding the amount of dividends which can be paid without prior approval, management believes GAI will be able to gain such approvals due to its strong surplus position. The maximum amount of dividends payable in 1994 from GAI based on its 1993 earned surplus is approximately $108 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, 1993, AFC's insurance group owned publicly traded equity securities of affiliates with a market value of $858 million, including equity securities of AFC subsidiaries of $451 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.
Under tax allocation agreements with AFC, 80%-owned U.S. subsidiaries generally compute tax provisions as if filing a separate return based on book taxable income computed in accordance with generally accepted accounting principles. The resulting provision (or credit) is currently payable to (or receivable from) AFC.
Management believes AFC has sufficient resources to meet its liquidity requirements through operations in the short-term and long-term future. If funds generated from operations, including dividends from subsidiaries, are insufficient to meet fixed charges in any period, AFC would be required to meet such charges through bank borrowings, sales of securities or other assets, or similar transactions.
Uncertainties In exchange for $5 million, AFC has agreed to indemnify Spelling Entertainment Group Inc. for up to $35 million in excess of a threshold amount of $25 million of the costs Spelling may incur in the 12 years beginning April 1, 1993 to resolve Spelling's environmental matters, bankruptcy claims and certain other matters. Additionally, an AFC subsidiary has responsibility for environmental remediation costs, which are estimated to be between $10 million and $15 million, associated with the
sales of former manufacturing properties. The subsidiary has reserved $10.6 million at December 31, 1993.
AFC's insurance subsidiaries do not establish reserves for unreported environmental claims because such amounts cannot be reasonably estimated. At December 31, 1993, they had recorded $45.1 million (net of reinsurance recoverables) for reported 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.
While the results of all such uncertainties cannot be predicted, based upon its knowledge of the facts, circumstances and applicable laws, management believes that sufficient reserves have been provided and that the ultimate resolution of these uncertainties will not have a material adverse effect on AFC's financial condition or liquidity.
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, excluding Chiquita which ceased being a subsidiary in 1991, were $32 million, $53 million and $28 million, in 1993, 1992 and 1991, respectively.
Management of AFC has always believed in the use of leverage (borrowing funds at predetermined rates) to increase the return on its equity. Historically, AFC has relied more on the use of fixed-rate debt and preferred stock issuances in its financing activities. AFC borrows from both public and private sources, with parent only debt at December 31, 1993, coming almost entirely from public sources.
Whenever possible, AFC tries to do its financing on a long-term basis, even if the current costs associated are slightly higher. At December 31, 1993, the average maturity of AFC's borrowings on a parent only basis was approximately 6-1/2 years; the average interest rate on those borrowings was 11.6%. Comparable figures for three years ago are 9 years maturity and 11.6% stated interest rate (12.8% effective rate).
In February 1994, AFC commenced an offer to issue new 9-3/4% Debentures due April 20, 2004 and cash in exchange for its publicly traded debentures. On March 28, 1994, AFC announced that the expiration date had been extended to April 15, and that in excess of $190 million of old debentures had been accepted for exchange. The table below shows (in thousands) total sinking fund and other principal payments on all debt of AFC (parent only) for 1994 and in subsequent periods on an historical basis and on a pro forma basis (a) assuming 50% of each issue of the old debentures are exchanged pursuant to the offer ("50% Accept-ance") and (b) assuming all of the old debentures are tendered ("100% Accept-ance"). The scheduled payments shown below assume that debentures purchased are applied to the earliest scheduled retirements.
Pro Forma December 31, 1993 50% 100% Historical Acceptance Acceptance
1994 $ 12,080 $ 3,231 $ 3,231 1995 10,883 261 261 1996 11,843 261 261 1997 17,818 5,493 5,493
1998 19,223 261 261 1999-2002 343,605 184,928 11,469 2003-2004 154,279 375,296 548,755
Total $569,731 $569,731 $569,731
Actual cash outlays will be less than indicated in the above table to the extent that AFC can satisfy scheduled retirements and sinking fund requirements by acquiring its debt at discounts from redemption values.
The net annual charge to pretax income for interest expense would decline by approximately $6.8 million based on 50% Acceptance and approximately $13.5 million based on 100% Acceptance.
Based on the results of this offer and cash availability, AFC will redeem some or all of the unexchanged debentures. In March 1994, AFC called for redemption its 13-1/2% Debentures and its 13-1/2% Series A Debentures. Holders of either issue may accept the exchange offer.
Interest and dividend payments on parent company debt and preferred stock (all issues) for the subsequent five years, assuming all sinking fund and other principal payments are made as scheduled and before effects of the 1994 exchange offers and redemptions, would be approximately (in millions):
1994 1995 1996 1997 1998
Interest $66.0 $64.7 $63.5 $62.3 $60.8 Dividends 26.0 25.5 25.1 25.1 25.1
Payment of preferred dividends and redemption of AFC Preferred Stock is subordinate to AFC's obligations to pay principal and interest on its debt.
At December 31, 1993, sinking fund and other scheduled principal payments on debt of subsidiaries for the next five years were as follows: 1994 - $4 million; 1995 - $63 million; 1996 - $1 million; 1997 - $16 million; and 1998 - $159 million.
Certain members of the Lindner family have the right to "put" to AFC their shares of AFC Common Stock or options at any time at a price based on AFC's book value per share (as defined). The "put" price is paid one-third in cash and the balance in a five-year installment note bearing interest at a rate equal to the five-year U.S. Treasury Note rate plus 3%. The aggregate purchase price for remaining shares and options covered by the "put" at December 31, 1993, was approximately $40 million.
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.
AFC attempts to optimize investment income while building the value of its portfolio, placing emphasis upon long-term performance. AFC's goal is to maxi-mize return on an ongoing basis rather than focusing on year-by-year performance.
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.
Fixed income investment funds are generally invested in securities with short-term and intermediate-term maturities with an objective of maximizing interest and dividend yields. This practice allows
additional flexibility in reacting to market conditions.
Approximately 95% of the bonds and redeemable preferred stocks held by AFC were rated "investment grade" (credit rating of AAA to BBB) at December 31, 1993, compared to less than 60% at the end of 1988. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated and non-investment grade.
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: 1993 - $165 million; 1992 - $104 million; 1991 - $38 million; 1990 - ($89 million) and 1989 - $64 million.
At December 31, 1993, AFC had gross unrealized gains and losses on bonds and redeemable preferred stocks and equity securities as follows (in millions):
Net Gross Unrealized Unrealized Gains Losses Gain Bonds and redeemable preferred stocks: Held to maturity $189.2 ($18.5) $170.7 Available for sale 133.2 - 133.2 322.4 (18.5) 303.9 Equity securities 137.2 (5.1) 132.1 $459.6 ($23.6) $436.0
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 and the carrying value of that investment is reduced.
At December 31, 1993, collateralized mortgage obligations ("CMOs") represented approximately 30% of AFC's bonds and redeemable preferred stocks. At that date, interest only (I/Os), principal only (P/Os) and other "high risk" CMOs represented approximately four-tenths of one percent of AFC's total CMO portfolio. AFC invests primarily in CMOs which are structured to minimize prepayment risk. In addition, the majority of CMOs held by AFC 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 AFC's CMOs are rated "AAA" 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, AFC does not believe a material risk (relative to earnings and liquidity) is inherent in holding such investments.
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 1993
General Due to decreases in ownership percentages, AFC ceased accounting for the following companies as subsidiaries and began accounting for them as investees: American Premier (April 1993), Spelling (July 1992), Chiquita (July 1991) and GACC (June 1991). AFC had accounted for American Premier as a subsidiary from 1992 through the first quarter of 1993 due to AFC's ownership exceeding 50%. As a result of these changes, current year income statement components are not comparable to prior years and are not
indicative of future years.
AFC's net earnings reached a record high of $220 million in 1993. Major factors contributing to the increase in earnings included $155 million in pretax gains from the sales of AFC's insurance agency operations, Spelling Entertainment Group, 4.5 million shares of American Premier and additional proceeds received on the 1990 sale of the NSA Group in addition to improved contributions to results from American Premier, Chiquita and GACC.
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. Significant realized gains on securities sales and from the public issuance of stock by an investee contributed to the $72 million of earnings in 1991.
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 103.9% in 1993, 105.0% in 1992 and 103.2% in 1991. Total net losses to AFC's insurance operations from catastrophes (natural disasters and other incidents of major loss) were $26 million in 1993, $42 million in 1992 and $22 million in 1991.
To understand the overall profitability of particular lines, timing of claims payments and the related impact of investment income must be considered. Certain "short-tail" lines of business (primarily property coverages) have quick loss payouts which reduce the time funds are held, thereby limiting investment income earned thereon. On the other hand, "long-tail" lines of business (primarily liability coverages and workers' compensation) have payouts that are either structured over many years or take many years to settle, thereby significantly increasing investment income earned on related premiums received.
While Great American desires and seeks to earn an underwriting profit on all of its business, it is not always possible to do so. As a result, the company attempts to expand in the most profitable areas and control growth or even reduce its involvement in the least profitable ones.
In recent years, many commercial lines markets have been extremely competitive as predicted premium rate increases have not materialized. Workers' compensation, in particular, has been especially hard hit by competition, rising benefit levels and claims fraud. Many states have begun to address these problems and, in the last couple of years, Great American has focused its efforts toward those markets where improvements are evident.
In 1993, Great American's underwriting results significantly outperformed the industry average for the eighth consecutive year. Great American has been able to exceed the industry's results by supplementing its commercial lines coverages with highly specialized niche products and new automobile and homeowner products.
Many of the improvements experienced by Great American and the market in general in recent years are expected to continue in 1994.
See the discussion of Underwriting and Loss and Loss Adjustment Expense Reserves under Item 1 - "Business - Great American Insurance Group".
1993 compared to 1992 Property and casualty insurance premiums decreased $657 million (31%) in 1993 reflecting the deconsolidation of American Premier's insurance operations beginning in the second quarter of 1993. Premiums for the remainder of AFC's insurance group were virtually unchanged.
1992 compared to 1991 Property and casualty insurance premiums increased $955 million (80%) in 1992 reflecting the consolidation of American Premier's insurance operations beginning in 1992. Premiums for the remainder of AFC's insurance group were virtually unchanged.
Investment Income Changes in investment income reflect fluctuations in market rates and changes in average invested assets.
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.
1992 compared to 1991 Investment income increased $120 million (21%) in 1992 reflecting primarily the consolidation of American Premier in 1992, partially offset by lower interest rates available in the marketplace.
Investee Corporations Equity in net earnings of investee corporations (companies in which AFC owns a significant portion of the voting stock) represents AFC's proportionate share of the investees' earnings and losses.
1993 compared to 1992 AFC's equity in the net earnings of investees in 1993 was $70 million compared to a loss of $339 million in 1992. The principal items responsible for this improvement were (i) the absence of losses from GACC in 1993 compared to AFC's loss of $187 million from that investment in 1992, (ii) a $108 million improvement from Chiquita's operations and (iii) $92 million in earnings from American Premier which became an investee in the second quarter of 1993 when AFC's ownership declined below 50%.
1992 compared to 1991 The decrease in equity in net earnings of investees in 1992 reflects primarily the results of Chiquita and GACC, both of which became investees in the third quarter of 1991. Chiquita reported a net loss of $284 million in 1992 attributable principally to (i) sharply increased banana costs and expenses and (ii) lower banana prices in the first half of the year. GACC reported a net loss of $597 million in 1992 which includes a $658 million provision to revalue intangible assets to reflect estimated current market values of broadcasting assets at December 31, 1992. In addition, significant debt, depreciation and amortization expenses continued to more than offset broadcasting results. In connection with a proposed financial restructuring of GACC, AFC transferred all securities and loans related to GACC to the investee account and reduced the carrying value of that investment to estimated net realizable value ($35 million).
Gains on Sales of Investees 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.
Gains on Sales of Subsidiaries The gains on sales of subsidiaries in 1993 include (i) a pretax gain of $44 million from the sale of American Business
Insurance, Inc. and (ii) a pretax gain of $31 million representing an adjustment on the 1990 sale of AFC's non-standard automobile insurance group to American Premier.
The gain on sale of subsidiary in 1992 represents a pretax gain from the sale of Kings Island Theme Park.
The gains on sales of subsidiaries in 1991 include (i) a pretax gain of $58 million as a result of Chiquita's public issuance of 5 million shares of its common stock; (ii) a pretax gain of $13 million on Charter's sale of its interest in an oil producing concession; and (iii) a $7 million pretax gain on the disposition of 455,000 shares of Chiquita common stock. These items were partially offset by a pretax loss of $12 million realized as a result of GACC's issuance of 16.5 million shares of its 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), GACC (through May 1991), Spelling Entertainment Inc. (from May 1991 to June 1992), Kings Island Theme Park (through September 1992) and Chiquita (through June 1991).
1993 1992 1991 Federal Systems $ 99.2 $ 414.0 $ - Diversified Products and Services 52.9 255.4 - Petroleum Products - 159.7 424.0 Broadcasting and Entertainment: Broadcasting - - 78.0 Entertainment - 118.8 139.4 Kings Island Theme Park - 83.0 79.2 Food Products: Fresh Foods - - 1,347.5 Prepared Foods - - 1,089.2 $152.1 $1,030.9 $3,157.3
Sales of Federal Systems and Diversified Products and Services represent American Premier's revenues from systems and software engineering services and the manufacture and supply of industrial products and services. Sales of petroleum products reflect Spelling's revenues from petroleum marketing activities. Broadcasting revenues represent GACC's television and radio operations. Entertainment revenues reflect Spelling's television production and distribution operations. Sales of food products represent Chiquita's revenues.
1993 compared to 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.
1992 compared to 1991 In July 1992, AFC's ownership of Spelling decreased below 50%; accordingly, Spelling's revenues are included for only the first six months of 1992 compared to the entire year for 1991. The increase in Kings Island revenues in 1992 was due primarily to a 14% increase in attendance over the comparable period in 1991. Revenues from several operating days in October and a "Winterfest" operation during the holiday season were approximately $5 million in the fourth quarter for 1991.
In October 1992, AFC sold the theme park to an unaffiliated party. See "Gains on Sales of Subsidiaries".
Interest on Annuities 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 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 5.3% at December 31, 1993; GALIC's products offer minimum interest rate guarantees of 3% to 4%. The rate at which GALIC credits interest on annuity policyholders' funds is subject to change based on market conditions.
Annuity receipts totaled $400 million in 1993, $360 million in 1992 and $460 million in 1991. Receipts in 1993 increased primarily due to the introduction of new single premium products in the second half of 1992. Receipts in 1992 were lower than anticipated due to (i) a reduction in receipts relating to a new product introduced in 1990 which encouraged rollovers of other retirement funds and (ii) unfavorable economic and market conditions, including the impact of the negative publicity associated with a number of highly publicized insolvencies in the life insurance industry. Annuity surrender payments represented 6.9%, 7.8% and 9.4% of average statutory reserves in 1993, 1992 and 1991, respectively.
1993 compared to 1992 Interest on annuity policyholders' funds decreased $13 million (5%) in 1993 due to a reduction in rates being credited to policyholders. The effect of this decrease more than offset an increase of 7% in the average amount of accumulated policyholders' funds held.
1992 compared to 1991 Interest on annuity policyholders' funds decreased by $16.3 million (6%) from 1991 due to a reduction in rates being credited to policyholders, which more than offset an increase of approximately 7% in the average amount of accumulated policyholders' funds held.
Interest on Borrowed Money Changes in interest expense result from fluctuations in market rates as well as changes in borrowings. AFC has generally financed its borrowings on a long-term basis which has resulted in higher current costs.
Interest expense included in AFC's consolidated statement of operations was comprised of (in millions): 1993 1992 1991 AFC Parent $ 71.1 $ 70.6 $ 73.8 Great American Holding 23.4 34.2 37.8 Great American Insurance 14.0 14.3 14.3 American Premier 17.2 69.2 - American Annuity 21.2 - - Chiquita - - 41.1 GACC - - 49.6 Spelling - 4.7 8.2 Other Companies 10.3 22.9 26.5 $157.2 $215.9 $251.3
GAHC's interest expense has decreased 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):
1993 1992 1991 Minority interest $35 $38 $44 Writeoff of debt discount and issue costs 24 - -
Allowance for bad debts 10 (3) 26 Relocation expenses 8 - - Book Value Incentive Plan 1 (1) 38
Allowance for bad debts includes charges for possible losses on agents' balances, reinsurance recoverables and other receivables. Relocation expenses represent the estimated costs of moving GALIC's operations from Los Angeles to Cincinnati.
Income Taxes Certain subsidiaries have not been able to recognize tax benefits on significant operating losses. Accordingly, AFC's effective tax rates were greater than the normal rate of 34% in 1992 and 1991. See Note L to the Financial Statements for an analysis of other items affecting AFC's effective tax rate.
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 portion of AFC's net deferred tax asset at December 31, 1992, attributable to American Premier was $245.3 million. 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.
The analysis of estimated future taxable income will be reviewed and updated periodically, and any required adjustments, which may increase or decrease the net deferred tax asset, will be made in the period in which the developments on which they are based become known.
Discontinued Operations Earnings from discontinued operations represent the results of Hunter Savings Association prior to its sale in December 1991. Earnings from continuing operations do not reflect earnings that would have been earned on the sales proceeds had the sale of Hunter taken place at the beginning of 1991.
Recent Accounting Standards The following Statements of Financial Accounting Standards ("SFAS") have been implemented by AFC in 1992 or 1993 or will be implemented in 1994. The implementation of these standards is discussed under various subheadings of Note A to the Financial Statements; effects of each are shown in relevant Notes. Implementation of SFAS Nos. 112 and 114 in the first quarter of 1994 and 1995, respectively, is not expected to have a significant effect on AFC.
SFAS# Subject of Standard (Year Implemented) Reference 106 Certain Postretirement Benefits(1993) "Benefit Plans" 107 Fair Values (1992) "Fair Value" 109 Income Taxes (1992) "Income Taxes" 112 Certain Employment Benefits (1994) -n/a- 113 Reinsurance (1993) "Reinsurance" 114 Impairment of Loans (1995) -n/a- 115 Investment in Securities (1993) "Investments"
Other standards issued in recent years did not apply to AFC or had only negligible effects on AFC.
ITEM 8
Financial Statements and Supplementary Data
Page Reports of Independent Auditors
Consolidated Balance Sheet: December 31, 1993 and 1992
Consolidated Statement of Operations: Years ended December 31, 1993, 1992 and 1991
Consolidated Statement of Changes in Capital Accounts: Years ended December 31, 1993, 1992 and 1991
Consolidated Statement of Cash Flows: Years ended December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements
"Selected Quarterly Financial Data" has been included in Note Q to the Consolidated Financial Statements.
PART III
ITEM 10
Directors and Executive Officers of the Registrant
The directors and executive officers of AFC at March 1, 1994, are:
Executive Name Age Position Since
Carl H. Lindner 74 Chairman of the Board and Chief 1959 Executive Officer Richard E. Lindner 72 Director 1959 Robert D. Lindner 73 Vice Chairman of the Board 1959 Ronald F. Walker 55 Director, President and Chief 1973 Operating Officer
Carl H. Lindner III 40 President of GAI and President 1987 and Chief Operating Officer of American Premier S. Craig Lindner 39 President of AAG and Senior Executive Vice President of AMM James E. Evans 48 Vice President and General Counsel Sandra W. Heimann 51 Vice President 1984 Robert C. Lintz 60 Vice President 1979 Thomas E. Mischell 46 Vice President 1985 Fred J. Runk 51 Vice President and Treasurer 1978
Carl H. Lindner has served as Chairman of the Board and Chief Executive Officer of AFC for more than five years. He serves in similar capacities with various AFC subsidiaries. He serves as Chairman of the Board of the following public companies: American Annuity Group, Inc. ("AAG"), American Financial Enterprises, Inc. ("AFEI"), Chiquita, General Cable, Great American Communications Company ("GACC") and American Premier.
AFC owns a substantial beneficial interest (over 20%) in all of these companies.
Richard E. Lindner is owner, Chairman of the Board of Directors, President and Chief Executive Officer of Thriftway, Inc., a supermarket chain otherwise unaffiliated with AFC, and has been associated with that company for over five years.
Robert D. Lindner, for more than five years, has served as Vice Chairman of the Board of Directors of AFC. In addition, he is Chairman of the Board of United Dairy Farmers, Inc. ("UDF") which, among other things, is engaged through subsidiaries in dairy processing and the operation of convenience stores. He is also a director of AFEI.
Ronald F. Walker has served as President and Chief Operating Officer of AFC for more than five years. He is also Vice Chairman of the Board of Directors of GAI and holds executive positions in most of AFC's other subsidiaries. He is also a director of AAG, AFEI, Chiquita, General Cable and Tejas Gas Company.
Carl H. Lindner III has been President of GAI for more than five years. He holds executive positions in many of GAI's subsidiaries. He has also been President and Chief Operating Officer of American Premier since 1991.
S. Craig Lindner has been Senior Executive Vice President of American Money Management Corporation ("AMM"), a subsidiary of AFC which provides investment services to AFC and its subsidiaries, for more than five years. He was elected President of AAG in March 1993.
James E. Evans has served as a Vice President and the General Counsel of AFC for more than five years.
Sandra W. Heimann has been a Vice President of AFC and an executive officer of AMM for more than five years.
Robert C. Lintz has been a Vice President of AFC for more than five years.
Thomas E. Mischell has been a Vice President of AFC for more than five years.
Fred J. Runk has served as Vice President and Treasurer of AFC for more than five years.
Carl H. Lindner, Robert D. Lindner and Richard E. Lindner are brothers. Carl H. Lindner III and S. Craig Lindner are sons of Carl H. Lindner.
All of the executive officers of AFC devote substantially all of their time to the affairs of AFC and its subsidiaries. All of the above are United States citizens.
The information required by the following Items will be provided within 120 days after end of Registrant's fiscal year.
ITEM 11 Executive Compensation
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
ITEM 13 Certain Relationships and Related Transactions
REPORTS OF INDEPENDENT AUDITORS
Board of Directors American Financial Corporation
We have audited the accompanying consolidated balance sheets of American Financial Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, changes in capital accounts, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the financial statements of American Premier Underwriters, Inc. (formerly The Penn Central Corporation), General Cable Corporation and American Annuity Group, Inc. (1991). Those statements were audited by other auditors whose reports have been furnished to us. The reports pertaining to the statements of General Cable Corporation and American Premier Underwriters, Inc. included explanatory paragraphs that described their change in method of accounting for income taxes in 1992. Our opinion on the consolidated financial statements and schedules, insofar as it relates to data included for those corporations as described in Note E, is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Financial Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, 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.
As discussed in Note A to the consolidated financial statements, American Financial Corporation and subsidiaries changed their method of accounting in 1993 for certain investments in debt and equity securities and in 1992 for income taxes.
ERNST & YOUNG
Cincinnati, Ohio March 25, 1994
REPORT OF AMERICAN PREMIER'S INDEPENDENT AUDITORS
American Premier Underwriters, Inc. (formerly The Penn Central Corporation):
We have audited the financial statements and the financial statement
schedules of American Premier Underwriters, Inc. and Consolidated Subsidiaries listed in the Index to Financial Statements and Financial Statement Schedules of American Premier Underwriters, Inc.'s Form 10-K for the year ended December 31, 1993 (included as Exhibit 99 herein). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of American Premier Underwriters, Inc. and Consolidated Subsidiaries at December 31, 1993 and 1992 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information shown therein.
As discussed in Note 1 to the financial statements, in 1992 the Company changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE
Cincinnati, Ohio February 16, 1994 (March 25, 1994 with respect to the change of the Company's name as discussed in Note 1 to American Premier's financial statements)
REPORT OF GENERAL CABLE'S INDEPENDENT AUDITORS
General Cable Corporation:
We have audited the consolidated financial statements and related schedules of General Cable Corporation and subsidiaries listed in Item 14(a) of the
Annual Report on Form 10-K of General Cable Corporation for the year ended December 31, 1993 (not presented separately herein). These consolidated financial statements and related schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and related schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of General Cable Corporation and subsidiaries at December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information shown therein.
As discussed in Notes 1 and 10 to the consolidated financial statements, in 1992 General Cable Corporation changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE
Cincinnati, Ohio February 18, 1994
REPORT OF AMERICAN ANNUITY'S INDEPENDENT AUDITORS
American Annuity Group, Inc.:
We have audited the consolidated balance sheet of American Annuity Group,
Inc., formerly Sprague Technologies, Inc., and subsidiaries as of December 31, 1991 and the related consolidated statements of operations, common stockholders' equity and cash flows for the year then ended (before adjustments and reclassifications to conform with the presentation for 1992). Our audit also included the 1991 financial statement schedule listed in the Index at Item 14(a) of American Annuity Group, Inc's. Form 10-K for the year ended December 31, 1993 (not presented separately herein). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements (before adjustments and reclassifications to conform with the presentation for 1992) present fairly, in all material respects, the financial position of American Annuity Group, Inc. and subsidiaries as of December 31, 1991 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE
Stamford, Connecticut March 24, 1992
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands)
December 31, 1993 1992
Assets Cash and short-term investments $ 167,950 $ 837,429 Investments: Bonds and redeemable preferred stocks: Held to maturity - at amortized cost (market - $3,959,400 and $4,705,600) 3,788,732 4,597,544 Available for sale - at market (amortized cost - $2,216,328 and $1,905,814) 2,349,528 1,976,514 Other stocks - principally at market (cost - $207,056 and $182,476) 339,156 230,876 Investment in investee corporations 899,800 568,207 Bonds and receivables from investees 6,783 305,701 Loans receivable 624,149 812,436 Real estate and other investments 139,319 179,152 8,147,467 8,670,430 Recoverables from reinsurers and prepaid reinsurance premiums 756,060 599,204 Trade receivables 298,240 594,834 Other receivables 213,507 318,799 Property, plant and equipment, net 44,950 215,851 Deferred tax asset - 258,300 Prepaid expenses, deferred charges and other assets 275,349 394,319 Cost in excess of net assets acquired 173,965 499,639
$10,077,488 $12,388,805
Liabilities and Capital Insurance claims and reserves $ 3,422,657 $ 4,279,853 Annuity policyholders' funds accumulated 4,256,674 3,973,524 Long-term debt: Parent company 571,874 557,161 American Premier - 657,800 Other subsidiaries 482,132 794,217 Accounts payable, accrued expenses and other liabilities 648,462 1,005,866 Minority interest 109,219 812,707 9,491,018 12,081,128
Capital subject to mandatory redemption 49,232 27,683 Preferred Stock (redemption value - $278,889) 168,588 168,588 Common Stock without par value 904 904 Retained earnings 210,846 42,402 Net unrealized gain on marketable securities, net of deferred income taxes 156,900 68,100
$10,077,488 $12,388,805
See notes to consolidated financial statements.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL ACCOUNTS (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES
A. Accounting Policies B. Acquisitions and Sales of Subsidiaries C. Segments of Operations D. Investments E. Investment in Investee Corporations F. Property, Plant and Equipment G. Cost in Excess of Net Assets Acquired H. Long-Term Debt I. Capital Subject to Mandatory Redemption J. Other Preferred Stock K. Common Stock L. Income Taxes M. Discontinued Operations N. Pending Legal Proceedings O. Benefit Plans P. Transactions With Affiliates Q. Quarterly Operating Results (Unaudited) R. Additional Information S. Restrictions on Transfer of Funds and Assets of Subsidiaries T. Subsequent Event (Unaudited)
A. Accounting Policies
Basis of Presentation The consolidated financial statements include the accounts of American Financial Corporation ("AFC") and its subsidiaries except for Hunter Savings Association which was sold in the fourth quarter of 1991 and is presented in the financial statements as "discontinued operations". Changes in ownership levels of other subsidiaries and investees have resulted in certain differences in the financial statements and have affected comparability between years. Certain reclassifications have been made to prior years to conform to the current year's presentation. All significant intercompany balances and transactions have been eliminated. All acquisitions have been treated as purchases. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements.
AFC's ownership of subsidiaries and significant investees with publicly traded shares at December 31, was as follows:
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investments Bonds, redeemable preferred stocks and other stocks at December 31, consisted of the following (in millions):
The table below sets forth the scheduled maturities of bonds and redeemable preferred stocks based on carrying value as of December 31, 1993. Data based on market value is generally the same. Collateralized mortgage obligations have an average life of approximately 4 years at December 31, 1993.
Held to Available Maturity Maturity for Sale One year or less 1% 1% After one year through five years 7 5 After five years through ten years 18 13 After ten years 55 31 81 50 Collateralized mortgage obligations 19 50 100% 100%
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Gross gains of $69.4 million, $85.2 million and $208.8 million and gross losses of $16.5 million, $4.7 million and $236.9 million were realized on sales of fixed maturity investments during 1993, 1992 and 1991, respectively.
Realized gains (losses) and changes in unrealized appreciation (depreciation) on fixed maturity and equity security investments are summarized as follows (in thousands):
Investment in other stocks at December 31, 1992 consisted of (in thousands):
At December 31, 1992, gross unrealized gains on other stocks were $63.7 million and gross unrealized losses were $15.1 million.
Carrying values of investments were determined after deducting cumulative provisions for impairment aggregating $47 million and $78 million at December 31, 1993 and 1992, respectively.
Fair values for investments are based on prices quoted, when available, in the most active market for each security. If quoted prices are not available, fair value is estimated based on present values, fair values of comparable securities, or similar methods.
Short-term investments are carried at cost; loans receivable are stated at the aggregate unpaid balance. Carrying amounts of these investments approximate their fair value.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Investment in Investee Corporations Investment in investee corporations represents AFC's ownership of securities of certain companies. All of the companies named in the following table are subject to the rules and regulations of the SEC. Market value of the investments (excluding $50 million in non-public securities at December 31, 1992, for which market values are not available) was approximately $940 million and $700 million at December 31, 1993 and 1992, respectively.
AFC's investment (and common stock ownership percentage) and equity in net earnings and losses of investees are stated below (dollars in thousands):
American Premier operates businesses primarily in specialty property and casualty insurance. In March 1994, American Premier changed its name from The Penn Central Corporation to reflect the nature of its business. Chiquita is a leading international marketer, processor and producer of quality fresh and processed food products. GACC is engaged in the ownership and operation of television and radio stations. General Cable primarily manufactures and markets electrical and communication wire and cable products.
Due to GACC's financial difficulties, AFC transferred all GACC securities and loans to the investee account and reduced the carrying value of that investment to estimated net realizable value ($35 million) at the end of 1992. AFC resumed equity accounting for its investment in GACC following GACC's reorganization at the end of 1993.
In July 1992, American Premier distributed to its shareholders approximately 88% of the stock of General Cable. AFC and its subsidiaries, excluding American Premier, received approximately 45% of the shares. The shares retained by American Premier are being held for distribution to creditors and other persons. Accordingly, those shares were included in "Other stocks" at December 31, 1992 and
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
General Cable was not consolidated because control was temporary. The operating results of General Cable for the first six months of 1992 are included in other income.
Sprague reported net losses of $29 million in 1992 and $53 million in 1991. Over the past few years, Sprague sold substantially all of its operating businesses and recorded substantial restructuring charges and loss provisions ($25 million in 1992 and $55 million in 1991).
Included in AFC's consolidated retained earnings at December 31, 1993, was approximately $145 million applicable to equity in undistributed net losses of investees. The unamortized negative goodwill in investees totaled approximately $62 million at December 31, 1993.
Summarized financial information for AFC's major investees at December 31, 1993, is shown below (in millions). See "Investee Corporations" in Management's Discussion and Analysis.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Great American Communications 1993 1992 1991
Contracts, Broadcasting Licenses and Other Intangibles $575 $540 Other Assets 145 174 Long-term Debt 433 635 Minority Interest - Preferred Stock of Subsidiary - 275 Shareholders' Equity (Deficit) 139 (339)
Net Revenues of Continuing Operations $205 $211 $202 Operating Income (Loss) 40 (642) 12 Loss from Continuing Operations (67) (613) (33) Discontinued Operations - 11 40 Extraordinary Items 408 5 77 Net Income (Loss) 341 (597) 84
General Cable Corporation Six Year months ended ended 12/31/93 12/31/92
Current Assets $338 $366 Non-current Assets 282 345 Current Liabilities 110 159 Notes Payable to American Premier 287 255 Non-current Liabilities 83 78 Shareholders' Equity 140 219
Net Sales from Continuing Operations $764 $416 Operating Income (Loss) 2 (29) Loss From Continuing Operations (26) (53) Discontinued Operations (32) - Net Loss (58) (53)
General Cable's 1993 results included a $34.4 million loss on the disposal of its equipment manufacturing businesses. AFC's share of this loss reduced negative goodwill and was not included in AFC's equity in General Cable's earnings. General Cable's results for the first six months of 1992 (prior to its spin-off from American Premier) are included in American Premier's results.
F. Property, Plant and Equipment Property, plant and equipment consisted of the following at December 31, (in thousands): 1993 1992
Land $ 3,654 $ 33,487 Buildings and improvements 21,493 96,523 Machinery, equipment and office furnishings 89,329 278,805 Other - 46,622 114,476 455,437 Less accumulated depreciation (69,526) (239,586)
$ 44,950 $215,851
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. Cost in Excess of Net Assets Acquired At December 31, 1993 and 1992, accumulated amortization of the excess of cost over net assets of purchased subsidiaries amounted to approximately $94 million and $176 million, respectively. Amortization expense was $15.0 million in 1993, $25.0 million in 1992 and $37.2 million in 1991.
H. Long-Term Debt Long-term debt consisted of the following at December 31, (in thousands):
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At December 31, 1993, sinking fund and other scheduled principal payments on debt for the subsequent five years were as follows (in thousands):
Parent Other Company Subsidiaries Total 1994 $12,080 $ 3,669 $ 15,749 1995 10,883 63,050 73,933 1996 11,843 1,064 12,907 1997 17,818 15,667 33,485 1998 19,223 158,821 178,044
In February 1994, AFC commenced an offer to issue new 9-3/4% Debentures due April 20, 2004 and cash in exchange for its publicly traded debentures. In December 1993, AFC wrote off $24.3 million in unamortized original issue discount and debt issue costs related to the debentures covered in the exchange offer.
Based on the results of this offer and cash availability, AFC will redeem some or all of the unexchanged debentures. In March 1994, AFC called for redemption its 13-1/2% Debentures and its 13-1/2% Series A Debentures. Holders of either issue may accept the Exchange Offer.
Parent company sinking fund and other scheduled principal payments on debt at December 31, 1993, assuming at least 50% of each issue of the old debentures are exchanged, would be as follows (in thousands):
1994 1995 1996 1997 1998 $3,231 $261 $261 $5,493 $261
AFC may, at its option, apply debentures otherwise purchased in excess of scheduled payments to satisfy any sinking fund requirement. The scheduled principal payments shown above assume that debentures purchased are applied to the earliest scheduled retirements.
At December 31, 1993, the estimated fair value of all long-term debt of AFC and its subsidiaries exceeded carrying value by approximately $23 million. Fair values of debt instruments were calculated using quoted market prices where available and present values, discounted cash flows, or similar techniques in other cases.
During 1993, GAHC entered into a new revolving credit agreement with several banks under which it can borrow up to $300 million. Borrowings bear interest at prime rate or at LIBOR plus 1.375% and are collateralized by a pledge of 50% of the stock of AFC's largest insurance subsidiary. The agreement converts to a four-year term loan in December 1996 and requires annual facility fees and commitment fees based upon the unused portion of the credit line. AFC guarantees amounts borrowed under the credit agreement.
In connection with the acquisition of GALIC, AAG borrowed $180 million under a Bank Term Loan Agreement and $50 million under a Bridge Loan. In 1993, AAG sold $225 million principal amount of Notes to the public and used the proceeds to pay off the Bank and Bridge Loan. Unamortized debt issue costs of $4.6 million (net of minority interest) were written off and are included in extraordinary items.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFEI redeemed its 13-7/8% Notes and paid $40 million of bank debt with the proceeds from the sale of shares of American Premier in August 1993. Subsequently, AFEI entered into a new revolving credit agreement which enables it to borrow a maximum of $20 million through December 1997.
Cash interest payments of $133 million, $206 million and $221 million were made on long-term debt in 1993, 1992 and 1991, respectively.
I. Capital Subject to Mandatory Redemption Capital subject to mandatory redemption includes AFC's Mandatory Redeemable Preferred Stock and capital subject to a put option.
Mandatory Redeemable Preferred Stock The outstanding shares of Mandatory Redeemable Preferred Stock are nonvoting, cumulative and consist of the following:
Series E, $10.50 par value - authorized 2,725,000 shares; annual dividends per share $1; to be retired at par in 1994 and 1995; 504,711 shares (stated value - $5.3 million) outstanding at December 31, 1993 and 1992.
Series I, $.01 par value - authorized 700,000 shares; annual dividends per share $2.66 in 1993; redeemable at $28 per share; 150,212 shares (stated value - $4.2 million) and 225,318 shares (stated value - $6.3 million) outstanding at December 31, 1993 and 1992, respectively.
The fair market value of AFC's Mandatory Redeemable Preferred Stock approximates stated value.
In February 1994, AFC redeemed the outstanding shares of Series I Preferred Stock. Approximately 45% of the Series E Preferred Stock is scheduled to be retired in December 1994; the balance is to be retired in December 1995.
During 1993, AFC purchased 75,106 shares of Series I Preferred Stock for approximately $2.1 million. During 1992, AFC purchased 680,369, 115,500 and 75,105 shares of Series D, Series E and Series I Preferred Stock, respectively, for approximately $10.4 million. During 1991, AFC purchased 679,689 shares of Series D Preferred Stock for approximately $7.1 million.
Capital Subject to Put Option Under an agreement entered into in 1983, certain members of the Lindner family (the "Group") who, in the aggregate, owned 1,848,235 shares of AFC Common Stock, were granted options to purchase an additional 1,225,000 shares. The options, which expire two years after the death of Robert D. Lindner, are exercisable at $6.65 per share plus $.40 per share per year from April 1983. Holders have the right to "put" to AFC any shares of AFC Common Stock or options at any time at a price equal to
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFC's book value per share, adjusted to reflect all equity securities (including investees and subsidiaries with publicly traded shares) at market prices. The purchase price is to be paid one-third in cash and the balance in a five-year installment note bearing interest at a rate equal to the five- year U.S. Treasury note rate plus 3%. AFC has the right to "call" any AFC shares owned by the Group after Robert D. Lindner's death at the same price as described under the "put" (but not less than $6.65 per share plus 10% compounded annually from April 1983). Further, AFC has a right of first refusal on shares owned by members of the Group.
At December 31, 1993, the Group owned 1,533,767 shares of AFC Common Stock and options to purchase an additional 762,500 shares. The aggregate purchase price for all shares covered by the put is included in "capital subject to mandatory redemption" and amounted to $40 million and $16 million at December 31, 1993 and 1992, respectively. Changes in the aggregate purchase price are charged or credited directly to retained earnings without affecting earnings.
J. Other Preferred Stock Under provisions of both the Nonvoting (55,800,000 shares authorized, including the redeemable issues) and Voting (3,500,000 shares authorized, none outstanding) Cumulative Preferred Stock, the Board of Directors is authorized to divide the authorized stock into series and to set specific terms and conditions of each series.
The outstanding shares of Nonvoting Cumulative Preferred Stock, excluding those that are mandatorily redeemable, consist of the following:
Series F, $1 par value - authorized 15,000,000 shares; annual dividends per share $1.80; 10% annually may be retired at AFC's option at $20 per share from 1994 to 1996; 13,753,254 shares (stated value - $168.0 million) outstanding at December 31, 1993 and 1992.
Series G, $1 par value - authorized 2,000,000 shares; annual dividends per share $1.05; may be retired at AFC's option at $10.50 per share; 364,158 shares (stated value - $600,000) outstanding at December 31, 1993 and 1992.
In 1992 and 1991, AFC sold 1.0 million and 1.4 million shares of Series F Preferred Stock to its ESORP for $15.0 million and $19.4 million in cash, respectively.
K. Common Stock At December 31, 1993, Carl H. Lindner and certain members of the Lindner family owned all of the outstanding Common Stock of AFC (18,971,217 shares, including 1,533,767 shares subject to a put option as described in Note I). Of the 32,300,000 authorized shares of Common Stock at December 31, 1993, 762,500 shares were reserved for issuance upon exercise of options.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
L. Income Taxes The following is a reconciliation of income taxes at the statutory rate of 35% in 1993 and 34% in 1992 and 1991 and income taxes as shown in the Statement of Operations (in thousands):
Adjusted earnings (loss) before income taxes consisted of the following (in thousands): 1993 1992 1991 Subject to tax in: United States $255,682($144,854) ($ 45,020) Foreign jurisdictions 1,744 - 187,065
$257,426($144,854) $142,045
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The total income tax provision consists of (in thousands):
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.
The components of the provision for deferred income taxes for 1991 were (in millions):
Undistributed earnings of subsidiaries and investees $19.6 Losses not utilized 20.5 Insurance underwriting adjustments (16.3) Investment income (16.2) Disposition of assets 35.9 Book value incentive plan (11.9) Other (5.4)
$26.2
For income tax purposes, certain members of the AFC consolidated tax group had approximately $180 million of operating loss carryforwards available at December 31, 1993. The carryforwards are scheduled to expire as follows: $23 million in 1994, $9 million in 1995 through 2000 and $148 million in 2001 through 2005.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The cumulative effect of implementing SFAS No. 109 in 1992, which resulted from giving recognition to previously unrecognized tax benefits, was income of $85.4 million. This income consisted of a charge of $40 million related to members of the AFC tax group and a benefit of $125.4 million for AFC's share of American Premier's accounting change. Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. The significant components of deferred tax assets and liabilities for AFC's tax group included in the Balance Sheet at December 31, were as follows (in millions):
The gross deferred tax asset was reduced by a valuation allowance based on an analysis of the likelihood of realization. Factors considered in assessing the need for a valuation allowance include: (i) recent tax returns, which show neither a history of large amounts of taxable income nor cumulative losses in recent years, (ii) opportunities to generate taxable income from sales of appreciated assets, and (iii) the likelihood of generating larger amounts of taxable income in the future. The likelihood of realizing this asset will be reviewed periodically; any adjustments required to the valuation allowance will be made in the period in which the developments on which they are based become known.
Cash payments for income taxes, net of refunds, were $49.6 million, $9.6 million and $41.2 million for 1993, 1992 and 1991, respectively.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
M. Discontinued Operations In December 1991, AFC sold Hunter Savings Association to Provident Bancorp (an affiliate) for approximately $67.9 million in Provident Bancorp securities and $834,000 in cash. Prior to the sale, Hunter paid AFC a dividend of approximately $26.8 million in cash. Discontinued operations for 1991 consisted of the following (in thousands): Gain Operations on Sale Pretax Earnings $17,683 $5,652 Tax (5,617) (1,922)
Net Earnings $12,066 $3,730
N. Pending Legal Proceedings Counsel has advised AFC that there is little likelihood of any substantial liability being incurred from any litigation pending against AFC and subsidiaries.
O. Benefit Plans AFC expensed ESORP contributions of $8.9 million in 1993, $7.4 million in 1992 and $7.5 million in 1991. Other operating and general expenses include a charge of $1 million in 1993, a credit of $1 million in 1992 and a charge of $38 million in 1991 for units outstanding under AFC's Book Value Incentive Plan.
In 1993, AFC began accruing postretirement benefits over the period the employees qualify for such benefits. Expense for 1993 was $3.1 million. Prior to this change, costs were charged to expense as incurred.
P. Transactions With Affiliates Various business has been transacted among AFC and its subsidiaries over the past several years, including rentals, data processing services, accounting services, investment management services, loans, leases, insurance, advertising and sales of assets. Unless otherwise disclosed, none of these transactions had a material effect on the net earnings or equity of AFC. Aggregate charges for these services within AFC and its subsidiaries have been insignificant in relation to consolidated revenues.
In addition, AFC and its subsidiaries have had certain of the above types of transactions with certain of AFC's officers and directors and with business entities owned by them. Charges for such services have been less than one percent of consolidated revenues in 1993, 1992 and 1991.
In 1993 AFC sold stock of an affiliate to certain of its officers and employees for $1.8 million in cash and $270,000 in 5.25% unsecured notes due in five equal annual installments beginning in 1996.
In 1991, The Provident Bank purchased a $5 million loan to an AFC resort real estate subsidiary from an unrelated bank. The loan is secured by the subsidiary's property and is guaranteed by AFC. At December 31, 1993, $452,000 is owed to Provident under the loan. Members of the Lindner family are majority owners of Provident's parent.
Except as noted otherwise, all of the above transactions have taken place at approximate market rates or values and, in the opinion of management, all amounts are fully collectible.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Q. Quarterly Operating Results (Unaudited) The operations of certain of AFC's business segments are seasonal in nature. While insurance premiums are recognized on a relatively level basis, claim losses related to adverse weather (snow, hail, hurricanes, tornados, etc.) may be seasonal. Quarterly results necessarily rely heavily on estimates. These estimates and certain other factors, such as the nature of investees' operations and discretionary sales of assets, cause the quarterly results not to be necessarily indicative of results for longer periods of time. The following are quarterly results of consolidated operations for the two years ended December 31, 1993 (in millions). See Note B for changes in ownership of companies whose revenues are included in the consolidated operating results and for the effects of gains on sales of subsidiaries in individual quarters.
Following American Premier's announcement in May 1993 that it was committed to sell its Federal Systems segment, AFC classified the operations of this business as "discontinued" for the periods American Premier was accounted for as a subsidiary. These operations have been classified as "continuing" operations below since the amounts were not material ($1.4 million in the first quarter of 1993 and $1.5 million, $1.5 million and $1.4 million in the first three quarters of 1992). In addition, AAG's $5.2 million (pretax before minority interest) writeoff of debt issue costs in the third quarter of 1993 has been reclassified as "extraordinary".
Realized gains (losses) on sales of securities and charges for possible losses on investments for the respective quarters amounted to (in millions):
New insurance regulations requiring rate rollbacks are being implemented in California as a result of the 1988 ballot initiative, Proposition 103. GAI has not received a rollback assessment and management believes an ultimate liability, if any, cannot be estimated. Since it is not probable that GAI will pay a material premium refund, no provision has been made in the financial statements for a potential liability.
In the normal course of business, AFC's insurance subsidiaries assume and cede reinsurance with other insurance companies. The following table shows (in millions) (i) amounts deducted from property and casualty premium income accounts in connection with reinsurance ceded, (ii) amounts included in income for reinsurance assumed and (iii) reinsurance recoveries deducted from losses and loss adjustment expenses.
1993 1992 1991 Reinsurance ceded $422 $278 $284 Reinsurance assumed: From companies under management contract 63 17 8 Other, primarily non-voluntary pools and associations 61 117 55 Reinsurance recoveries 343 151 109
The fair value of the liability for annuities in the payout phase is assumed to be the present value of the anticipated cash flows, discounted at current interest rates. Fair value of annuities in the accumulation phase is assumed to be the policyholders' cash surrender amount. The aggregate fair value of all annuity liabilities, net of deferred policy acquisition costs, at December 31, 1993, approximates the amounts recorded in the financial statements.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Financial Instruments with Off-Balance-Sheet Risk In the normal course of business, AFC and its subsidiaries enter into financial instrument transactions which may present off-balance-sheet risks, of both credit and market risk nature. These transactions include interest rate swaps and collars, commitments to fund loans, loan guarantees and commitments to purchase and sell securities or loans.
Market risk arises from the possibility that interest and exchange rate movements may make financial instruments less valuable or more onerous. Credit risk arises from the possibility of failure of another party to perform according to the terms of a contract. Appropriate collateral, credit analysis and other control procedures are considered in the light of circumstances of individual situations to minimize risk. Management does not anticipate any material adverse effect on its financial position resulting from involvement in these instruments.
At December 31, 1993, AFC and its subsidiaries had commitments to fund credit facilities and contribute limited partnership capital totalling $35 million at December 31, 1993.
S. Restrictions on Transfer of Funds and Assets of Subsidiaries Payments of dividends, loans and advances by AFC's subsidiaries are subject to various state laws, federal regulations and debt covenants which limit the amount of dividends, loans and advances that can be paid. The maximum amount of dividends payable in 1994 from GAI based on its 1993 earned surplus is approximately $108 million. Total "restrictions" on intercompany transfers from AFC's subsidiaries cannot be quantified due to the discretionary nature of the restrictions.
T. Subsequent Event (Unaudited) In February 1994, American Premier announced that it was considering a proposal from AFC to purchase GAI's personal lines business (primarily insurance of private passenger automobiles and residential property) for $380 million. These operations had earned premiums of $342 million in 1993 and represented approximately 25% of the premiums earned by all of GAI's insurance operations. The purchase would include the transfer of a portfolio of principally investment grade securities with a market value of approximately $450 million. The estimated net book value (GAAP basis) of the business to be transferred would be approximately $200 million.
PART IV
ITEM 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report: 1. Financial Statements are included in Part II, Item 8.
2. Financial Statement Schedules: A. Selected Quarterly Financial Data is included in Note Q to the Consolidated Financial Statements.
B. Schedules filed herewith for 1993, 1992 and 1991:
Page II - Amounts Receivable from Related Parties and Under- writers, Promoters, and Employees other than Related Parties S-2
III - Condensed Financial Information of Registrant S-4
XIV - Supplemental Information Concerning Property-Casualty Insurance Operations S-6
All other schedules for which provisions are made in the applicable regulation of the Securities and Exchange Commission have been omitted as they are not applicable, not required, or the information required thereby is set forth in the Financial Statements or the notes thereto.
C. The annual report on Form 10-K of American Premier Underwriters, Inc. (File No. 1-1569) for the period ended December 31, 1993, is hereby incorporated by reference.
Copies of this Annual Report on Form 10-K and all subsequent reports filed pursuant to Section 13 of the Securities Exchange Act of 1934 may be obtained from the Commission's principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the rules and regulations of the Commission or may be examined without charge at Room 1024 of the Commission's public reference facilities at the same address. Copies of material filed with the Commission may also be inspected at the following regional offices: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, New York, New York 10048.
3. Exhibits - see Exhibit Index on page E-1.
(b) Reports on Form 8-K:
Date of Report Items Reported February 23, 1994 1. Exchange Offer for AFC Debentures 2. Proposal to sell personal lines business to American Premier
March 17, 1994 1. Amended Exchange Offer terms 2. Call for redemption of 13-1/2% Debentures
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES THREE YEARS ENDED DECEMBER 31, 1993 (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES THREE YEARS ENDED DECEMBER 31, 1993 (In Thousands)
AMERICAN FINANCIAL CORPORATION - PARENT ONLY SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES SCHEDULE XIV - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS THREE YEARS ENDED DECEMBER 31, 1993 (IN MILLIONS)
INDEX TO EXHIBITS
AMERICAN FINANCIAL CORPORATION
Number Exhibit Description
3 Articles of Incorporation and Code of Regulations, filed as Exhibit 3 to AFC's Form 10-K for 1988. *
4 Instruments defining the The rights of holders of rights of security holders. Registrant's Preferred Stock are defined in the Articles of Incorporation. Registrant has no outstanding debt issues exceeding 10% of the assets of Registrant and consolidated subsidiaries.
Management Contracts: 10(a) Book Value Incentive Plan, filed as Exhibit 10(a) to AFC's Form 10-K for 1983. *
10(b) Option Agreement, filed as Exhibit 10(b) to AFC's Form 10-K for 1983. *
10(c) Nonqualified ESORP Plan, filed as Exhibit 10(e) to AFC's Form 10-K for 1989. *
12 Computation of ratios of earnings to fixed charges and fixed charges and preferred dividends.
21 Subsidiaries of the Registrant.
28 Information from reports furnished to state insurance regulatory authorities.
99 Form 10-K of American Premier Underwriters, Inc. for 1993.
(*) Incorporated herein by reference.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND FIXED CHARGES AND PREFERRED DIVIDENDS (Dollars in Thousands)
AMERICAN FINANCIAL CORPORATION
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AFC at December 31, 1993. All corporations are subsidiaries of AFC and, if indented, subsidiaries of the company under which they are listed.
Percentage of State of Common Equity Name of Company Incorporation Ownership
American Financial Enterprises, Inc. Connecticut 83% Great American Holding Corporation Ohio 100 Great American Insurance Company Ohio 100 American Annuity Group, Inc. Delaware 80 Great American Life Insurance Company Ohio 100 American Empire Surplus Lines Insurance Company Delaware 100 American National Fire Insurance Company New York 100 Great American Management Services, Inc. Ohio 100 Mid-Continent Casualty Company Oklahoma 100 Stonewall Insurance Company Alabama 100 Transport Insurance Company Ohio 100
The names of certain subsidiaries are omitted, as such subsidiaries in the aggregate would not constitute a significant subsidiary.
See Part I, Item 1 of this Report for a description of certain companies in which AFC owns a significant portion and accounts for under the equity method.
AMERICAN FINANCIAL CORPORATION
EXHIBIT 28 - INFORMATION FROM REPORTS FURNISHED TO STATE INSURANCE REGULATORY AUTHORITIES
Schedule P of Annual Statements
A. CONSOLIDATED PROPERTY AND CASUALTY ENTITIES - See Attached Schedules
Schedule P (prepared in accordance with the rules prescribed by the National Association of Insurance Commissioners) includes the reserves of AFC's consolidated property and casualty subsidiaries. The following is a summary of Schedule P reserves (in millions):
GAI Insurance Group Schedule P - Part 1 Summary - col. 33 $1,823 - col. 34 321 Statutory Loss and Loss Adjustment Expense Reserves $2,144
B. UNCONSOLIDATED SUBSIDIARIES None
C. 50% OR LESS OWNED PROPERTY AND CASUALTY INVESTEES Not Included
Information for American Premier Underwriters, Inc. for 1993 is not included since that company files such information with the Commission as a registrant in its own right.
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, American Financial Corporation has duly caused this Report to be signed on its behalf by the undersigned, duly authorized.
American Financial Corporation
Signed: March 28, 1994 BY:s/CARL H. LINDNER
Carl H. Lindner Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
s/CARL H. LINDNER Chairman of the Board March 28, 1994 Carl H. Lindner of Directors
s/ROBERT D. LINDNER Director March 28, 1994 Robert D. Lindner
s/RONALD F. WALKER Director* March 28, 1994 Ronald F. Walker
s/FRED J. RUNK Vice President and March 28, 1994 Fred J. Runk Treasurer (principal financial and accounting officer)
* Member of the Audit Committee
ITEM 5
Market for Registrant's Common Equity and Related Stockholder Matters
Not applicable - Registrant's Common Stock is owned by fewer than 20 share-holders. See the Consolidated Financial Statements for information regarding dividends. ITEM 6
ITEM 6
Selected Financial Data
The following table sets forth certain data for the periods indicated (dollars in millions).
ITEM 7
ITEM 7
Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL
Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of AFC's financial condition and results of operations. This discussion should be read in conjunction with the financial statements beginning on page.
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 redemption of 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.
LIQUIDITY AND CAPITAL RESOURCES
Ratios The following ratios may be considered relevant indicators of AFC's liquidity and are typically presented by AFC in its prospectuses and similar documents. Management believes that balance sheet ratios (debt-to-equity) are more meaningful on a parent only basis. On the other hand, earnings statement ratios (fixed charges) are more meaningful on a total enterprise basis since the parent only ratio is dependent, to a great degree, on the discretionary nature of dividend payments from subsidiaries.
Ratios of AFC's (parent only) long-term debt to equity (i) excluding Capital Subject to Mandatory Redemption, or (ii) including it as either (a) debt or (b) equity at December 31, 1993, 1992 and 1991 are shown below. Ratios of earnings to fixed charges, excluding and including preferred dividends, for the three years ended December 31, 1993 are also shown below.
1993 1992 1991 Debt to equity 1.06 1.99 2.13 Debt (plus redeemable capital) to equity 1.16 2.09 2.45 Debt to equity (plus redeemable capital) .98 1.81 1.63
Earnings to fixed charges 2.62 2.15 1.54 Earnings to fixed charges plus preferred dividends 2.26 1.94 1.42
Sources of Funds A wholly-owned subsidiary, Great American Holding Corporation ("GAHC"), has a revolving credit agreement with several banks under which it can borrow up to $300 million. The credit line converts to a four-year term loan with scheduled principal payments to begin in March 1997. Borrowings under the credit line are made by GAHC and are advanced to AFC. The line is guaranteed by AFC and secured by 50% of the stock of Great American Insurance Company ("GAI"). Borrowings, repayments and interest payments on the line are included in "net advances from (to) subsidiaries" in the following table. At December 31, 1993, GAHC had no outstanding borrowings under the agreement.
Funds to meet the parent company's expenditures have been provided from a variety of sources within the holding company, from subsidiaries and directly from outside sources, as detailed in the following table (in millions):
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 $320 million of which $305 million was available at December 31, 1993.
Generally, over 90% of the dividends (including non-cash dividends) received from subsidiaries have been from GAI. Payments of dividends by GAI are subject to various laws and regulations which limit the amount of dividends that can be paid without regulatory approval. During 1993, the State of Ohio revised its dividend law for Ohio-domiciled insurers. Under the new law, the maximum amount of dividends which may be paid without (i) prior approval or (ii) expiration of a 30 day waiting period without disapproval is the greater of statutory net income or 10% of policyholders' surplus as of the preceding December 31, but only to the extent of earned surplus as of the preceding December 31. While the new law is generally more restrictive than the prior law regarding the amount of dividends which can be paid without prior approval, management believes GAI will be able to gain such approvals due to its strong surplus position. The maximum amount of dividends payable in 1994 from GAI based on its 1993 earned surplus is approximately $108 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, 1993, AFC's insurance group owned publicly traded equity securities of affiliates with a market value of $858 million, including equity securities of AFC subsidiaries of $451 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.
Under tax allocation agreements with AFC, 80%-owned U.S. subsidiaries generally compute tax provisions as if filing a separate return based on book taxable income computed in accordance with generally accepted accounting principles. The resulting provision (or credit) is currently payable to (or receivable from) AFC.
Management believes AFC has sufficient resources to meet its liquidity requirements through operations in the short-term and long-term future. If funds generated from operations, including dividends from subsidiaries, are insufficient to meet fixed charges in any period, AFC would be required to meet such charges through bank borrowings, sales of securities or other assets, or similar transactions.
Uncertainties In exchange for $5 million, AFC has agreed to indemnify Spelling Entertainment Group Inc. for up to $35 million in excess of a threshold amount of $25 million of the costs Spelling may incur in the 12 years beginning April 1, 1993 to resolve Spelling's environmental matters, bankruptcy claims and certain other matters. Additionally, an AFC subsidiary has responsibility for environmental remediation costs, which are estimated to be between $10 million and $15 million, associated with the
sales of former manufacturing properties. The subsidiary has reserved $10.6 million at December 31, 1993.
AFC's insurance subsidiaries do not establish reserves for unreported environmental claims because such amounts cannot be reasonably estimated. At December 31, 1993, they had recorded $45.1 million (net of reinsurance recoverables) for reported 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.
While the results of all such uncertainties cannot be predicted, based upon its knowledge of the facts, circumstances and applicable laws, management believes that sufficient reserves have been provided and that the ultimate resolution of these uncertainties will not have a material adverse effect on AFC's financial condition or liquidity.
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, excluding Chiquita which ceased being a subsidiary in 1991, were $32 million, $53 million and $28 million, in 1993, 1992 and 1991, respectively.
Management of AFC has always believed in the use of leverage (borrowing funds at predetermined rates) to increase the return on its equity. Historically, AFC has relied more on the use of fixed-rate debt and preferred stock issuances in its financing activities. AFC borrows from both public and private sources, with parent only debt at December 31, 1993, coming almost entirely from public sources.
Whenever possible, AFC tries to do its financing on a long-term basis, even if the current costs associated are slightly higher. At December 31, 1993, the average maturity of AFC's borrowings on a parent only basis was approximately 6-1/2 years; the average interest rate on those borrowings was 11.6%. Comparable figures for three years ago are 9 years maturity and 11.6% stated interest rate (12.8% effective rate).
In February 1994, AFC commenced an offer to issue new 9-3/4% Debentures due April 20, 2004 and cash in exchange for its publicly traded debentures. On March 28, 1994, AFC announced that the expiration date had been extended to April 15, and that in excess of $190 million of old debentures had been accepted for exchange. The table below shows (in thousands) total sinking fund and other principal payments on all debt of AFC (parent only) for 1994 and in subsequent periods on an historical basis and on a pro forma basis (a) assuming 50% of each issue of the old debentures are exchanged pursuant to the offer ("50% Accept-ance") and (b) assuming all of the old debentures are tendered ("100% Accept-ance"). The scheduled payments shown below assume that debentures purchased are applied to the earliest scheduled retirements.
Pro Forma December 31, 1993 50% 100% Historical Acceptance Acceptance
1994 $ 12,080 $ 3,231 $ 3,231 1995 10,883 261 261 1996 11,843 261 261 1997 17,818 5,493 5,493
1998 19,223 261 261 1999-2002 343,605 184,928 11,469 2003-2004 154,279 375,296 548,755
Total $569,731 $569,731 $569,731
Actual cash outlays will be less than indicated in the above table to the extent that AFC can satisfy scheduled retirements and sinking fund requirements by acquiring its debt at discounts from redemption values.
The net annual charge to pretax income for interest expense would decline by approximately $6.8 million based on 50% Acceptance and approximately $13.5 million based on 100% Acceptance.
Based on the results of this offer and cash availability, AFC will redeem some or all of the unexchanged debentures. In March 1994, AFC called for redemption its 13-1/2% Debentures and its 13-1/2% Series A Debentures. Holders of either issue may accept the exchange offer.
Interest and dividend payments on parent company debt and preferred stock (all issues) for the subsequent five years, assuming all sinking fund and other principal payments are made as scheduled and before effects of the 1994 exchange offers and redemptions, would be approximately (in millions):
1994 1995 1996 1997 1998
Interest $66.0 $64.7 $63.5 $62.3 $60.8 Dividends 26.0 25.5 25.1 25.1 25.1
Payment of preferred dividends and redemption of AFC Preferred Stock is subordinate to AFC's obligations to pay principal and interest on its debt.
At December 31, 1993, sinking fund and other scheduled principal payments on debt of subsidiaries for the next five years were as follows: 1994 - $4 million; 1995 - $63 million; 1996 - $1 million; 1997 - $16 million; and 1998 - $159 million.
Certain members of the Lindner family have the right to "put" to AFC their shares of AFC Common Stock or options at any time at a price based on AFC's book value per share (as defined). The "put" price is paid one-third in cash and the balance in a five-year installment note bearing interest at a rate equal to the five-year U.S. Treasury Note rate plus 3%. The aggregate purchase price for remaining shares and options covered by the "put" at December 31, 1993, was approximately $40 million.
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.
AFC attempts to optimize investment income while building the value of its portfolio, placing emphasis upon long-term performance. AFC's goal is to maxi-mize return on an ongoing basis rather than focusing on year-by-year performance.
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.
Fixed income investment funds are generally invested in securities with short-term and intermediate-term maturities with an objective of maximizing interest and dividend yields. This practice allows
additional flexibility in reacting to market conditions.
Approximately 95% of the bonds and redeemable preferred stocks held by AFC were rated "investment grade" (credit rating of AAA to BBB) at December 31, 1993, compared to less than 60% at the end of 1988. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated and non-investment grade.
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: 1993 - $165 million; 1992 - $104 million; 1991 - $38 million; 1990 - ($89 million) and 1989 - $64 million.
At December 31, 1993, AFC had gross unrealized gains and losses on bonds and redeemable preferred stocks and equity securities as follows (in millions):
Net Gross Unrealized Unrealized Gains Losses Gain Bonds and redeemable preferred stocks: Held to maturity $189.2 ($18.5) $170.7 Available for sale 133.2 - 133.2 322.4 (18.5) 303.9 Equity securities 137.2 (5.1) 132.1 $459.6 ($23.6) $436.0
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 and the carrying value of that investment is reduced.
At December 31, 1993, collateralized mortgage obligations ("CMOs") represented approximately 30% of AFC's bonds and redeemable preferred stocks. At that date, interest only (I/Os), principal only (P/Os) and other "high risk" CMOs represented approximately four-tenths of one percent of AFC's total CMO portfolio. AFC invests primarily in CMOs which are structured to minimize prepayment risk. In addition, the majority of CMOs held by AFC 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 AFC's CMOs are rated "AAA" 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, AFC does not believe a material risk (relative to earnings and liquidity) is inherent in holding such investments.
RESULTS OF OPERATIONS - THREE YEARS ENDED DECEMBER 31, 1993
General Due to decreases in ownership percentages, AFC ceased accounting for the following companies as subsidiaries and began accounting for them as investees: American Premier (April 1993), Spelling (July 1992), Chiquita (July 1991) and GACC (June 1991). AFC had accounted for American Premier as a subsidiary from 1992 through the first quarter of 1993 due to AFC's ownership exceeding 50%. As a result of these changes, current year income statement components are not comparable to prior years and are not
indicative of future years.
AFC's net earnings reached a record high of $220 million in 1993. Major factors contributing to the increase in earnings included $155 million in pretax gains from the sales of AFC's insurance agency operations, Spelling Entertainment Group, 4.5 million shares of American Premier and additional proceeds received on the 1990 sale of the NSA Group in addition to improved contributions to results from American Premier, Chiquita and GACC.
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. Significant realized gains on securities sales and from the public issuance of stock by an investee contributed to the $72 million of earnings in 1991.
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 103.9% in 1993, 105.0% in 1992 and 103.2% in 1991. Total net losses to AFC's insurance operations from catastrophes (natural disasters and other incidents of major loss) were $26 million in 1993, $42 million in 1992 and $22 million in 1991.
To understand the overall profitability of particular lines, timing of claims payments and the related impact of investment income must be considered. Certain "short-tail" lines of business (primarily property coverages) have quick loss payouts which reduce the time funds are held, thereby limiting investment income earned thereon. On the other hand, "long-tail" lines of business (primarily liability coverages and workers' compensation) have payouts that are either structured over many years or take many years to settle, thereby significantly increasing investment income earned on related premiums received.
While Great American desires and seeks to earn an underwriting profit on all of its business, it is not always possible to do so. As a result, the company attempts to expand in the most profitable areas and control growth or even reduce its involvement in the least profitable ones.
In recent years, many commercial lines markets have been extremely competitive as predicted premium rate increases have not materialized. Workers' compensation, in particular, has been especially hard hit by competition, rising benefit levels and claims fraud. Many states have begun to address these problems and, in the last couple of years, Great American has focused its efforts toward those markets where improvements are evident.
In 1993, Great American's underwriting results significantly outperformed the industry average for the eighth consecutive year. Great American has been able to exceed the industry's results by supplementing its commercial lines coverages with highly specialized niche products and new automobile and homeowner products.
Many of the improvements experienced by Great American and the market in general in recent years are expected to continue in 1994.
See the discussion of Underwriting and Loss and Loss Adjustment Expense Reserves under Item 1 - "Business - Great American Insurance Group".
1993 compared to 1992 Property and casualty insurance premiums decreased $657 million (31%) in 1993 reflecting the deconsolidation of American Premier's insurance operations beginning in the second quarter of 1993. Premiums for the remainder of AFC's insurance group were virtually unchanged.
1992 compared to 1991 Property and casualty insurance premiums increased $955 million (80%) in 1992 reflecting the consolidation of American Premier's insurance operations beginning in 1992. Premiums for the remainder of AFC's insurance group were virtually unchanged.
Investment Income Changes in investment income reflect fluctuations in market rates and changes in average invested assets.
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.
1992 compared to 1991 Investment income increased $120 million (21%) in 1992 reflecting primarily the consolidation of American Premier in 1992, partially offset by lower interest rates available in the marketplace.
Investee Corporations Equity in net earnings of investee corporations (companies in which AFC owns a significant portion of the voting stock) represents AFC's proportionate share of the investees' earnings and losses.
1993 compared to 1992 AFC's equity in the net earnings of investees in 1993 was $70 million compared to a loss of $339 million in 1992. The principal items responsible for this improvement were (i) the absence of losses from GACC in 1993 compared to AFC's loss of $187 million from that investment in 1992, (ii) a $108 million improvement from Chiquita's operations and (iii) $92 million in earnings from American Premier which became an investee in the second quarter of 1993 when AFC's ownership declined below 50%.
1992 compared to 1991 The decrease in equity in net earnings of investees in 1992 reflects primarily the results of Chiquita and GACC, both of which became investees in the third quarter of 1991. Chiquita reported a net loss of $284 million in 1992 attributable principally to (i) sharply increased banana costs and expenses and (ii) lower banana prices in the first half of the year. GACC reported a net loss of $597 million in 1992 which includes a $658 million provision to revalue intangible assets to reflect estimated current market values of broadcasting assets at December 31, 1992. In addition, significant debt, depreciation and amortization expenses continued to more than offset broadcasting results. In connection with a proposed financial restructuring of GACC, AFC transferred all securities and loans related to GACC to the investee account and reduced the carrying value of that investment to estimated net realizable value ($35 million).
Gains on Sales of Investees 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.
Gains on Sales of Subsidiaries The gains on sales of subsidiaries in 1993 include (i) a pretax gain of $44 million from the sale of American Business
Insurance, Inc. and (ii) a pretax gain of $31 million representing an adjustment on the 1990 sale of AFC's non-standard automobile insurance group to American Premier.
The gain on sale of subsidiary in 1992 represents a pretax gain from the sale of Kings Island Theme Park.
The gains on sales of subsidiaries in 1991 include (i) a pretax gain of $58 million as a result of Chiquita's public issuance of 5 million shares of its common stock; (ii) a pretax gain of $13 million on Charter's sale of its interest in an oil producing concession; and (iii) a $7 million pretax gain on the disposition of 455,000 shares of Chiquita common stock. These items were partially offset by a pretax loss of $12 million realized as a result of GACC's issuance of 16.5 million shares of its 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), GACC (through May 1991), Spelling Entertainment Inc. (from May 1991 to June 1992), Kings Island Theme Park (through September 1992) and Chiquita (through June 1991).
1993 1992 1991 Federal Systems $ 99.2 $ 414.0 $ - Diversified Products and Services 52.9 255.4 - Petroleum Products - 159.7 424.0 Broadcasting and Entertainment: Broadcasting - - 78.0 Entertainment - 118.8 139.4 Kings Island Theme Park - 83.0 79.2 Food Products: Fresh Foods - - 1,347.5 Prepared Foods - - 1,089.2 $152.1 $1,030.9 $3,157.3
Sales of Federal Systems and Diversified Products and Services represent American Premier's revenues from systems and software engineering services and the manufacture and supply of industrial products and services. Sales of petroleum products reflect Spelling's revenues from petroleum marketing activities. Broadcasting revenues represent GACC's television and radio operations. Entertainment revenues reflect Spelling's television production and distribution operations. Sales of food products represent Chiquita's revenues.
1993 compared to 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.
1992 compared to 1991 In July 1992, AFC's ownership of Spelling decreased below 50%; accordingly, Spelling's revenues are included for only the first six months of 1992 compared to the entire year for 1991. The increase in Kings Island revenues in 1992 was due primarily to a 14% increase in attendance over the comparable period in 1991. Revenues from several operating days in October and a "Winterfest" operation during the holiday season were approximately $5 million in the fourth quarter for 1991.
In October 1992, AFC sold the theme park to an unaffiliated party. See "Gains on Sales of Subsidiaries".
Interest on Annuities 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 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 5.3% at December 31, 1993; GALIC's products offer minimum interest rate guarantees of 3% to 4%. The rate at which GALIC credits interest on annuity policyholders' funds is subject to change based on market conditions.
Annuity receipts totaled $400 million in 1993, $360 million in 1992 and $460 million in 1991. Receipts in 1993 increased primarily due to the introduction of new single premium products in the second half of 1992. Receipts in 1992 were lower than anticipated due to (i) a reduction in receipts relating to a new product introduced in 1990 which encouraged rollovers of other retirement funds and (ii) unfavorable economic and market conditions, including the impact of the negative publicity associated with a number of highly publicized insolvencies in the life insurance industry. Annuity surrender payments represented 6.9%, 7.8% and 9.4% of average statutory reserves in 1993, 1992 and 1991, respectively.
1993 compared to 1992 Interest on annuity policyholders' funds decreased $13 million (5%) in 1993 due to a reduction in rates being credited to policyholders. The effect of this decrease more than offset an increase of 7% in the average amount of accumulated policyholders' funds held.
1992 compared to 1991 Interest on annuity policyholders' funds decreased by $16.3 million (6%) from 1991 due to a reduction in rates being credited to policyholders, which more than offset an increase of approximately 7% in the average amount of accumulated policyholders' funds held.
Interest on Borrowed Money Changes in interest expense result from fluctuations in market rates as well as changes in borrowings. AFC has generally financed its borrowings on a long-term basis which has resulted in higher current costs.
Interest expense included in AFC's consolidated statement of operations was comprised of (in millions): 1993 1992 1991 AFC Parent $ 71.1 $ 70.6 $ 73.8 Great American Holding 23.4 34.2 37.8 Great American Insurance 14.0 14.3 14.3 American Premier 17.2 69.2 - American Annuity 21.2 - - Chiquita - - 41.1 GACC - - 49.6 Spelling - 4.7 8.2 Other Companies 10.3 22.9 26.5 $157.2 $215.9 $251.3
GAHC's interest expense has decreased 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):
1993 1992 1991 Minority interest $35 $38 $44 Writeoff of debt discount and issue costs 24 - -
Allowance for bad debts 10 (3) 26 Relocation expenses 8 - - Book Value Incentive Plan 1 (1) 38
Allowance for bad debts includes charges for possible losses on agents' balances, reinsurance recoverables and other receivables. Relocation expenses represent the estimated costs of moving GALIC's operations from Los Angeles to Cincinnati.
Income Taxes Certain subsidiaries have not been able to recognize tax benefits on significant operating losses. Accordingly, AFC's effective tax rates were greater than the normal rate of 34% in 1992 and 1991. See Note L to the Financial Statements for an analysis of other items affecting AFC's effective tax rate.
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 portion of AFC's net deferred tax asset at December 31, 1992, attributable to American Premier was $245.3 million. 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.
The analysis of estimated future taxable income will be reviewed and updated periodically, and any required adjustments, which may increase or decrease the net deferred tax asset, will be made in the period in which the developments on which they are based become known.
Discontinued Operations Earnings from discontinued operations represent the results of Hunter Savings Association prior to its sale in December 1991. Earnings from continuing operations do not reflect earnings that would have been earned on the sales proceeds had the sale of Hunter taken place at the beginning of 1991.
Recent Accounting Standards The following Statements of Financial Accounting Standards ("SFAS") have been implemented by AFC in 1992 or 1993 or will be implemented in 1994. The implementation of these standards is discussed under various subheadings of Note A to the Financial Statements; effects of each are shown in relevant Notes. Implementation of SFAS Nos. 112 and 114 in the first quarter of 1994 and 1995, respectively, is not expected to have a significant effect on AFC.
SFAS# Subject of Standard (Year Implemented) Reference 106 Certain Postretirement Benefits(1993) "Benefit Plans" 107 Fair Values (1992) "Fair Value" 109 Income Taxes (1992) "Income Taxes" 112 Certain Employment Benefits (1994) -n/a- 113 Reinsurance (1993) "Reinsurance" 114 Impairment of Loans (1995) -n/a- 115 Investment in Securities (1993) "Investments"
Other standards issued in recent years did not apply to AFC or had only negligible effects on AFC.
ITEM 8
ITEM 8
Financial Statements and Supplementary Data
Page Reports of Independent Auditors
Consolidated Balance Sheet: December 31, 1993 and 1992
Consolidated Statement of Operations: Years ended December 31, 1993, 1992 and 1991
Consolidated Statement of Changes in Capital Accounts: Years ended December 31, 1993, 1992 and 1991
Consolidated Statement of Cash Flows: Years ended December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements
"Selected Quarterly Financial Data" has been included in Note Q to the Consolidated Financial Statements.
PART III
ITEM 10
Directors and Executive Officers of the Registrant
The directors and executive officers of AFC at March 1, 1994, are:
Executive Name Age Position Since
Carl H. Lindner 74 Chairman of the Board and Chief 1959 Executive Officer Richard E. Lindner 72 Director 1959 Robert D. Lindner 73 Vice Chairman of the Board 1959 Ronald F. Walker 55 Director, President and Chief 1973 Operating Officer
Carl H. Lindner III 40 President of GAI and President 1987 and Chief Operating Officer of American Premier S. Craig Lindner 39 President of AAG and Senior Executive Vice President of AMM James E. Evans 48 Vice President and General Counsel Sandra W. Heimann 51 Vice President 1984 Robert C. Lintz 60 Vice President 1979 Thomas E. Mischell 46 Vice President 1985 Fred J. Runk 51 Vice President and Treasurer 1978
Carl H. Lindner has served as Chairman of the Board and Chief Executive Officer of AFC for more than five years. He serves in similar capacities with various AFC subsidiaries. He serves as Chairman of the Board of the following public companies: American Annuity Group, Inc. ("AAG"), American Financial Enterprises, Inc. ("AFEI"), Chiquita, General Cable, Great American Communications Company ("GACC") and American Premier.
AFC owns a substantial beneficial interest (over 20%) in all of these companies.
Richard E. Lindner is owner, Chairman of the Board of Directors, President and Chief Executive Officer of Thriftway, Inc., a supermarket chain otherwise unaffiliated with AFC, and has been associated with that company for over five years.
Robert D. Lindner, for more than five years, has served as Vice Chairman of the Board of Directors of AFC. In addition, he is Chairman of the Board of United Dairy Farmers, Inc. ("UDF") which, among other things, is engaged through subsidiaries in dairy processing and the operation of convenience stores. He is also a director of AFEI.
Ronald F. Walker has served as President and Chief Operating Officer of AFC for more than five years. He is also Vice Chairman of the Board of Directors of GAI and holds executive positions in most of AFC's other subsidiaries. He is also a director of AAG, AFEI, Chiquita, General Cable and Tejas Gas Company.
Carl H. Lindner III has been President of GAI for more than five years. He holds executive positions in many of GAI's subsidiaries. He has also been President and Chief Operating Officer of American Premier since 1991.
S. Craig Lindner has been Senior Executive Vice President of American Money Management Corporation ("AMM"), a subsidiary of AFC which provides investment services to AFC and its subsidiaries, for more than five years. He was elected President of AAG in March 1993.
James E. Evans has served as a Vice President and the General Counsel of AFC for more than five years.
Sandra W. Heimann has been a Vice President of AFC and an executive officer of AMM for more than five years.
Robert C. Lintz has been a Vice President of AFC for more than five years.
Thomas E. Mischell has been a Vice President of AFC for more than five years.
Fred J. Runk has served as Vice President and Treasurer of AFC for more than five years.
Carl H. Lindner, Robert D. Lindner and Richard E. Lindner are brothers. Carl H. Lindner III and S. Craig Lindner are sons of Carl H. Lindner.
All of the executive officers of AFC devote substantially all of their time to the affairs of AFC and its subsidiaries. All of the above are United States citizens.
The information required by the following Items will be provided within 120 days after end of Registrant's fiscal year.
ITEM 11 Executive Compensation
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
ITEM 13 Certain Relationships and Related Transactions
REPORTS OF INDEPENDENT AUDITORS
Board of Directors American Financial Corporation
We have audited the accompanying consolidated balance sheets of American Financial Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, changes in capital accounts, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the financial statements of American Premier Underwriters, Inc. (formerly The Penn Central Corporation), General Cable Corporation and American Annuity Group, Inc. (1991). Those statements were audited by other auditors whose reports have been furnished to us. The reports pertaining to the statements of General Cable Corporation and American Premier Underwriters, Inc. included explanatory paragraphs that described their change in method of accounting for income taxes in 1992. Our opinion on the consolidated financial statements and schedules, insofar as it relates to data included for those corporations as described in Note E, is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Financial Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, 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.
As discussed in Note A to the consolidated financial statements, American Financial Corporation and subsidiaries changed their method of accounting in 1993 for certain investments in debt and equity securities and in 1992 for income taxes.
ERNST & YOUNG
Cincinnati, Ohio March 25, 1994
REPORT OF AMERICAN PREMIER'S INDEPENDENT AUDITORS
American Premier Underwriters, Inc. (formerly The Penn Central Corporation):
We have audited the financial statements and the financial statement
schedules of American Premier Underwriters, Inc. and Consolidated Subsidiaries listed in the Index to Financial Statements and Financial Statement Schedules of American Premier Underwriters, Inc.'s Form 10-K for the year ended December 31, 1993 (included as Exhibit 99 herein). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of American Premier Underwriters, Inc. and Consolidated Subsidiaries at December 31, 1993 and 1992 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information shown therein.
As discussed in Note 1 to the financial statements, in 1992 the Company changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE
Cincinnati, Ohio February 16, 1994 (March 25, 1994 with respect to the change of the Company's name as discussed in Note 1 to American Premier's financial statements)
REPORT OF GENERAL CABLE'S INDEPENDENT AUDITORS
General Cable Corporation:
We have audited the consolidated financial statements and related schedules of General Cable Corporation and subsidiaries listed in Item 14(a) of the
Annual Report on Form 10-K of General Cable Corporation for the year ended December 31, 1993 (not presented separately herein). These consolidated financial statements and related schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and related schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of General Cable Corporation and subsidiaries at December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information shown therein.
As discussed in Notes 1 and 10 to the consolidated financial statements, in 1992 General Cable Corporation changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE
Cincinnati, Ohio February 18, 1994
REPORT OF AMERICAN ANNUITY'S INDEPENDENT AUDITORS
American Annuity Group, Inc.:
We have audited the consolidated balance sheet of American Annuity Group,
Inc., formerly Sprague Technologies, Inc., and subsidiaries as of December 31, 1991 and the related consolidated statements of operations, common stockholders' equity and cash flows for the year then ended (before adjustments and reclassifications to conform with the presentation for 1992). Our audit also included the 1991 financial statement schedule listed in the Index at Item 14(a) of American Annuity Group, Inc's. Form 10-K for the year ended December 31, 1993 (not presented separately herein). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements (before adjustments and reclassifications to conform with the presentation for 1992) present fairly, in all material respects, the financial position of American Annuity Group, Inc. and subsidiaries as of December 31, 1991 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE
Stamford, Connecticut March 24, 1992
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands)
December 31, 1993 1992
Assets Cash and short-term investments $ 167,950 $ 837,429 Investments: Bonds and redeemable preferred stocks: Held to maturity - at amortized cost (market - $3,959,400 and $4,705,600) 3,788,732 4,597,544 Available for sale - at market (amortized cost - $2,216,328 and $1,905,814) 2,349,528 1,976,514 Other stocks - principally at market (cost - $207,056 and $182,476) 339,156 230,876 Investment in investee corporations 899,800 568,207 Bonds and receivables from investees 6,783 305,701 Loans receivable 624,149 812,436 Real estate and other investments 139,319 179,152 8,147,467 8,670,430 Recoverables from reinsurers and prepaid reinsurance premiums 756,060 599,204 Trade receivables 298,240 594,834 Other receivables 213,507 318,799 Property, plant and equipment, net 44,950 215,851 Deferred tax asset - 258,300 Prepaid expenses, deferred charges and other assets 275,349 394,319 Cost in excess of net assets acquired 173,965 499,639
$10,077,488 $12,388,805
Liabilities and Capital Insurance claims and reserves $ 3,422,657 $ 4,279,853 Annuity policyholders' funds accumulated 4,256,674 3,973,524 Long-term debt: Parent company 571,874 557,161 American Premier - 657,800 Other subsidiaries 482,132 794,217 Accounts payable, accrued expenses and other liabilities 648,462 1,005,866 Minority interest 109,219 812,707 9,491,018 12,081,128
Capital subject to mandatory redemption 49,232 27,683 Preferred Stock (redemption value - $278,889) 168,588 168,588 Common Stock without par value 904 904 Retained earnings 210,846 42,402 Net unrealized gain on marketable securities, net of deferred income taxes 156,900 68,100
$10,077,488 $12,388,805
See notes to consolidated financial statements.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL ACCOUNTS (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES
A. Accounting Policies B. Acquisitions and Sales of Subsidiaries C. Segments of Operations D. Investments E. Investment in Investee Corporations F. Property, Plant and Equipment G. Cost in Excess of Net Assets Acquired H. Long-Term Debt I. Capital Subject to Mandatory Redemption J. Other Preferred Stock K. Common Stock L. Income Taxes M. Discontinued Operations N. Pending Legal Proceedings O. Benefit Plans P. Transactions With Affiliates Q. Quarterly Operating Results (Unaudited) R. Additional Information S. Restrictions on Transfer of Funds and Assets of Subsidiaries T. Subsequent Event (Unaudited)
A. Accounting Policies
Basis of Presentation The consolidated financial statements include the accounts of American Financial Corporation ("AFC") and its subsidiaries except for Hunter Savings Association which was sold in the fourth quarter of 1991 and is presented in the financial statements as "discontinued operations". Changes in ownership levels of other subsidiaries and investees have resulted in certain differences in the financial statements and have affected comparability between years. Certain reclassifications have been made to prior years to conform to the current year's presentation. All significant intercompany balances and transactions have been eliminated. All acquisitions have been treated as purchases. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements.
AFC's ownership of subsidiaries and significant investees with publicly traded shares at December 31, was as follows:
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investments Bonds, redeemable preferred stocks and other stocks at December 31, consisted of the following (in millions):
The table below sets forth the scheduled maturities of bonds and redeemable preferred stocks based on carrying value as of December 31, 1993. Data based on market value is generally the same. Collateralized mortgage obligations have an average life of approximately 4 years at December 31, 1993.
Held to Available Maturity Maturity for Sale One year or less 1% 1% After one year through five years 7 5 After five years through ten years 18 13 After ten years 55 31 81 50 Collateralized mortgage obligations 19 50 100% 100%
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Gross gains of $69.4 million, $85.2 million and $208.8 million and gross losses of $16.5 million, $4.7 million and $236.9 million were realized on sales of fixed maturity investments during 1993, 1992 and 1991, respectively.
Realized gains (losses) and changes in unrealized appreciation (depreciation) on fixed maturity and equity security investments are summarized as follows (in thousands):
Investment in other stocks at December 31, 1992 consisted of (in thousands):
At December 31, 1992, gross unrealized gains on other stocks were $63.7 million and gross unrealized losses were $15.1 million.
Carrying values of investments were determined after deducting cumulative provisions for impairment aggregating $47 million and $78 million at December 31, 1993 and 1992, respectively.
Fair values for investments are based on prices quoted, when available, in the most active market for each security. If quoted prices are not available, fair value is estimated based on present values, fair values of comparable securities, or similar methods.
Short-term investments are carried at cost; loans receivable are stated at the aggregate unpaid balance. Carrying amounts of these investments approximate their fair value.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Investment in Investee Corporations Investment in investee corporations represents AFC's ownership of securities of certain companies. All of the companies named in the following table are subject to the rules and regulations of the SEC. Market value of the investments (excluding $50 million in non-public securities at December 31, 1992, for which market values are not available) was approximately $940 million and $700 million at December 31, 1993 and 1992, respectively.
AFC's investment (and common stock ownership percentage) and equity in net earnings and losses of investees are stated below (dollars in thousands):
American Premier operates businesses primarily in specialty property and casualty insurance. In March 1994, American Premier changed its name from The Penn Central Corporation to reflect the nature of its business. Chiquita is a leading international marketer, processor and producer of quality fresh and processed food products. GACC is engaged in the ownership and operation of television and radio stations. General Cable primarily manufactures and markets electrical and communication wire and cable products.
Due to GACC's financial difficulties, AFC transferred all GACC securities and loans to the investee account and reduced the carrying value of that investment to estimated net realizable value ($35 million) at the end of 1992. AFC resumed equity accounting for its investment in GACC following GACC's reorganization at the end of 1993.
In July 1992, American Premier distributed to its shareholders approximately 88% of the stock of General Cable. AFC and its subsidiaries, excluding American Premier, received approximately 45% of the shares. The shares retained by American Premier are being held for distribution to creditors and other persons. Accordingly, those shares were included in "Other stocks" at December 31, 1992 and
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
General Cable was not consolidated because control was temporary. The operating results of General Cable for the first six months of 1992 are included in other income.
Sprague reported net losses of $29 million in 1992 and $53 million in 1991. Over the past few years, Sprague sold substantially all of its operating businesses and recorded substantial restructuring charges and loss provisions ($25 million in 1992 and $55 million in 1991).
Included in AFC's consolidated retained earnings at December 31, 1993, was approximately $145 million applicable to equity in undistributed net losses of investees. The unamortized negative goodwill in investees totaled approximately $62 million at December 31, 1993.
Summarized financial information for AFC's major investees at December 31, 1993, is shown below (in millions). See "Investee Corporations" in Management's Discussion and Analysis.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Great American Communications 1993 1992 1991
Contracts, Broadcasting Licenses and Other Intangibles $575 $540 Other Assets 145 174 Long-term Debt 433 635 Minority Interest - Preferred Stock of Subsidiary - 275 Shareholders' Equity (Deficit) 139 (339)
Net Revenues of Continuing Operations $205 $211 $202 Operating Income (Loss) 40 (642) 12 Loss from Continuing Operations (67) (613) (33) Discontinued Operations - 11 40 Extraordinary Items 408 5 77 Net Income (Loss) 341 (597) 84
General Cable Corporation Six Year months ended ended 12/31/93 12/31/92
Current Assets $338 $366 Non-current Assets 282 345 Current Liabilities 110 159 Notes Payable to American Premier 287 255 Non-current Liabilities 83 78 Shareholders' Equity 140 219
Net Sales from Continuing Operations $764 $416 Operating Income (Loss) 2 (29) Loss From Continuing Operations (26) (53) Discontinued Operations (32) - Net Loss (58) (53)
General Cable's 1993 results included a $34.4 million loss on the disposal of its equipment manufacturing businesses. AFC's share of this loss reduced negative goodwill and was not included in AFC's equity in General Cable's earnings. General Cable's results for the first six months of 1992 (prior to its spin-off from American Premier) are included in American Premier's results.
F. Property, Plant and Equipment Property, plant and equipment consisted of the following at December 31, (in thousands): 1993 1992
Land $ 3,654 $ 33,487 Buildings and improvements 21,493 96,523 Machinery, equipment and office furnishings 89,329 278,805 Other - 46,622 114,476 455,437 Less accumulated depreciation (69,526) (239,586)
$ 44,950 $215,851
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. Cost in Excess of Net Assets Acquired At December 31, 1993 and 1992, accumulated amortization of the excess of cost over net assets of purchased subsidiaries amounted to approximately $94 million and $176 million, respectively. Amortization expense was $15.0 million in 1993, $25.0 million in 1992 and $37.2 million in 1991.
H. Long-Term Debt Long-term debt consisted of the following at December 31, (in thousands):
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At December 31, 1993, sinking fund and other scheduled principal payments on debt for the subsequent five years were as follows (in thousands):
Parent Other Company Subsidiaries Total 1994 $12,080 $ 3,669 $ 15,749 1995 10,883 63,050 73,933 1996 11,843 1,064 12,907 1997 17,818 15,667 33,485 1998 19,223 158,821 178,044
In February 1994, AFC commenced an offer to issue new 9-3/4% Debentures due April 20, 2004 and cash in exchange for its publicly traded debentures. In December 1993, AFC wrote off $24.3 million in unamortized original issue discount and debt issue costs related to the debentures covered in the exchange offer.
Based on the results of this offer and cash availability, AFC will redeem some or all of the unexchanged debentures. In March 1994, AFC called for redemption its 13-1/2% Debentures and its 13-1/2% Series A Debentures. Holders of either issue may accept the Exchange Offer.
Parent company sinking fund and other scheduled principal payments on debt at December 31, 1993, assuming at least 50% of each issue of the old debentures are exchanged, would be as follows (in thousands):
1994 1995 1996 1997 1998 $3,231 $261 $261 $5,493 $261
AFC may, at its option, apply debentures otherwise purchased in excess of scheduled payments to satisfy any sinking fund requirement. The scheduled principal payments shown above assume that debentures purchased are applied to the earliest scheduled retirements.
At December 31, 1993, the estimated fair value of all long-term debt of AFC and its subsidiaries exceeded carrying value by approximately $23 million. Fair values of debt instruments were calculated using quoted market prices where available and present values, discounted cash flows, or similar techniques in other cases.
During 1993, GAHC entered into a new revolving credit agreement with several banks under which it can borrow up to $300 million. Borrowings bear interest at prime rate or at LIBOR plus 1.375% and are collateralized by a pledge of 50% of the stock of AFC's largest insurance subsidiary. The agreement converts to a four-year term loan in December 1996 and requires annual facility fees and commitment fees based upon the unused portion of the credit line. AFC guarantees amounts borrowed under the credit agreement.
In connection with the acquisition of GALIC, AAG borrowed $180 million under a Bank Term Loan Agreement and $50 million under a Bridge Loan. In 1993, AAG sold $225 million principal amount of Notes to the public and used the proceeds to pay off the Bank and Bridge Loan. Unamortized debt issue costs of $4.6 million (net of minority interest) were written off and are included in extraordinary items.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFEI redeemed its 13-7/8% Notes and paid $40 million of bank debt with the proceeds from the sale of shares of American Premier in August 1993. Subsequently, AFEI entered into a new revolving credit agreement which enables it to borrow a maximum of $20 million through December 1997.
Cash interest payments of $133 million, $206 million and $221 million were made on long-term debt in 1993, 1992 and 1991, respectively.
I. Capital Subject to Mandatory Redemption Capital subject to mandatory redemption includes AFC's Mandatory Redeemable Preferred Stock and capital subject to a put option.
Mandatory Redeemable Preferred Stock The outstanding shares of Mandatory Redeemable Preferred Stock are nonvoting, cumulative and consist of the following:
Series E, $10.50 par value - authorized 2,725,000 shares; annual dividends per share $1; to be retired at par in 1994 and 1995; 504,711 shares (stated value - $5.3 million) outstanding at December 31, 1993 and 1992.
Series I, $.01 par value - authorized 700,000 shares; annual dividends per share $2.66 in 1993; redeemable at $28 per share; 150,212 shares (stated value - $4.2 million) and 225,318 shares (stated value - $6.3 million) outstanding at December 31, 1993 and 1992, respectively.
The fair market value of AFC's Mandatory Redeemable Preferred Stock approximates stated value.
In February 1994, AFC redeemed the outstanding shares of Series I Preferred Stock. Approximately 45% of the Series E Preferred Stock is scheduled to be retired in December 1994; the balance is to be retired in December 1995.
During 1993, AFC purchased 75,106 shares of Series I Preferred Stock for approximately $2.1 million. During 1992, AFC purchased 680,369, 115,500 and 75,105 shares of Series D, Series E and Series I Preferred Stock, respectively, for approximately $10.4 million. During 1991, AFC purchased 679,689 shares of Series D Preferred Stock for approximately $7.1 million.
Capital Subject to Put Option Under an agreement entered into in 1983, certain members of the Lindner family (the "Group") who, in the aggregate, owned 1,848,235 shares of AFC Common Stock, were granted options to purchase an additional 1,225,000 shares. The options, which expire two years after the death of Robert D. Lindner, are exercisable at $6.65 per share plus $.40 per share per year from April 1983. Holders have the right to "put" to AFC any shares of AFC Common Stock or options at any time at a price equal to
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFC's book value per share, adjusted to reflect all equity securities (including investees and subsidiaries with publicly traded shares) at market prices. The purchase price is to be paid one-third in cash and the balance in a five-year installment note bearing interest at a rate equal to the five- year U.S. Treasury note rate plus 3%. AFC has the right to "call" any AFC shares owned by the Group after Robert D. Lindner's death at the same price as described under the "put" (but not less than $6.65 per share plus 10% compounded annually from April 1983). Further, AFC has a right of first refusal on shares owned by members of the Group.
At December 31, 1993, the Group owned 1,533,767 shares of AFC Common Stock and options to purchase an additional 762,500 shares. The aggregate purchase price for all shares covered by the put is included in "capital subject to mandatory redemption" and amounted to $40 million and $16 million at December 31, 1993 and 1992, respectively. Changes in the aggregate purchase price are charged or credited directly to retained earnings without affecting earnings.
J. Other Preferred Stock Under provisions of both the Nonvoting (55,800,000 shares authorized, including the redeemable issues) and Voting (3,500,000 shares authorized, none outstanding) Cumulative Preferred Stock, the Board of Directors is authorized to divide the authorized stock into series and to set specific terms and conditions of each series.
The outstanding shares of Nonvoting Cumulative Preferred Stock, excluding those that are mandatorily redeemable, consist of the following:
Series F, $1 par value - authorized 15,000,000 shares; annual dividends per share $1.80; 10% annually may be retired at AFC's option at $20 per share from 1994 to 1996; 13,753,254 shares (stated value - $168.0 million) outstanding at December 31, 1993 and 1992.
Series G, $1 par value - authorized 2,000,000 shares; annual dividends per share $1.05; may be retired at AFC's option at $10.50 per share; 364,158 shares (stated value - $600,000) outstanding at December 31, 1993 and 1992.
In 1992 and 1991, AFC sold 1.0 million and 1.4 million shares of Series F Preferred Stock to its ESORP for $15.0 million and $19.4 million in cash, respectively.
K. Common Stock At December 31, 1993, Carl H. Lindner and certain members of the Lindner family owned all of the outstanding Common Stock of AFC (18,971,217 shares, including 1,533,767 shares subject to a put option as described in Note I). Of the 32,300,000 authorized shares of Common Stock at December 31, 1993, 762,500 shares were reserved for issuance upon exercise of options.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
L. Income Taxes The following is a reconciliation of income taxes at the statutory rate of 35% in 1993 and 34% in 1992 and 1991 and income taxes as shown in the Statement of Operations (in thousands):
Adjusted earnings (loss) before income taxes consisted of the following (in thousands): 1993 1992 1991 Subject to tax in: United States $255,682($144,854) ($ 45,020) Foreign jurisdictions 1,744 - 187,065
$257,426($144,854) $142,045
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The total income tax provision consists of (in thousands):
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.
The components of the provision for deferred income taxes for 1991 were (in millions):
Undistributed earnings of subsidiaries and investees $19.6 Losses not utilized 20.5 Insurance underwriting adjustments (16.3) Investment income (16.2) Disposition of assets 35.9 Book value incentive plan (11.9) Other (5.4)
$26.2
For income tax purposes, certain members of the AFC consolidated tax group had approximately $180 million of operating loss carryforwards available at December 31, 1993. The carryforwards are scheduled to expire as follows: $23 million in 1994, $9 million in 1995 through 2000 and $148 million in 2001 through 2005.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The cumulative effect of implementing SFAS No. 109 in 1992, which resulted from giving recognition to previously unrecognized tax benefits, was income of $85.4 million. This income consisted of a charge of $40 million related to members of the AFC tax group and a benefit of $125.4 million for AFC's share of American Premier's accounting change. Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. The significant components of deferred tax assets and liabilities for AFC's tax group included in the Balance Sheet at December 31, were as follows (in millions):
The gross deferred tax asset was reduced by a valuation allowance based on an analysis of the likelihood of realization. Factors considered in assessing the need for a valuation allowance include: (i) recent tax returns, which show neither a history of large amounts of taxable income nor cumulative losses in recent years, (ii) opportunities to generate taxable income from sales of appreciated assets, and (iii) the likelihood of generating larger amounts of taxable income in the future. The likelihood of realizing this asset will be reviewed periodically; any adjustments required to the valuation allowance will be made in the period in which the developments on which they are based become known.
Cash payments for income taxes, net of refunds, were $49.6 million, $9.6 million and $41.2 million for 1993, 1992 and 1991, respectively.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
M. Discontinued Operations In December 1991, AFC sold Hunter Savings Association to Provident Bancorp (an affiliate) for approximately $67.9 million in Provident Bancorp securities and $834,000 in cash. Prior to the sale, Hunter paid AFC a dividend of approximately $26.8 million in cash. Discontinued operations for 1991 consisted of the following (in thousands): Gain Operations on Sale Pretax Earnings $17,683 $5,652 Tax (5,617) (1,922)
Net Earnings $12,066 $3,730
N. Pending Legal Proceedings Counsel has advised AFC that there is little likelihood of any substantial liability being incurred from any litigation pending against AFC and subsidiaries.
O. Benefit Plans AFC expensed ESORP contributions of $8.9 million in 1993, $7.4 million in 1992 and $7.5 million in 1991. Other operating and general expenses include a charge of $1 million in 1993, a credit of $1 million in 1992 and a charge of $38 million in 1991 for units outstanding under AFC's Book Value Incentive Plan.
In 1993, AFC began accruing postretirement benefits over the period the employees qualify for such benefits. Expense for 1993 was $3.1 million. Prior to this change, costs were charged to expense as incurred.
P. Transactions With Affiliates Various business has been transacted among AFC and its subsidiaries over the past several years, including rentals, data processing services, accounting services, investment management services, loans, leases, insurance, advertising and sales of assets. Unless otherwise disclosed, none of these transactions had a material effect on the net earnings or equity of AFC. Aggregate charges for these services within AFC and its subsidiaries have been insignificant in relation to consolidated revenues.
In addition, AFC and its subsidiaries have had certain of the above types of transactions with certain of AFC's officers and directors and with business entities owned by them. Charges for such services have been less than one percent of consolidated revenues in 1993, 1992 and 1991.
In 1993 AFC sold stock of an affiliate to certain of its officers and employees for $1.8 million in cash and $270,000 in 5.25% unsecured notes due in five equal annual installments beginning in 1996.
In 1991, The Provident Bank purchased a $5 million loan to an AFC resort real estate subsidiary from an unrelated bank. The loan is secured by the subsidiary's property and is guaranteed by AFC. At December 31, 1993, $452,000 is owed to Provident under the loan. Members of the Lindner family are majority owners of Provident's parent.
Except as noted otherwise, all of the above transactions have taken place at approximate market rates or values and, in the opinion of management, all amounts are fully collectible.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Q. Quarterly Operating Results (Unaudited) The operations of certain of AFC's business segments are seasonal in nature. While insurance premiums are recognized on a relatively level basis, claim losses related to adverse weather (snow, hail, hurricanes, tornados, etc.) may be seasonal. Quarterly results necessarily rely heavily on estimates. These estimates and certain other factors, such as the nature of investees' operations and discretionary sales of assets, cause the quarterly results not to be necessarily indicative of results for longer periods of time. The following are quarterly results of consolidated operations for the two years ended December 31, 1993 (in millions). See Note B for changes in ownership of companies whose revenues are included in the consolidated operating results and for the effects of gains on sales of subsidiaries in individual quarters.
Following American Premier's announcement in May 1993 that it was committed to sell its Federal Systems segment, AFC classified the operations of this business as "discontinued" for the periods American Premier was accounted for as a subsidiary. These operations have been classified as "continuing" operations below since the amounts were not material ($1.4 million in the first quarter of 1993 and $1.5 million, $1.5 million and $1.4 million in the first three quarters of 1992). In addition, AAG's $5.2 million (pretax before minority interest) writeoff of debt issue costs in the third quarter of 1993 has been reclassified as "extraordinary".
Realized gains (losses) on sales of securities and charges for possible losses on investments for the respective quarters amounted to (in millions):
New insurance regulations requiring rate rollbacks are being implemented in California as a result of the 1988 ballot initiative, Proposition 103. GAI has not received a rollback assessment and management believes an ultimate liability, if any, cannot be estimated. Since it is not probable that GAI will pay a material premium refund, no provision has been made in the financial statements for a potential liability.
In the normal course of business, AFC's insurance subsidiaries assume and cede reinsurance with other insurance companies. The following table shows (in millions) (i) amounts deducted from property and casualty premium income accounts in connection with reinsurance ceded, (ii) amounts included in income for reinsurance assumed and (iii) reinsurance recoveries deducted from losses and loss adjustment expenses.
1993 1992 1991 Reinsurance ceded $422 $278 $284 Reinsurance assumed: From companies under management contract 63 17 8 Other, primarily non-voluntary pools and associations 61 117 55 Reinsurance recoveries 343 151 109
The fair value of the liability for annuities in the payout phase is assumed to be the present value of the anticipated cash flows, discounted at current interest rates. Fair value of annuities in the accumulation phase is assumed to be the policyholders' cash surrender amount. The aggregate fair value of all annuity liabilities, net of deferred policy acquisition costs, at December 31, 1993, approximates the amounts recorded in the financial statements.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Financial Instruments with Off-Balance-Sheet Risk In the normal course of business, AFC and its subsidiaries enter into financial instrument transactions which may present off-balance-sheet risks, of both credit and market risk nature. These transactions include interest rate swaps and collars, commitments to fund loans, loan guarantees and commitments to purchase and sell securities or loans.
Market risk arises from the possibility that interest and exchange rate movements may make financial instruments less valuable or more onerous. Credit risk arises from the possibility of failure of another party to perform according to the terms of a contract. Appropriate collateral, credit analysis and other control procedures are considered in the light of circumstances of individual situations to minimize risk. Management does not anticipate any material adverse effect on its financial position resulting from involvement in these instruments.
At December 31, 1993, AFC and its subsidiaries had commitments to fund credit facilities and contribute limited partnership capital totalling $35 million at December 31, 1993.
S. Restrictions on Transfer of Funds and Assets of Subsidiaries Payments of dividends, loans and advances by AFC's subsidiaries are subject to various state laws, federal regulations and debt covenants which limit the amount of dividends, loans and advances that can be paid. The maximum amount of dividends payable in 1994 from GAI based on its 1993 earned surplus is approximately $108 million. Total "restrictions" on intercompany transfers from AFC's subsidiaries cannot be quantified due to the discretionary nature of the restrictions.
T. Subsequent Event (Unaudited) In February 1994, American Premier announced that it was considering a proposal from AFC to purchase GAI's personal lines business (primarily insurance of private passenger automobiles and residential property) for $380 million. These operations had earned premiums of $342 million in 1993 and represented approximately 25% of the premiums earned by all of GAI's insurance operations. The purchase would include the transfer of a portfolio of principally investment grade securities with a market value of approximately $450 million. The estimated net book value (GAAP basis) of the business to be transferred would be approximately $200 million.
PART IV
ITEM 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report: 1. Financial Statements are included in Part II, Item 8.
2. Financial Statement Schedules: A. Selected Quarterly Financial Data is included in Note Q to the Consolidated Financial Statements.
B. Schedules filed herewith for 1993, 1992 and 1991:
Page II - Amounts Receivable from Related Parties and Under- writers, Promoters, and Employees other than Related Parties S-2
III - Condensed Financial Information of Registrant S-4
XIV - Supplemental Information Concerning Property-Casualty Insurance Operations S-6
All other schedules for which provisions are made in the applicable regulation of the Securities and Exchange Commission have been omitted as they are not applicable, not required, or the information required thereby is set forth in the Financial Statements or the notes thereto.
C. The annual report on Form 10-K of American Premier Underwriters, Inc. (File No. 1-1569) for the period ended December 31, 1993, is hereby incorporated by reference.
Copies of this Annual Report on Form 10-K and all subsequent reports filed pursuant to Section 13 of the Securities Exchange Act of 1934 may be obtained from the Commission's principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the rules and regulations of the Commission or may be examined without charge at Room 1024 of the Commission's public reference facilities at the same address. Copies of material filed with the Commission may also be inspected at the following regional offices: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, New York, New York 10048.
3. Exhibits - see Exhibit Index on page E-1.
(b) Reports on Form 8-K:
Date of Report Items Reported February 23, 1994 1. Exchange Offer for AFC Debentures 2. Proposal to sell personal lines business to American Premier
March 17, 1994 1. Amended Exchange Offer terms 2. Call for redemption of 13-1/2% Debentures
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES THREE YEARS ENDED DECEMBER 31, 1993 (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES THREE YEARS ENDED DECEMBER 31, 1993 (In Thousands)
AMERICAN FINANCIAL CORPORATION - PARENT ONLY SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES SCHEDULE XIV - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS THREE YEARS ENDED DECEMBER 31, 1993 (IN MILLIONS)
INDEX TO EXHIBITS
AMERICAN FINANCIAL CORPORATION
Number Exhibit Description
3 Articles of Incorporation and Code of Regulations, filed as Exhibit 3 to AFC's Form 10-K for 1988. *
4 Instruments defining the The rights of holders of rights of security holders. Registrant's Preferred Stock are defined in the Articles of Incorporation. Registrant has no outstanding debt issues exceeding 10% of the assets of Registrant and consolidated subsidiaries.
Management Contracts: 10(a) Book Value Incentive Plan, filed as Exhibit 10(a) to AFC's Form 10-K for 1983. *
10(b) Option Agreement, filed as Exhibit 10(b) to AFC's Form 10-K for 1983. *
10(c) Nonqualified ESORP Plan, filed as Exhibit 10(e) to AFC's Form 10-K for 1989. *
12 Computation of ratios of earnings to fixed charges and fixed charges and preferred dividends.
21 Subsidiaries of the Registrant.
28 Information from reports furnished to state insurance regulatory authorities.
99 Form 10-K of American Premier Underwriters, Inc. for 1993.
(*) Incorporated herein by reference.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND FIXED CHARGES AND PREFERRED DIVIDENDS (Dollars in Thousands)
AMERICAN FINANCIAL CORPORATION
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AFC at December 31, 1993. All corporations are subsidiaries of AFC and, if indented, subsidiaries of the company under which they are listed.
Percentage of State of Common Equity Name of Company Incorporation Ownership
American Financial Enterprises, Inc. Connecticut 83% Great American Holding Corporation Ohio 100 Great American Insurance Company Ohio 100 American Annuity Group, Inc. Delaware 80 Great American Life Insurance Company Ohio 100 American Empire Surplus Lines Insurance Company Delaware 100 American National Fire Insurance Company New York 100 Great American Management Services, Inc. Ohio 100 Mid-Continent Casualty Company Oklahoma 100 Stonewall Insurance Company Alabama 100 Transport Insurance Company Ohio 100
The names of certain subsidiaries are omitted, as such subsidiaries in the aggregate would not constitute a significant subsidiary.
See Part I, Item 1 of this Report for a description of certain companies in which AFC owns a significant portion and accounts for under the equity method.
AMERICAN FINANCIAL CORPORATION
EXHIBIT 28 - INFORMATION FROM REPORTS FURNISHED TO STATE INSURANCE REGULATORY AUTHORITIES
Schedule P of Annual Statements
A. CONSOLIDATED PROPERTY AND CASUALTY ENTITIES - See Attached Schedules
Schedule P (prepared in accordance with the rules prescribed by the National Association of Insurance Commissioners) includes the reserves of AFC's consolidated property and casualty subsidiaries. The following is a summary of Schedule P reserves (in millions):
GAI Insurance Group Schedule P - Part 1 Summary - col. 33 $1,823 - col. 34 321 Statutory Loss and Loss Adjustment Expense Reserves $2,144
B. UNCONSOLIDATED SUBSIDIARIES None
C. 50% OR LESS OWNED PROPERTY AND CASUALTY INVESTEES Not Included
Information for American Premier Underwriters, Inc. for 1993 is not included since that company files such information with the Commission as a registrant in its own right.
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, American Financial Corporation has duly caused this Report to be signed on its behalf by the undersigned, duly authorized.
American Financial Corporation
Signed: March 28, 1994 BY:s/CARL H. LINDNER
Carl H. Lindner Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
s/CARL H. LINDNER Chairman of the Board March 28, 1994 Carl H. Lindner of Directors
s/ROBERT D. LINDNER Director March 28, 1994 Robert D. Lindner
s/RONALD F. WALKER Director* March 28, 1994 Ronald F. Walker
s/FRED J. RUNK Vice President and March 28, 1994 Fred J. Runk Treasurer (principal financial and accounting officer)
* Member of the Audit Committee
ITEM 10
Directors and Executive Officers of the Registrant
The directors and executive officers of AFC at March 1, 1994, are:
Executive Name Age Position Since
Carl H. Lindner 74 Chairman of the Board and Chief 1959 Executive Officer Richard E. Lindner 72 Director 1959 Robert D. Lindner 73 Vice Chairman of the Board 1959 Ronald F. Walker 55 Director, President and Chief 1973 Operating Officer
Carl H. Lindner III 40 President of GAI and President 1987 and Chief Operating Officer of American Premier S. Craig Lindner 39 President of AAG and Senior Executive Vice President of AMM James E. Evans 48 Vice President and General Counsel Sandra W. Heimann 51 Vice President 1984 Robert C. Lintz 60 Vice President 1979 Thomas E. Mischell 46 Vice President 1985 Fred J. Runk 51 Vice President and Treasurer 1978
Carl H. Lindner has served as Chairman of the Board and Chief Executive Officer of AFC for more than five years. He serves in similar capacities with various AFC subsidiaries. He serves as Chairman of the Board of the following public companies: American Annuity Group, Inc. ("AAG"), American Financial Enterprises, Inc. ("AFEI"), Chiquita, General Cable, Great American Communications Company ("GACC") and American Premier.
AFC owns a substantial beneficial interest (over 20%) in all of these companies.
Richard E. Lindner is owner, Chairman of the Board of Directors, President and Chief Executive Officer of Thriftway, Inc., a supermarket chain otherwise unaffiliated with AFC, and has been associated with that company for over five years.
Robert D. Lindner, for more than five years, has served as Vice Chairman of the Board of Directors of AFC. In addition, he is Chairman of the Board of United Dairy Farmers, Inc. ("UDF") which, among other things, is engaged through subsidiaries in dairy processing and the operation of convenience stores. He is also a director of AFEI.
Ronald F. Walker has served as President and Chief Operating Officer of AFC for more than five years. He is also Vice Chairman of the Board of Directors of GAI and holds executive positions in most of AFC's other subsidiaries. He is also a director of AAG, AFEI, Chiquita, General Cable and Tejas Gas Company.
Carl H. Lindner III has been President of GAI for more than five years. He holds executive positions in many of GAI's subsidiaries. He has also been President and Chief Operating Officer of American Premier since 1991.
S. Craig Lindner has been Senior Executive Vice President of American Money Management Corporation ("AMM"), a subsidiary of AFC which provides investment services to AFC and its subsidiaries, for more than five years. He was elected President of AAG in March 1993.
James E. Evans has served as a Vice President and the General Counsel of AFC for more than five years.
Sandra W. Heimann has been a Vice President of AFC and an executive officer of AMM for more than five years.
Robert C. Lintz has been a Vice President of AFC for more than five years.
Thomas E. Mischell has been a Vice President of AFC for more than five years.
Fred J. Runk has served as Vice President and Treasurer of AFC for more than five years.
Carl H. Lindner, Robert D. Lindner and Richard E. Lindner are brothers. Carl H. Lindner III and S. Craig Lindner are sons of Carl H. Lindner.
All of the executive officers of AFC devote substantially all of their time to the affairs of AFC and its subsidiaries. All of the above are United States citizens.
The information required by the following Items will be provided within 120 days after end of Registrant's fiscal year.
ITEM 11
ITEM 11 Executive Compensation
ITEM 12
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
ITEM 13
ITEM 13 Certain Relationships and Related Transactions
REPORTS OF INDEPENDENT AUDITORS
Board of Directors American Financial Corporation
We have audited the accompanying consolidated balance sheets of American Financial Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, changes in capital accounts, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the financial statements of American Premier Underwriters, Inc. (formerly The Penn Central Corporation), General Cable Corporation and American Annuity Group, Inc. (1991). Those statements were audited by other auditors whose reports have been furnished to us. The reports pertaining to the statements of General Cable Corporation and American Premier Underwriters, Inc. included explanatory paragraphs that described their change in method of accounting for income taxes in 1992. Our opinion on the consolidated financial statements and schedules, insofar as it relates to data included for those corporations as described in Note E, is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Financial Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, 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.
As discussed in Note A to the consolidated financial statements, American Financial Corporation and subsidiaries changed their method of accounting in 1993 for certain investments in debt and equity securities and in 1992 for income taxes.
ERNST & YOUNG
Cincinnati, Ohio March 25, 1994
REPORT OF AMERICAN PREMIER'S INDEPENDENT AUDITORS
American Premier Underwriters, Inc. (formerly The Penn Central Corporation):
We have audited the financial statements and the financial statement
schedules of American Premier Underwriters, Inc. and Consolidated Subsidiaries listed in the Index to Financial Statements and Financial Statement Schedules of American Premier Underwriters, Inc.'s Form 10-K for the year ended December 31, 1993 (included as Exhibit 99 herein). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of American Premier Underwriters, Inc. and Consolidated Subsidiaries at December 31, 1993 and 1992 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information shown therein.
As discussed in Note 1 to the financial statements, in 1992 the Company changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE
Cincinnati, Ohio February 16, 1994 (March 25, 1994 with respect to the change of the Company's name as discussed in Note 1 to American Premier's financial statements)
REPORT OF GENERAL CABLE'S INDEPENDENT AUDITORS
General Cable Corporation:
We have audited the consolidated financial statements and related schedules of General Cable Corporation and subsidiaries listed in Item 14(a) of the
Annual Report on Form 10-K of General Cable Corporation for the year ended December 31, 1993 (not presented separately herein). These consolidated financial statements and related schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and related schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of General Cable Corporation and subsidiaries at December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information shown therein.
As discussed in Notes 1 and 10 to the consolidated financial statements, in 1992 General Cable Corporation changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE
Cincinnati, Ohio February 18, 1994
REPORT OF AMERICAN ANNUITY'S INDEPENDENT AUDITORS
American Annuity Group, Inc.:
We have audited the consolidated balance sheet of American Annuity Group,
Inc., formerly Sprague Technologies, Inc., and subsidiaries as of December 31, 1991 and the related consolidated statements of operations, common stockholders' equity and cash flows for the year then ended (before adjustments and reclassifications to conform with the presentation for 1992). Our audit also included the 1991 financial statement schedule listed in the Index at Item 14(a) of American Annuity Group, Inc's. Form 10-K for the year ended December 31, 1993 (not presented separately herein). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements (before adjustments and reclassifications to conform with the presentation for 1992) present fairly, in all material respects, the financial position of American Annuity Group, Inc. and subsidiaries as of December 31, 1991 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE
Stamford, Connecticut March 24, 1992
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands)
December 31, 1993 1992
Assets Cash and short-term investments $ 167,950 $ 837,429 Investments: Bonds and redeemable preferred stocks: Held to maturity - at amortized cost (market - $3,959,400 and $4,705,600) 3,788,732 4,597,544 Available for sale - at market (amortized cost - $2,216,328 and $1,905,814) 2,349,528 1,976,514 Other stocks - principally at market (cost - $207,056 and $182,476) 339,156 230,876 Investment in investee corporations 899,800 568,207 Bonds and receivables from investees 6,783 305,701 Loans receivable 624,149 812,436 Real estate and other investments 139,319 179,152 8,147,467 8,670,430 Recoverables from reinsurers and prepaid reinsurance premiums 756,060 599,204 Trade receivables 298,240 594,834 Other receivables 213,507 318,799 Property, plant and equipment, net 44,950 215,851 Deferred tax asset - 258,300 Prepaid expenses, deferred charges and other assets 275,349 394,319 Cost in excess of net assets acquired 173,965 499,639
$10,077,488 $12,388,805
Liabilities and Capital Insurance claims and reserves $ 3,422,657 $ 4,279,853 Annuity policyholders' funds accumulated 4,256,674 3,973,524 Long-term debt: Parent company 571,874 557,161 American Premier - 657,800 Other subsidiaries 482,132 794,217 Accounts payable, accrued expenses and other liabilities 648,462 1,005,866 Minority interest 109,219 812,707 9,491,018 12,081,128
Capital subject to mandatory redemption 49,232 27,683 Preferred Stock (redemption value - $278,889) 168,588 168,588 Common Stock without par value 904 904 Retained earnings 210,846 42,402 Net unrealized gain on marketable securities, net of deferred income taxes 156,900 68,100
$10,077,488 $12,388,805
See notes to consolidated financial statements.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL ACCOUNTS (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES
A. Accounting Policies B. Acquisitions and Sales of Subsidiaries C. Segments of Operations D. Investments E. Investment in Investee Corporations F. Property, Plant and Equipment G. Cost in Excess of Net Assets Acquired H. Long-Term Debt I. Capital Subject to Mandatory Redemption J. Other Preferred Stock K. Common Stock L. Income Taxes M. Discontinued Operations N. Pending Legal Proceedings O. Benefit Plans P. Transactions With Affiliates Q. Quarterly Operating Results (Unaudited) R. Additional Information S. Restrictions on Transfer of Funds and Assets of Subsidiaries T. Subsequent Event (Unaudited)
A. Accounting Policies
Basis of Presentation The consolidated financial statements include the accounts of American Financial Corporation ("AFC") and its subsidiaries except for Hunter Savings Association which was sold in the fourth quarter of 1991 and is presented in the financial statements as "discontinued operations". Changes in ownership levels of other subsidiaries and investees have resulted in certain differences in the financial statements and have affected comparability between years. Certain reclassifications have been made to prior years to conform to the current year's presentation. All significant intercompany balances and transactions have been eliminated. All acquisitions have been treated as purchases. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements.
AFC's ownership of subsidiaries and significant investees with publicly traded shares at December 31, was as follows:
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investments Bonds, redeemable preferred stocks and other stocks at December 31, consisted of the following (in millions):
The table below sets forth the scheduled maturities of bonds and redeemable preferred stocks based on carrying value as of December 31, 1993. Data based on market value is generally the same. Collateralized mortgage obligations have an average life of approximately 4 years at December 31, 1993.
Held to Available Maturity Maturity for Sale One year or less 1% 1% After one year through five years 7 5 After five years through ten years 18 13 After ten years 55 31 81 50 Collateralized mortgage obligations 19 50 100% 100%
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Gross gains of $69.4 million, $85.2 million and $208.8 million and gross losses of $16.5 million, $4.7 million and $236.9 million were realized on sales of fixed maturity investments during 1993, 1992 and 1991, respectively.
Realized gains (losses) and changes in unrealized appreciation (depreciation) on fixed maturity and equity security investments are summarized as follows (in thousands):
Investment in other stocks at December 31, 1992 consisted of (in thousands):
At December 31, 1992, gross unrealized gains on other stocks were $63.7 million and gross unrealized losses were $15.1 million.
Carrying values of investments were determined after deducting cumulative provisions for impairment aggregating $47 million and $78 million at December 31, 1993 and 1992, respectively.
Fair values for investments are based on prices quoted, when available, in the most active market for each security. If quoted prices are not available, fair value is estimated based on present values, fair values of comparable securities, or similar methods.
Short-term investments are carried at cost; loans receivable are stated at the aggregate unpaid balance. Carrying amounts of these investments approximate their fair value.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Investment in Investee Corporations Investment in investee corporations represents AFC's ownership of securities of certain companies. All of the companies named in the following table are subject to the rules and regulations of the SEC. Market value of the investments (excluding $50 million in non-public securities at December 31, 1992, for which market values are not available) was approximately $940 million and $700 million at December 31, 1993 and 1992, respectively.
AFC's investment (and common stock ownership percentage) and equity in net earnings and losses of investees are stated below (dollars in thousands):
American Premier operates businesses primarily in specialty property and casualty insurance. In March 1994, American Premier changed its name from The Penn Central Corporation to reflect the nature of its business. Chiquita is a leading international marketer, processor and producer of quality fresh and processed food products. GACC is engaged in the ownership and operation of television and radio stations. General Cable primarily manufactures and markets electrical and communication wire and cable products.
Due to GACC's financial difficulties, AFC transferred all GACC securities and loans to the investee account and reduced the carrying value of that investment to estimated net realizable value ($35 million) at the end of 1992. AFC resumed equity accounting for its investment in GACC following GACC's reorganization at the end of 1993.
In July 1992, American Premier distributed to its shareholders approximately 88% of the stock of General Cable. AFC and its subsidiaries, excluding American Premier, received approximately 45% of the shares. The shares retained by American Premier are being held for distribution to creditors and other persons. Accordingly, those shares were included in "Other stocks" at December 31, 1992 and
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
General Cable was not consolidated because control was temporary. The operating results of General Cable for the first six months of 1992 are included in other income.
Sprague reported net losses of $29 million in 1992 and $53 million in 1991. Over the past few years, Sprague sold substantially all of its operating businesses and recorded substantial restructuring charges and loss provisions ($25 million in 1992 and $55 million in 1991).
Included in AFC's consolidated retained earnings at December 31, 1993, was approximately $145 million applicable to equity in undistributed net losses of investees. The unamortized negative goodwill in investees totaled approximately $62 million at December 31, 1993.
Summarized financial information for AFC's major investees at December 31, 1993, is shown below (in millions). See "Investee Corporations" in Management's Discussion and Analysis.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Great American Communications 1993 1992 1991
Contracts, Broadcasting Licenses and Other Intangibles $575 $540 Other Assets 145 174 Long-term Debt 433 635 Minority Interest - Preferred Stock of Subsidiary - 275 Shareholders' Equity (Deficit) 139 (339)
Net Revenues of Continuing Operations $205 $211 $202 Operating Income (Loss) 40 (642) 12 Loss from Continuing Operations (67) (613) (33) Discontinued Operations - 11 40 Extraordinary Items 408 5 77 Net Income (Loss) 341 (597) 84
General Cable Corporation Six Year months ended ended 12/31/93 12/31/92
Current Assets $338 $366 Non-current Assets 282 345 Current Liabilities 110 159 Notes Payable to American Premier 287 255 Non-current Liabilities 83 78 Shareholders' Equity 140 219
Net Sales from Continuing Operations $764 $416 Operating Income (Loss) 2 (29) Loss From Continuing Operations (26) (53) Discontinued Operations (32) - Net Loss (58) (53)
General Cable's 1993 results included a $34.4 million loss on the disposal of its equipment manufacturing businesses. AFC's share of this loss reduced negative goodwill and was not included in AFC's equity in General Cable's earnings. General Cable's results for the first six months of 1992 (prior to its spin-off from American Premier) are included in American Premier's results.
F. Property, Plant and Equipment Property, plant and equipment consisted of the following at December 31, (in thousands): 1993 1992
Land $ 3,654 $ 33,487 Buildings and improvements 21,493 96,523 Machinery, equipment and office furnishings 89,329 278,805 Other - 46,622 114,476 455,437 Less accumulated depreciation (69,526) (239,586)
$ 44,950 $215,851
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. Cost in Excess of Net Assets Acquired At December 31, 1993 and 1992, accumulated amortization of the excess of cost over net assets of purchased subsidiaries amounted to approximately $94 million and $176 million, respectively. Amortization expense was $15.0 million in 1993, $25.0 million in 1992 and $37.2 million in 1991.
H. Long-Term Debt Long-term debt consisted of the following at December 31, (in thousands):
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At December 31, 1993, sinking fund and other scheduled principal payments on debt for the subsequent five years were as follows (in thousands):
Parent Other Company Subsidiaries Total 1994 $12,080 $ 3,669 $ 15,749 1995 10,883 63,050 73,933 1996 11,843 1,064 12,907 1997 17,818 15,667 33,485 1998 19,223 158,821 178,044
In February 1994, AFC commenced an offer to issue new 9-3/4% Debentures due April 20, 2004 and cash in exchange for its publicly traded debentures. In December 1993, AFC wrote off $24.3 million in unamortized original issue discount and debt issue costs related to the debentures covered in the exchange offer.
Based on the results of this offer and cash availability, AFC will redeem some or all of the unexchanged debentures. In March 1994, AFC called for redemption its 13-1/2% Debentures and its 13-1/2% Series A Debentures. Holders of either issue may accept the Exchange Offer.
Parent company sinking fund and other scheduled principal payments on debt at December 31, 1993, assuming at least 50% of each issue of the old debentures are exchanged, would be as follows (in thousands):
1994 1995 1996 1997 1998 $3,231 $261 $261 $5,493 $261
AFC may, at its option, apply debentures otherwise purchased in excess of scheduled payments to satisfy any sinking fund requirement. The scheduled principal payments shown above assume that debentures purchased are applied to the earliest scheduled retirements.
At December 31, 1993, the estimated fair value of all long-term debt of AFC and its subsidiaries exceeded carrying value by approximately $23 million. Fair values of debt instruments were calculated using quoted market prices where available and present values, discounted cash flows, or similar techniques in other cases.
During 1993, GAHC entered into a new revolving credit agreement with several banks under which it can borrow up to $300 million. Borrowings bear interest at prime rate or at LIBOR plus 1.375% and are collateralized by a pledge of 50% of the stock of AFC's largest insurance subsidiary. The agreement converts to a four-year term loan in December 1996 and requires annual facility fees and commitment fees based upon the unused portion of the credit line. AFC guarantees amounts borrowed under the credit agreement.
In connection with the acquisition of GALIC, AAG borrowed $180 million under a Bank Term Loan Agreement and $50 million under a Bridge Loan. In 1993, AAG sold $225 million principal amount of Notes to the public and used the proceeds to pay off the Bank and Bridge Loan. Unamortized debt issue costs of $4.6 million (net of minority interest) were written off and are included in extraordinary items.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFEI redeemed its 13-7/8% Notes and paid $40 million of bank debt with the proceeds from the sale of shares of American Premier in August 1993. Subsequently, AFEI entered into a new revolving credit agreement which enables it to borrow a maximum of $20 million through December 1997.
Cash interest payments of $133 million, $206 million and $221 million were made on long-term debt in 1993, 1992 and 1991, respectively.
I. Capital Subject to Mandatory Redemption Capital subject to mandatory redemption includes AFC's Mandatory Redeemable Preferred Stock and capital subject to a put option.
Mandatory Redeemable Preferred Stock The outstanding shares of Mandatory Redeemable Preferred Stock are nonvoting, cumulative and consist of the following:
Series E, $10.50 par value - authorized 2,725,000 shares; annual dividends per share $1; to be retired at par in 1994 and 1995; 504,711 shares (stated value - $5.3 million) outstanding at December 31, 1993 and 1992.
Series I, $.01 par value - authorized 700,000 shares; annual dividends per share $2.66 in 1993; redeemable at $28 per share; 150,212 shares (stated value - $4.2 million) and 225,318 shares (stated value - $6.3 million) outstanding at December 31, 1993 and 1992, respectively.
The fair market value of AFC's Mandatory Redeemable Preferred Stock approximates stated value.
In February 1994, AFC redeemed the outstanding shares of Series I Preferred Stock. Approximately 45% of the Series E Preferred Stock is scheduled to be retired in December 1994; the balance is to be retired in December 1995.
During 1993, AFC purchased 75,106 shares of Series I Preferred Stock for approximately $2.1 million. During 1992, AFC purchased 680,369, 115,500 and 75,105 shares of Series D, Series E and Series I Preferred Stock, respectively, for approximately $10.4 million. During 1991, AFC purchased 679,689 shares of Series D Preferred Stock for approximately $7.1 million.
Capital Subject to Put Option Under an agreement entered into in 1983, certain members of the Lindner family (the "Group") who, in the aggregate, owned 1,848,235 shares of AFC Common Stock, were granted options to purchase an additional 1,225,000 shares. The options, which expire two years after the death of Robert D. Lindner, are exercisable at $6.65 per share plus $.40 per share per year from April 1983. Holders have the right to "put" to AFC any shares of AFC Common Stock or options at any time at a price equal to
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFC's book value per share, adjusted to reflect all equity securities (including investees and subsidiaries with publicly traded shares) at market prices. The purchase price is to be paid one-third in cash and the balance in a five-year installment note bearing interest at a rate equal to the five- year U.S. Treasury note rate plus 3%. AFC has the right to "call" any AFC shares owned by the Group after Robert D. Lindner's death at the same price as described under the "put" (but not less than $6.65 per share plus 10% compounded annually from April 1983). Further, AFC has a right of first refusal on shares owned by members of the Group.
At December 31, 1993, the Group owned 1,533,767 shares of AFC Common Stock and options to purchase an additional 762,500 shares. The aggregate purchase price for all shares covered by the put is included in "capital subject to mandatory redemption" and amounted to $40 million and $16 million at December 31, 1993 and 1992, respectively. Changes in the aggregate purchase price are charged or credited directly to retained earnings without affecting earnings.
J. Other Preferred Stock Under provisions of both the Nonvoting (55,800,000 shares authorized, including the redeemable issues) and Voting (3,500,000 shares authorized, none outstanding) Cumulative Preferred Stock, the Board of Directors is authorized to divide the authorized stock into series and to set specific terms and conditions of each series.
The outstanding shares of Nonvoting Cumulative Preferred Stock, excluding those that are mandatorily redeemable, consist of the following:
Series F, $1 par value - authorized 15,000,000 shares; annual dividends per share $1.80; 10% annually may be retired at AFC's option at $20 per share from 1994 to 1996; 13,753,254 shares (stated value - $168.0 million) outstanding at December 31, 1993 and 1992.
Series G, $1 par value - authorized 2,000,000 shares; annual dividends per share $1.05; may be retired at AFC's option at $10.50 per share; 364,158 shares (stated value - $600,000) outstanding at December 31, 1993 and 1992.
In 1992 and 1991, AFC sold 1.0 million and 1.4 million shares of Series F Preferred Stock to its ESORP for $15.0 million and $19.4 million in cash, respectively.
K. Common Stock At December 31, 1993, Carl H. Lindner and certain members of the Lindner family owned all of the outstanding Common Stock of AFC (18,971,217 shares, including 1,533,767 shares subject to a put option as described in Note I). Of the 32,300,000 authorized shares of Common Stock at December 31, 1993, 762,500 shares were reserved for issuance upon exercise of options.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
L. Income Taxes The following is a reconciliation of income taxes at the statutory rate of 35% in 1993 and 34% in 1992 and 1991 and income taxes as shown in the Statement of Operations (in thousands):
Adjusted earnings (loss) before income taxes consisted of the following (in thousands): 1993 1992 1991 Subject to tax in: United States $255,682($144,854) ($ 45,020) Foreign jurisdictions 1,744 - 187,065
$257,426($144,854) $142,045
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The total income tax provision consists of (in thousands):
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.
The components of the provision for deferred income taxes for 1991 were (in millions):
Undistributed earnings of subsidiaries and investees $19.6 Losses not utilized 20.5 Insurance underwriting adjustments (16.3) Investment income (16.2) Disposition of assets 35.9 Book value incentive plan (11.9) Other (5.4)
$26.2
For income tax purposes, certain members of the AFC consolidated tax group had approximately $180 million of operating loss carryforwards available at December 31, 1993. The carryforwards are scheduled to expire as follows: $23 million in 1994, $9 million in 1995 through 2000 and $148 million in 2001 through 2005.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The cumulative effect of implementing SFAS No. 109 in 1992, which resulted from giving recognition to previously unrecognized tax benefits, was income of $85.4 million. This income consisted of a charge of $40 million related to members of the AFC tax group and a benefit of $125.4 million for AFC's share of American Premier's accounting change. Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. The significant components of deferred tax assets and liabilities for AFC's tax group included in the Balance Sheet at December 31, were as follows (in millions):
The gross deferred tax asset was reduced by a valuation allowance based on an analysis of the likelihood of realization. Factors considered in assessing the need for a valuation allowance include: (i) recent tax returns, which show neither a history of large amounts of taxable income nor cumulative losses in recent years, (ii) opportunities to generate taxable income from sales of appreciated assets, and (iii) the likelihood of generating larger amounts of taxable income in the future. The likelihood of realizing this asset will be reviewed periodically; any adjustments required to the valuation allowance will be made in the period in which the developments on which they are based become known.
Cash payments for income taxes, net of refunds, were $49.6 million, $9.6 million and $41.2 million for 1993, 1992 and 1991, respectively.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
M. Discontinued Operations In December 1991, AFC sold Hunter Savings Association to Provident Bancorp (an affiliate) for approximately $67.9 million in Provident Bancorp securities and $834,000 in cash. Prior to the sale, Hunter paid AFC a dividend of approximately $26.8 million in cash. Discontinued operations for 1991 consisted of the following (in thousands): Gain Operations on Sale Pretax Earnings $17,683 $5,652 Tax (5,617) (1,922)
Net Earnings $12,066 $3,730
N. Pending Legal Proceedings Counsel has advised AFC that there is little likelihood of any substantial liability being incurred from any litigation pending against AFC and subsidiaries.
O. Benefit Plans AFC expensed ESORP contributions of $8.9 million in 1993, $7.4 million in 1992 and $7.5 million in 1991. Other operating and general expenses include a charge of $1 million in 1993, a credit of $1 million in 1992 and a charge of $38 million in 1991 for units outstanding under AFC's Book Value Incentive Plan.
In 1993, AFC began accruing postretirement benefits over the period the employees qualify for such benefits. Expense for 1993 was $3.1 million. Prior to this change, costs were charged to expense as incurred.
P. Transactions With Affiliates Various business has been transacted among AFC and its subsidiaries over the past several years, including rentals, data processing services, accounting services, investment management services, loans, leases, insurance, advertising and sales of assets. Unless otherwise disclosed, none of these transactions had a material effect on the net earnings or equity of AFC. Aggregate charges for these services within AFC and its subsidiaries have been insignificant in relation to consolidated revenues.
In addition, AFC and its subsidiaries have had certain of the above types of transactions with certain of AFC's officers and directors and with business entities owned by them. Charges for such services have been less than one percent of consolidated revenues in 1993, 1992 and 1991.
In 1993 AFC sold stock of an affiliate to certain of its officers and employees for $1.8 million in cash and $270,000 in 5.25% unsecured notes due in five equal annual installments beginning in 1996.
In 1991, The Provident Bank purchased a $5 million loan to an AFC resort real estate subsidiary from an unrelated bank. The loan is secured by the subsidiary's property and is guaranteed by AFC. At December 31, 1993, $452,000 is owed to Provident under the loan. Members of the Lindner family are majority owners of Provident's parent.
Except as noted otherwise, all of the above transactions have taken place at approximate market rates or values and, in the opinion of management, all amounts are fully collectible.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Q. Quarterly Operating Results (Unaudited) The operations of certain of AFC's business segments are seasonal in nature. While insurance premiums are recognized on a relatively level basis, claim losses related to adverse weather (snow, hail, hurricanes, tornados, etc.) may be seasonal. Quarterly results necessarily rely heavily on estimates. These estimates and certain other factors, such as the nature of investees' operations and discretionary sales of assets, cause the quarterly results not to be necessarily indicative of results for longer periods of time. The following are quarterly results of consolidated operations for the two years ended December 31, 1993 (in millions). See Note B for changes in ownership of companies whose revenues are included in the consolidated operating results and for the effects of gains on sales of subsidiaries in individual quarters.
Following American Premier's announcement in May 1993 that it was committed to sell its Federal Systems segment, AFC classified the operations of this business as "discontinued" for the periods American Premier was accounted for as a subsidiary. These operations have been classified as "continuing" operations below since the amounts were not material ($1.4 million in the first quarter of 1993 and $1.5 million, $1.5 million and $1.4 million in the first three quarters of 1992). In addition, AAG's $5.2 million (pretax before minority interest) writeoff of debt issue costs in the third quarter of 1993 has been reclassified as "extraordinary".
Realized gains (losses) on sales of securities and charges for possible losses on investments for the respective quarters amounted to (in millions):
New insurance regulations requiring rate rollbacks are being implemented in California as a result of the 1988 ballot initiative, Proposition 103. GAI has not received a rollback assessment and management believes an ultimate liability, if any, cannot be estimated. Since it is not probable that GAI will pay a material premium refund, no provision has been made in the financial statements for a potential liability.
In the normal course of business, AFC's insurance subsidiaries assume and cede reinsurance with other insurance companies. The following table shows (in millions) (i) amounts deducted from property and casualty premium income accounts in connection with reinsurance ceded, (ii) amounts included in income for reinsurance assumed and (iii) reinsurance recoveries deducted from losses and loss adjustment expenses.
1993 1992 1991 Reinsurance ceded $422 $278 $284 Reinsurance assumed: From companies under management contract 63 17 8 Other, primarily non-voluntary pools and associations 61 117 55 Reinsurance recoveries 343 151 109
The fair value of the liability for annuities in the payout phase is assumed to be the present value of the anticipated cash flows, discounted at current interest rates. Fair value of annuities in the accumulation phase is assumed to be the policyholders' cash surrender amount. The aggregate fair value of all annuity liabilities, net of deferred policy acquisition costs, at December 31, 1993, approximates the amounts recorded in the financial statements.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Financial Instruments with Off-Balance-Sheet Risk In the normal course of business, AFC and its subsidiaries enter into financial instrument transactions which may present off-balance-sheet risks, of both credit and market risk nature. These transactions include interest rate swaps and collars, commitments to fund loans, loan guarantees and commitments to purchase and sell securities or loans.
Market risk arises from the possibility that interest and exchange rate movements may make financial instruments less valuable or more onerous. Credit risk arises from the possibility of failure of another party to perform according to the terms of a contract. Appropriate collateral, credit analysis and other control procedures are considered in the light of circumstances of individual situations to minimize risk. Management does not anticipate any material adverse effect on its financial position resulting from involvement in these instruments.
At December 31, 1993, AFC and its subsidiaries had commitments to fund credit facilities and contribute limited partnership capital totalling $35 million at December 31, 1993.
S. Restrictions on Transfer of Funds and Assets of Subsidiaries Payments of dividends, loans and advances by AFC's subsidiaries are subject to various state laws, federal regulations and debt covenants which limit the amount of dividends, loans and advances that can be paid. The maximum amount of dividends payable in 1994 from GAI based on its 1993 earned surplus is approximately $108 million. Total "restrictions" on intercompany transfers from AFC's subsidiaries cannot be quantified due to the discretionary nature of the restrictions.
T. Subsequent Event (Unaudited) In February 1994, American Premier announced that it was considering a proposal from AFC to purchase GAI's personal lines business (primarily insurance of private passenger automobiles and residential property) for $380 million. These operations had earned premiums of $342 million in 1993 and represented approximately 25% of the premiums earned by all of GAI's insurance operations. The purchase would include the transfer of a portfolio of principally investment grade securities with a market value of approximately $450 million. The estimated net book value (GAAP basis) of the business to be transferred would be approximately $200 million.
PART IV
ITEM 14
ITEM 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report: 1. Financial Statements are included in Part II, Item 8.
2. Financial Statement Schedules: A. Selected Quarterly Financial Data is included in Note Q to the Consolidated Financial Statements.
B. Schedules filed herewith for 1993, 1992 and 1991:
Page II - Amounts Receivable from Related Parties and Under- writers, Promoters, and Employees other than Related Parties S-2
III - Condensed Financial Information of Registrant S-4
XIV - Supplemental Information Concerning Property-Casualty Insurance Operations S-6
All other schedules for which provisions are made in the applicable regulation of the Securities and Exchange Commission have been omitted as they are not applicable, not required, or the information required thereby is set forth in the Financial Statements or the notes thereto.
C. The annual report on Form 10-K of American Premier Underwriters, Inc. (File No. 1-1569) for the period ended December 31, 1993, is hereby incorporated by reference.
Copies of this Annual Report on Form 10-K and all subsequent reports filed pursuant to Section 13 of the Securities Exchange Act of 1934 may be obtained from the Commission's principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the rules and regulations of the Commission or may be examined without charge at Room 1024 of the Commission's public reference facilities at the same address. Copies of material filed with the Commission may also be inspected at the following regional offices: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, New York, New York 10048.
3. Exhibits - see Exhibit Index on page E-1.
(b) Reports on Form 8-K:
Date of Report Items Reported February 23, 1994 1. Exchange Offer for AFC Debentures 2. Proposal to sell personal lines business to American Premier
March 17, 1994 1. Amended Exchange Offer terms 2. Call for redemption of 13-1/2% Debentures
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES THREE YEARS ENDED DECEMBER 31, 1993 (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES THREE YEARS ENDED DECEMBER 31, 1993 (In Thousands)
AMERICAN FINANCIAL CORPORATION - PARENT ONLY SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (In Thousands)
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES SCHEDULE XIV - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS THREE YEARS ENDED DECEMBER 31, 1993 (IN MILLIONS)
INDEX TO EXHIBITS
AMERICAN FINANCIAL CORPORATION
Number Exhibit Description
3 Articles of Incorporation and Code of Regulations, filed as Exhibit 3 to AFC's Form 10-K for 1988. *
4 Instruments defining the The rights of holders of rights of security holders. Registrant's Preferred Stock are defined in the Articles of Incorporation. Registrant has no outstanding debt issues exceeding 10% of the assets of Registrant and consolidated subsidiaries.
Management Contracts: 10(a) Book Value Incentive Plan, filed as Exhibit 10(a) to AFC's Form 10-K for 1983. *
10(b) Option Agreement, filed as Exhibit 10(b) to AFC's Form 10-K for 1983. *
10(c) Nonqualified ESORP Plan, filed as Exhibit 10(e) to AFC's Form 10-K for 1989. *
12 Computation of ratios of earnings to fixed charges and fixed charges and preferred dividends.
21 Subsidiaries of the Registrant.
28 Information from reports furnished to state insurance regulatory authorities.
99 Form 10-K of American Premier Underwriters, Inc. for 1993.
(*) Incorporated herein by reference.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND FIXED CHARGES AND PREFERRED DIVIDENDS (Dollars in Thousands)
AMERICAN FINANCIAL CORPORATION
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AFC at December 31, 1993. All corporations are subsidiaries of AFC and, if indented, subsidiaries of the company under which they are listed.
Percentage of State of Common Equity Name of Company Incorporation Ownership
American Financial Enterprises, Inc. Connecticut 83% Great American Holding Corporation Ohio 100 Great American Insurance Company Ohio 100 American Annuity Group, Inc. Delaware 80 Great American Life Insurance Company Ohio 100 American Empire Surplus Lines Insurance Company Delaware 100 American National Fire Insurance Company New York 100 Great American Management Services, Inc. Ohio 100 Mid-Continent Casualty Company Oklahoma 100 Stonewall Insurance Company Alabama 100 Transport Insurance Company Ohio 100
The names of certain subsidiaries are omitted, as such subsidiaries in the aggregate would not constitute a significant subsidiary.
See Part I, Item 1 of this Report for a description of certain companies in which AFC owns a significant portion and accounts for under the equity method.
AMERICAN FINANCIAL CORPORATION
EXHIBIT 28 - INFORMATION FROM REPORTS FURNISHED TO STATE INSURANCE REGULATORY AUTHORITIES
Schedule P of Annual Statements
A. CONSOLIDATED PROPERTY AND CASUALTY ENTITIES - See Attached Schedules
Schedule P (prepared in accordance with the rules prescribed by the National Association of Insurance Commissioners) includes the reserves of AFC's consolidated property and casualty subsidiaries. The following is a summary of Schedule P reserves (in millions):
GAI Insurance Group Schedule P - Part 1 Summary - col. 33 $1,823 - col. 34 321 Statutory Loss and Loss Adjustment Expense Reserves $2,144
B. UNCONSOLIDATED SUBSIDIARIES None
C. 50% OR LESS OWNED PROPERTY AND CASUALTY INVESTEES Not Included
Information for American Premier Underwriters, Inc. for 1993 is not included since that company files such information with the Commission as a registrant in its own right.
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, American Financial Corporation has duly caused this Report to be signed on its behalf by the undersigned, duly authorized.
American Financial Corporation
Signed: March 28, 1994 BY:s/CARL H. LINDNER
Carl H. Lindner Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
s/CARL H. LINDNER Chairman of the Board March 28, 1994 Carl H. Lindner of Directors
s/ROBERT D. LINDNER Director March 28, 1994 Robert D. Lindner
s/RONALD F. WALKER Director* March 28, 1994 Ronald F. Walker
s/FRED J. RUNK Vice President and March 28, 1994 Fred J. Runk Treasurer (principal financial and accounting officer)
* Member of the Audit Committee