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. At December 31, 1994, Carl H. Lindner and certain members of the Lindner family owned all of the outstanding Common Stock of AFC (See "1995 merger" below).
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 and radio and television station operations.
1995 Merger
On March 23, 1995, shareholders of American Premier Underwriters, Inc. ("American Premier") approved the merger of AFC with a newly formed subsidiary of American Premier Group, Inc. ("New American Premier"), another new company formed to own 100% of the common stock of both AFC and American Premier. Consummation of the merger is pending receipt of a ruling from the Internal Revenue Service which is expected at the end of March or early April. In the transaction, Carl H. Lindner and members of his family, who own 100% of the common stock of AFC, will exchange their AFC Common Stock for approximately 55% of New American Premier voting common stock. Shareholders of American Premier, including AFC and its subsidiaries, will receive shares of New American Premier stock on a one-for-one basis. As a result of the merger, AFC and its subsidiaries will own 18.7 million shares of the common stock of New American Premier which, as long as AFC is owned by New American Premier, generally will not be eligible to vote.
AFC will continue to be a separate SEC reporting company with publicly traded debentures and preferred stock. Holders of AFC Series F and G Preferred Stock will be granted voting rights equal to approximately 21% of the total voting power of AFC shareholders immediately prior to the merger. AFC and New American Premier have stated that following completion of the transaction they will likely redeem substantial amounts of the debt of American Premier, AFC and AFC's wholly-owned subsidiaries.
General
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 F to AFC's financial statements). The following table shows AFC's percentage ownership of voting securities of its significant affiliates over the past several years:
(a) Sold to American Annuity Group in December 1992. (b) Sold in June 1994. 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 in March 1993.
The following summarizes the more significant changes in ownership percentages shown in the above table.
American Annuity Group Between 1990 and 1992, American Annuity disposed of its manufacturing 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 In 1991, American Premier repurchased and retired approximately 6 million shares of its common stock. During 1991, AFC purchased an additional 1.6 million shares of American Premier common. In 1993, American Financial Enterprises, Inc. ("AFEI") sold 4.5 million shares of American Premier common stock in a secondary public offering.
Chiquita Brands International In 1991, Chiquita sold 5 million shares of its stock in a public offering.
Citicasters In 1991, GACC issued 21.6 million common 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. In June 1994, AFEI purchased 1.2 million shares of Citicasters common stock. In the second half of 1994, Citicasters repurchased and retired approximately 2.4 million shares of its common stock.
General Cable In 1992, American Premier distributed to its shareholders approximately 88% of the stock of General Cable, which was formed to own certain of American Premier's manufacturing businesses. AFC and its subsidiaries received approximately 45% of General Cable in the spin-off. In 1994, an unaffiliated company acquired all of the common stock of General Cable including AFC's and the 12% which had been retained by American Premier.
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 1993, AFC sold its common stock investment in Spelling to Blockbuster Entertainment Corporation.
_______________________________________________________
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 3,500 persons.
According to the most recent ranking published in "Best's Review", Great American was the 43rd largest among all property and casualty insurance groups operating in the United States on the basis of total net premiums written in 1993. 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 period it was owned by GAI.
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 generally accepted accounting principles ("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, netting of reinsurance recoverables and prepaid reinsurance premiums against the corresponding liability, 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.
(*) Grossed up for reinsurance recoverables in accordance with a change in accounting rules.
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). Insurance ratios computed on a GAAP basis are not significantly different from the statutory ratios presented below.
(*) Source: "Best's Aggregates & Averages - Property/Casualty" (1994 Edition); 1994 is an estimate (industry wide) from "Best Week Property/Casualty Supplement" (1/11/95 Edition)
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 1994, approximately half of Great American's premiums were written in these specialized niche product areas.
Certain natural disasters (hurricanes, tornados, floods, 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 the Northridge, California earthquake and winter storms in 1994; flooding in the Midwest in 1993; Hurricanes Andrew and Iniki, Chicago flooding, and Los Angeles civil disorder in 1992 and Oakland fires in 1991. Total net losses to AFC's insurance operations from catastrophes were $51 million in 1994; $26 million in 1993; $42 million in 1992; $22 million in 1991; and $13 million in 1990. These amounts are included in the tables herein.
Insurance regulations in various states require prior approval of premium rate increases on approximately two-thirds of Great American's personal lines business which represents about one-fourth of Great American's total 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 follows (dollars in millions). Losses incurred and loss ratios exclude loss adjustment expenses. Combined ratios are stated before policyholders' dividends.
Surety operations. Unusually high Combined Ratio in 1994 generally reflects the effects of the Northridge, California earthquake and poor results from an industrial risk pool arrangement.
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.
(*) Source: "Best's Aggregates & Averages - Property/Casualty"; 1994 is an estimate (industry wide) from "Best Week Property/Casualty Supplement" (1/11/95 Edition)
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 1994 compared to 1990, before giving effect to reinsurance, was as follows (dollars in millions):
(*) Less than 2%.
In August 1994, the California Supreme Court upheld Proposition 103, an insurance reform measure passed by California voters in 1988. In addition to increasing rate regulation, Proposition 103 gives the California insurance commissioner power to mandate rate rollbacks for most lines of property and casualty insurance. By its terms, Proposition 103 does not affect workers' compensation insurance. On March 22, 1995, Great American signed a settlement agreement with the California Department of Insurance setting its refund obligation at $19 million. The agreement is expected to become final in April, following a required waiting period.
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.
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 4% to 8%. As a result, the total liability for losses and LAE at December 31, 1994, 1993 and 1992 has been reduced by $71 million, $56 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 second line shows the re-estimated liability as of December 31, 1994. 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 1994, but incurred in 1984, would be included in the re-estimated liability and cumulative deficiency percentage for each of the years 1984 through 1993. 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.
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
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, 1994, are as follows (in millions):
Asbestos and Environmental
The insurance industry typically includes only claims relating to polluted waste sites and asbestos in defining environmental exposures. Great American extends this definition to include claims relating to breast implants, repetitive stress on keyboards, DES (a drug used in pregnancies years ago alleged to cause cancer and birth defects), and other latent injuries ("A&E").
Establishing reserves for A&E claims is subject to uncertainties that are greater than those presented 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, unresolved legal issues regarding policy coverage, and the extent and timing of any such contractual liability. Courts have reached different and sometimes inconsistent conclusions as to when the loss occurred and what policies provide coverage, what claims are covered, whether there is an insured obligation to
defend, how policy limits are determined and other policy provisions. Management believes these issues are not likely to be resolved in the near future.
Prior to the fourth quarter of 1994, Great American maintained reserves only on its reported A&E claims; reserves for claims incurred but not reported ("IBNR") were not allocated to A&E claims. Following completion of a detailed analysis in the fourth quarter, Great American allocated a specific portion of its IBNR reserves to A&E claims. Based on known facts and current law, management believes that its reserves for such claims are adequate.
The following table is a progression of reserves (in millions) for exposures for which Great American has been held liable under general liability policies written years ago where environmental coverage was not intended and, in many cases, was specifically excluded.
Since the mid-1980's, Great American has also written certain environmental coverages (asbestos abatement and underground storage tank liability) in which the premium charged is intended to provide coverage for the specific environ- mental exposures inherent in these policies. The business has been profitable since its inception. To date, approximately $160 million of premiums has been written and reserves for unpaid losses and LAE aggregated $56 million at December 31, 1994 (not included in the above table).
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 91% of the next $110 million in losses. Contracts relating to reinsurance are subject to periodic renegotiation.
Included in "recoverables from reinsurers and prepaid reinsurance premiums" were $75 million on paid losses and LAE and $730 million on unpaid losses and LAE at December 31, 1994. The collectibility of a reinsurance balance is based upon the financial condition of a reinsurer as well as individual claim considerations. Market conditions over the past few years have forced many reinsurers into financial difficulties or liquidation proceedings. At December 31, 1994, Great American had an allowance of approximately $79 million for doubtful collection of reinsurance recoverables. Great American regularly monitors the financial strength of its reinsurers. This process periodically results in the transfer of risks to more financially secure reinsurers. 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. Management believes that this present group of reinsurers is financially sound.
Premiums written for reinsurance ceded and assumed are presented in the following table (in millions):
All of the Texas business written by two companies controlled and managed by Great American is "ceded to" Great American. These companies ceded written premiums of $63 million in 1993, $17 million in 1992, $8 million in 1991 and $8 million in 1990. Beginning in 1994, statutory guidelines require that this business be reported as direct, rather than assumed, due to the relationship of these companies with Great American. Prior year amounts have been reclassified to conform with the current year's presentation.
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):
(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 American Annuity generally has been taken from American Annuity's 1994 Form 10-K.
General
American Annuity is a holding company whose primary asset is the capital stock of GALIC which it acquired from GAI on December 31, 1992. GALIC sells annuities primarily to employees of qualified not-for-profit organizations. GALIC is currently rated "A" (Excellent) by A.M. Best. American Annuity and its subsidiaries 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. Contributions are made at the discretion of the participants through payroll deductions or through tax-free "rollovers" of funds. 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 are issued in exchange for a one-time lump-sum premium payment. Since January 1, 1990, approximately three-fourths of GALIC's SPDA receipts have resulted from rollovers of tax-deferred funds previously maintained by policyholders with other insurers. In 1994, FPDAs accounted for approximately 55% of GALIC's total annuity receipts.
All of GALIC's annuity products have been fixed rate annuities. 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. At December 31, 1994, approximately 94% of GALIC's policyholder liabilities consisted of annuities which offered a minimum interest rate guarantee of 4%. GALIC's new products offer a minimum guaranteed rate of 3%. 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.
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 crediting rates which it has the option to change, (ii) designing annuity products that encourage persistency and (iii) maintaining an appropriate matching of assets and liabilities. GALIC imposes certain surrender charges and front-end fees during the first five to ten years of a policy to discourage customers from surrendering or withdrawing funds in those early years. Over the past five years, the annual persistency rate of GALIC's annuity products has averaged 92%.
At December 31, 1994, GALIC had approximately 250,000 annuity policies in force, nearly all of which were individual contracts. GALIC's policyholders are employees of over 7,300 institutions nationwide. Of the $4.7 billion in total statutory reserves held by GALIC as of December 31, 1994, approximately 94% were attributable to policies in the accumulation phase. Annuity surrender payments have averaged approximately 8% of statutory reserves over the past five years.
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 1994, written premiums from this market segment represented approximately three-fourths of GALIC's total tax qualified premiums.
GALIC markets its annuity products through over 50 managing general agents ("MGAs") who, in turn, direct more than 900 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 New York) and in the District of Columbia and Virgin Islands. The geographical distribution of GALIC's annuity premiums written in 1994 compared to 1990 was as follows (dollars in millions):
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):
_____________________________________________________
American Premier
Data in this section generally has been taken from American Premier's 1994 Form 10-K.
American Premier's principal operations are conducted by a group of insurance subsidiaries which write non-standard automobile insurance and workers' compensation coverage. American Premier employs approximately 4,300 persons.
Insurance
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 record, occupation or type of vehicle driven, or (ii) those who have been cancelled or rejected by another insurance company. Premium rates for non-standard risks are generally higher than for standard risks.
The NSA Group has been successful in profitably underwriting this specialty insurance niche, reporting a statutory combined ratio of 99.7% in 1994. The NSA Group is comprised of four principal operating units which are currently rated "A+" (Superior) to "A-" (Excellent) by A.M. Best Company.
American Premier acquired Republic Indemnity Company of America in 1989. Republic sells workers' compensation and employer's liability insurance principally in California. The workers' compensation portion of the coverage provides for statutorily prescribed benefits that employers are required to pay to employees who are injured in the course of employment. The employer's liability portion of the coverage provides protection to an employer for its liability for losses suffered by its employees which are not included within the statutorily prescribed workers' compensation coverage.
Republic reported a statutory combined ratio (after policyholders' dividends) of 95.9% for 1994. Management believes that Republic's stringent underwriting standards, disciplined claims philosophy, expense containment and reputation with insureds have combined to produce superior underwriting results as compared to the industry in general. Republic is currently rated "A+" (Superior) by A.M. Best Company.
Unless otherwise indicated, data in this section is presented on the statutory basis prescribed by the National Association of Insurance Commissioners 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. The statutory ratios for the major classes of business written by American Premier's Insurance Group are as follows.
(*) Source: "Best Week Property/Casualty Supplement" (1/11/95 Edition); 1994 is an estimate. The combined ratio for non-standard automobile represents the private passenger automobile insurance industry. While there is no reliable regularly published combined ratio data for the non-standard automobile industry, American Premier believes such a ratio would be lower than the private passenger automobile industry average shown above.
The NSA Group has achieved underwriting success over the past several years due to the refinement of various risk profiles, thereby dividing the consumer market into more defined segments which can either be excluded from coverage or priced properly. The NSA Group generally writes policies of short duration, allowing more frequent evaluations of individual risks, providing management greater flexibility in the ongoing assessment of the business. In addition, cost control measures have been implemented in the underwriting and claims handling areas.
Republic's workers' compensation insurance operations are highly regulated by California state authorities. In July 1993, California enacted significant changes in the workers' compensation insurance system (the "Reform Legislation"). The Reform Legislation called for mandated premium rate reductions that have already impacted Republic's results of operations.
Management intends to maintain its stringent underwriting standards and pricing discipline, which are likely to have at least a temporary adverse effect on premium volume and profitability. Historically, Republic's policyholder dividends have been among the highest in the industry. To meet future pricing competition, Republic has the option of quoting business without indication of policyholder dividends. While this option may serve to partially mitigate the adverse effects of these developments, the Company is unable to predict their ultimate impact on its workers' compensation insurance operations.
The U.S. geographical distribution of gross written premiums in 1994 compared to 1993, was as follows (dollars in millions):
In addition, a 51%-owned company (started in 1993) specializing in non-standard automobile insurance had 1994 gross written premiums of $63 million in the United Kingdom.
The NSA Group attributes its premium growth in recent years primarily to entry into additional states, increased market penetration in its existing states, overall growth in the non-standard market, and the 1993 purchase of Leader National. The non-standard market has experienced growth in recent years as standard insurers have become more restrictive in the types of risks they will write.
Approximately 89% of net premiums written by Republic in 1994 were from the sale of policies that provide for the discretionary payment of dividends (premium refunds). These dividends are paid when Republic's experience with such policyholders has been more favorable than certain specified levels and Republic has had favorable overall financial results.
Loss and Loss Adjustment Expense Reserves
The following table provides an analysis of changes in American Premier's estimated liability for losses and LAE over the past three years, net of all reinsurance activity, on a GAAP basis (in millions):
(*) Represents reductions in the estimates of ultimate losses and LAE related to such claims.
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).
Other
During 1994 and 1995, American Premier completed the divestiture of all of its non-insurance subsidiaries. In June 1994, American Premier sold its last major non-insurance asset, namely its investment in General Cable common stock and notes, for $177 million. American Premier received approximately $42 million in cash and $11 million in notes for other non-insurance assets sold.
_____________________________________________________
Chiquita Brands International
Data in this section generally has been taken from Chiquita's 1994 Form 10-K.
Chiquita is a leading international marketer, processor and producer of quality fresh and processed food products. Chiquita employs approximately 45,000 persons, 36,000 of whom are employed in Central and South America and 5,000 of whom are employed in the Meat Division which is held for sale. In recent years, it 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, apples, avocados, citrus, grapes, kiwi, mangos and nectarines sold under the "Chiquita" brand name;
* Bananas, citrus and other quality fresh fruit including apples, apricots, cherries, grapes, 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. Sales of bananas comprise approximately 60% of Chiquita's total net sales, excluding the Meat Division.
In 1994, Chiquita sold over 40% of its total banana volumes in each of Europe and North America. 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 1994, approximately 35% of all bananas sold by Chiquita were sourced from Panama. Bananas sourced from other countries, including Colombia, Costa Rica, Guatemala and Honduras, comprised from 4% to 19% (depending on the country) of bananas sold by Chiquita in 1994. Approximately two-thirds of the bananas sourced by Chiquita in 1994 were produced by subsidiaries and the remainder were purchased under purchase fruit arrangements from suppliers. Chiquita's low concentration of banana production 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 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," "Naked Juice," "Friday" and other brands;
* Wet, fresh cut and ready-to-eat salads sold under the "Club Chef" and "Naked Foods" 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 Chiquita's specifications. Chiquita also produces and sells banana puree, sliced bananas and other specialty banana products to producers of baby food, fruit beverages, baked goods and fruit-based products, to wholesalers of bakery and dairy food products and to selected licensees. 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. Chiquita markets, refines and produces shortening, margarine and vegetable oil products from oil palm grown on Chiquita's plantations located in Costa Rica and Honduras.
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 major component of its Meat Division in December 1992 and has since made significant progress including: (i) successful ongoing cost reduction efforts that have contributed to improved Meat Division operating results; (ii) terminating retiree medical benefits; (iii) obtaining government subsidies and union concessions; (iv) obtaining stand alone working capital financing; and (v) the sale of the specialty meat operations in 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 operations.
_____________________________________________________
Citicasters
Data in this section generally has been taken from Citicasters' 1994 Form 10-K.
Citicasters is engaged in the ownership and operation of radio and television stations. In June 1994, Citicasters changed its name from Great American Communications Company to reflect its identity as an owner and operator of radio and television broadcast stations in metropolitan markets. At December 31, 1994, Citicasters and its subsidiaries employed approximately 700 full-time employees and 200 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 Citicasters common stock. In addition, AFC contributed $7.5 million of new capital to Citicasters in exchange for additional common stock and 14% notes.
In June 1994, AFEI purchased 1.2 million shares of Citicasters common stock for $23.9 million in cash. During the second half of 1994, Citicasters repurchased 2.4 million shares of its common stock at a total cost of $51.1 million. At December 31, 1994, AFC owned 37% of Citicasters' voting common stock; AFC's Chairman owned an additional 17% of the stock.
During 1994, Citicasters sold its television stations in Birmingham, Greensboro/High Point, Kansas City, and Phoenix to New World Communications Group Inc. for $355 million in cash and a five-year warrant to purchase 5 million shares of New World Class A common stock at $15 per share. Citicasters used the cash generated from this sale to retire in excess of $300 million in debt and to repurchase 2.4 million shares of stock. Citicasters also sold its radio stations in Milwaukee, Denver and Detroit during 1994 for an aggregate of $26.5 million. During 1994, Citicasters acquired its second FM radio station in Sacramento for $16 million and reached an agreement to acquire its second FM station in Cincinnati for $15 million. Citicasters has also entered into agreements to acquire second FM radio stations in the Tampa and Portland markets.
At December 31, 1994, Citicasters owned and/or operated two network-affiliated television stations, ten FM radio stations and four 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 1994.
(A) Rankings are based on Arbitron Radio Report services, generally for all persons aged 12 and over and for all hours of the week except overnight. (B) AOR - Album Oriented Rock C - Country AC - Adult Contemporary CH - Contemporary Hits CR - Classic Rock (C) Operated under a local marketing arrangement as of December 31, 1994; under agreement for purchase for which a closing is anticipated in the first quarter of 1995. (D) Separate rating not meaningful. These stations are operated in conjunction with the related FM station.
Substantially all of Citicasters' 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.
Citicasters' AM radio stations offer their listeners a wide range of programs including news, music, discussion, commentary and sports. Citicasters' FM radio stations offer programming more focused on music.
Federal Communication Commission ("FCC") rules permitting ownership of two FM and two AM radio stations in certain markets (a "duopoly") have created opportunities for Citicasters to increase advertising revenues and may reduce operating expenses. Citicasters expects to purchase, sell or exchange radio stations in order to take advantage of the considerable operating opportunities presented by the duopoly rules.
Citicasters' 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. 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 news, entertainment, sports, public affairs and religious programs.
_____________________________________________________
Other Companies
AFEI is a holding company with assets consisting primarily of investments in the common stock of American Premier, American Annuity and Citicasters.
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 (office buildings and The Cincinnatian Hotel), Louisiana (Le Pavillon Hotel), Massachusetts (Chatham Bars Inn) and apartments in Alabama, Florida, Kentucky, Louisiana, Minnesota, Oklahoma, Pennsylvania, Texas and Wisconsin; and Financial World Magazine. These operations employ approximately 700 full-time employees.
In June 1994, AFC sold its investment in General Cable common stock to an unaffiliated company for $27.6 million in cash. General Cable was formed in 1992 to hold American Premier's wire and cable and heavy equipment manufacturing businesses.
AFC was engaged in the distribution and production of filmed entertainment programming through Spelling Entertainment Group. In 1993, AFC sold its common stock investment in Spelling to Blockbuster Entertainment 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.
In 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 the wholly-owned Kings Island, one of the top ten theme parks in the United States based on attendance. In 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, 1994, 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.
Fixed Maturity Investments
Unlike most insurance groups which have portfolios that are invested heavily in tax-exempt bonds, AFC invests substantial amounts in taxable bonds. The National Association of Insurance Commissioners ("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 mandatory redeemable preferred stocks, by NAIC designation (and comparable Standard & Poor's Corporation rating) as of December 31, 1994 (dollars in millions).
(*)less than 1%
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, the number of 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 mandatory redeemable preferred stocks is interest and dividend income rather than realization of capital gains. AFC invests in bonds and mandatory redeemable preferred stocks that have primarily short-term and intermediate-term maturities. This practice allows flexibility in reacting to fluctuations of interest rates.
Equity Investments
AFC's equity investment practice permits concentration of attention on a relatively limited number of companies in relatively few industries, principally insurance, financial services and food products. Some of the equity 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.
_____________________________________________________
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. Radio and television broadcast revenues generally tend to be higher in the second and fourth calendar 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.
Great American, American Premier 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, products offered, 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 insurance 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 AFC insurance companies. 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.
Citicasters' 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.
_____________________________________________________
Regulation
AFC's insurance companies 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, continuing service arrangements with affiliates and certain other transactions. 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, 1993. 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 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 1994, 43 states were accredited, including Ohio.
The NAIC has 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 became effective with the filing of the 1994 Annual Statement for property and casualty companies. Based on the 1994 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 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. A draft of the model law was released for comment in 1994. It is not possible to predict the content of the final law. However, based on the draft released in 1994, it is not expected that the final law will have a material impact on the investment activities of 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 countries where it sources and markets its products, including import quotas and tariffs, currency exchange controls and taxes. In 1993, the European Union ("EU") implemented a new quota effectively restricting the volume of Latin American bananas imported into the EU, which had the effect of decreasing Chiquita's volume and market share in Europe. In two separate rulings, General Agreement on Tariffs and Trade ("GATT") panels found this banana policy to be illegal. In March 1994, four of the countries which had filed GATT actions against the EU banana policy (Costa Rica, Colombia, Nicaragua and Venezuela) reached a settlement with the EU by signing a "Framework Agreement". This agreement authorizes the imposition of additional restrictive and discriminatory quotas and export licenses on U.S. banana marketing firms, while leaving EU firms exempt. Full implementation of the agreement and related regulations could significantly increase Chiquita's cost to export bananas from these sources. Three additional European countries (Sweden, Finland and Austria) joined the EU in January 1995. These countries, which have had substantially unrestricted banana markets in which Chiquita has supplied a significant portion of the bananas, are in the process of transition to the more restrictive EU quota and licensing environment.
In September 1994, Chiquita and the Hawaii Banana Industry Association made a joint filing with the Office of the U.S. Trade Representative under Section 301 of the U.S. Trade Act of 1974, charging that the EU quota and licensing regime and the Framework Agreement are unreasonable, discriminatory and a burden and restriction on U.S. commerce. In October 1994, in response to this petition, the U.S. Government initiated a formal investigation of the EU banana import policy. In January 1995, the U.S. Government announced a preliminary finding against the EU banana import policy and launched separate investigations of the Colombian and Costa Rican Framework Agreement policies. The EU, Colombian and Costa Rican investigations are continuing. Section 301 authorizes retaliatory measures, such as tariffs or withdrawal of trade concessions, against the offending countries. However, there can be no assurance as to the results of the investigation, the nature and extent of actions the U.S. Government might take, or the impact on the EU quota regime or the Framework Agreement.
Citicasters' 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 in downtown Cincinnati. AFC and its affiliates occupy about three-fifths of the aggregate 580,000 square feet of commercial and office space. American Premier and Citicasters lease their headquarters in one of these buildings.
GAI, its subsidiaries, and American Premier's insurance subsidiaries lease the majority of their office and storage facilities in numerous cities throughout the United States, including GAI's and American Annuity's home offices in Cincinnati.
Citicasters owns three of its studio buildings and eight of its transmission sites.
Chiquita owns approximately three-fourths of the 171,000 acres used for the cultivation of its bananas and oil palm and support activities. It also owns over one-half of the 42 ocean-going refrigerated vessels used primarily for transporting tropical fruit.
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. which entered bankruptcy and receivership proceedings in 1985 and 1986. 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"), and others were added as cross-defendants to that litigation by the Commissioner. The Commissioner's cross-complaint against the AFC Defendants 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. In 1990, the Commissioner entered into a Partial Settlement Agreement with the AFC Defendants and others providing they 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 the misconduct by one or more of the AFC Defendants or others. The liability of any AFC Defendant or other party must be determined on an individual comparative fault basis. The AFC Defendants have denied all material allegations. A preliminary finding was reached in December 1994 denying the Commissioner's claims against the reinsurers which the trial court is expected to accept. Management believes there is little likelihood that this litigation will have a material impact on AFC's financial statements.
The following information has been summarized from "Legal Proceedings" of American Premier's 1994 Form 10-K. In May 1994, USX Corporation and an affiliated company ("USX") filed actions against American Premier seeking indemnification and contribution for all or a portion of the approximately $600 million paid under a judgment in an antitrust action. USX alleged that the judgment was attributable to activities of certain pre-1976 railroad operations of an American Premier predecessor company. The predecessor company had been dismissed by the court as a defendant in the earlier action. American Premier believes that the actions are without merit and that it has substantial defenses. In June 1994, American Premier requested a court order to enjoin the litigation. That order was granted in October 1994. USX has appealed.
PART II
ITEM 5
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).
(A) Fixed charges are computed on a "total enterprise" basis. For purposes of calculating the ratios, "earnings" have been computed by adding to pretax earnings (excluding discontinued operations) the fixed charges and the minority interest in earnings of subsidiaries having fixed charges and deducting (adding) the undistributed equity in earnings (losses) of investees. Fixed charges include interest (excluding interest on annuity policyholders' funds), amortization of debt discount and expense, preferred dividend requirements of subsidiaries and a portion of rental expense deemed to be representative of the interest factor.
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 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.
1995 MERGER
On March 23, 1995, shareholders of American Premier Underwriters, Inc. ("American Premier") approved a transaction whereby the owners of 100% of AFC's Common Stock will exchange their shares for approximately 55% of the voting shares of a newly formed holding company, American Premier Group, Inc. ("New American Premier"), making AFC a subsidiary of New American Premier. In addition, American Premier will merge with a newly formed subsidiary of New American Premier and all shareholders of American Premier, including AFC and its subsidiaries, will receive shares of New American Premier common stock on a one-for-one basis. Consummation of the merger is pending receipt of a ruling from the Internal Revenue Service which is expected at the end of March or early April. See Note A to the financial statements.
Following the merger, AFC expects to borrow funds from American Premier to retire substantial portions of its debt. Which issues and how much of AFC's debt will be retired and what rate of interest will be charged on funds borrowed from American Premier have not been determined. The balance sheet effects of any such debt retirements are not expected to be material. The earnings effect will depend primarily on the difference, if any, between the interest rate charged by American Premier and the rates on the debt to be retired.
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.
The ratio of AFC's (parent only) long-term debt to equity (excluding Capital Subject to Mandatory Redemption) was 1.24, 1.06 and 1.99 at December 31, 1994, 1993, and 1992, respectively. Ratios of earnings to fixed charges, excluding and including preferred dividends, for the three years ended December 31, 1994, are shown below.
The National Association of Insurance Commissioners has adopted a model law enacting risk based capital ("RBC") formulas which applies to both life and property and casualty companies. The RBC formulas determine the amount of capital that an insurance company needs to ensure that it has an acceptably low expectation of becoming financially impaired. At December 31, 1994, the capital ratios of all AFC insurance companies exceed the RBC requirements by substantial amounts.
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) affiliates" in the following table. At December 31, 1994, GAHC had borrowings of $160 million outstanding 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 $370 million of which $164 million was available at December 31, 1994.
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. Under Ohio 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. The maximum amount of
dividends payable (without prior approval) in 1995 from GAI based on its 1994 policyholders' surplus is approximately $95 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, 1994, AFC's insurance companies owned publicly traded equity securities of affiliates with a market value of $914 million, including equity securities of AFC subsidiaries of $485 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. Following the 1995 merger, AFC and American Premier will each continue to file consolidated returns as common parents of separate consolidated tax groups.
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 costs, which are estimated to be between $8.6 million and $14 million, associated with the sales of former manufacturing properties. The subsidiary has reserved $11.7 million at December 31, 1994.
Great American's liability for unpaid losses and loss adjustment expenses includes amounts for various liability coverages related to environmental and hazardous product claims. The insurance industry typically includes only claims relating to polluted waste sites and asbestos in defining environmental exposures, whereas Great American extends this definition to include claims relating to breast implants, repetitive stress on keyboards, DES (a drug used in pregnancies years ago alleged to cause cancer and birth defects), and other latent injuries. At December 31, 1994, Great American had recorded $227 million (net of reinsurance recoverables of $155 million) for 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.
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 were $16 million, $32 million and $53 million in 1994, 1993 and 1992, 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, 1994, 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, 1994, the average maturity of AFC's borrowings on a parent only basis was approximately 7 years; the average interest rate on those borrowings was 10.7%. Comparable figures for three years ago are 8 years maturity and 11.6% stated interest rate (12.9% effective rate).
AFC often extends the maturities of its long-term debt through exchange offers which strengthen AFC's capital structure and enable it to utilize the cash savings for other corporate purposes. In April 1994, AFC issued $203.8 million of 9-3/4% Debentures due April 20, 2004 in exchange for a portion of its publicly traded debentures. A cash premium of $6.5 million on the debentures exchanged is included in Extraordinary Items in the Statement of Operations. AFC also redeemed at par all 13-1/2% Debentures not tendered in the exchange for approximately $63.2 million in cash.
Following its merger with a newly formed subsidiary of New American Premier in 1995, AFC intends to repay or redeem substantial amounts of its debt with proceeds of up to $625 million of borrowings from American Premier under long-term subordinated notes payable. Interest payments on parent company debt afterwards are expected to approximate $50 million to $55 million annually through 1999, a significant portion of which will be payable to American Premier. Dividend payments on preferred stock are expected to be $25 million annually for the same period.
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 94% of the bonds and redeemable preferred stocks held by AFC were rated "investment grade" (credit rating of AAA to BBB) at December 31, 1994, 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: 1994 - $50 million; 1993 - $165 million; 1992 - $104 million; 1991 - $38 million and 1990 - ($89 million.)
At December 31, 1994, AFC had gross unrealized gains and losses on bonds and redeemable preferred stocks and equity securities as follows (in millions):
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, 1994, AFC's mortgage-backed securities portfolio, which consisted primarily of collateralized mortgage obligations ("CMOs"), represented approximately 25% of AFC's bonds and mandatory redeemable preferred stocks. At that date, interest only (I/Os), principal only (P/Os) and other "high risk" CMOs represented approximately eight-tenths of one percent of AFC's total mortgage-backed securities 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 discounts 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 primarily 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, 1994
General Due to decreases in ownership percentages, AFC ceased accounting for American Premier and Spelling as subsidiaries and began accounting for them as investees in April 1993 and July 1992, respectively. 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.
Pretax earnings were $44 million in 1994 compared to $262 million in 1993 and a pretax loss of $145 million in 1992.
Results for 1994 include AFC's share ($28 million) of American Premier's loss on the sale of General Cable notes, GAI's $19 million charge relating to a rate rollback liability in California and a $35 million charge related to payments under AFC's Book Value Incentive Plan. These items were partially offset by a $42 million decrease in interest expense.
Results for 1993 include (i) $155 million in gains from the sales of AFC's insurance agency operations, Spelling Entertainment Group and 4.5 million shares of American Premier and additional proceeds received on the 1990 sale of the NSA Group, and (ii) AFC's share ($52 million) of a tax benefit recorded by American Premier in the second, third and fourth quarters of 1993. These items were partially offset by a write-off of debt discount and expenses of $24 million.
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.
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 103.6% in 1994, 103.9% in 1993 and 105.0% in 1992. Total net losses to AFC's insurance operations from catastrophes (natural disasters and other incidents of major loss) were $51 million in 1994, $26 million in 1993 and $42 million in 1992. The 1994 catastrophes included $20.0 million ($20.2 million before reinsurance) related to winter storms and $19 million ($41 million before reinsurance) related to the Northridge, California earthquake. These losses represented 1.5% and 1.4% of Great American's combined ratio. The 1994 ratio does not reflect Great American's charge for California's Proposition 103.
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 1994, Great American's underwriting results significantly outperformed the industry average for the ninth consecutive year. Great American has been able to exceed the industry's results by focusing on highly specialized niche products, supplemented by commercial lines coverages and personal automobile products.
An unusually large loss for "property and multiple peril" coverage in 1992 generally reflects the effects of Hurricanes Andrew and Iniki.
Unusually good results for "workers' compensation and other liability" coverage in 1992 and 1994 generally reflect reductions in redundant reserves on certain matured coverages, and general improvement in 1994 in workers' compensation due to industry-wide reforms, improved pricing, and favorable trends in medical care inflation and incidents of fraud, along with emphasis on specific programs (i.e. Drug- Free Workplace) and a focus on profitable pockets of business and classes.
An unusually large loss for "all other" coverage in 1994 generally reflects the effects of the Northridge, California earthquake and poor results from an industrial risk pool arrangement.
See the discussion of Underwriting and Loss and Loss Adjustment Expense Reserves under Item 1 - "Business - Great American Insurance Group".
1994 compared to 1993 Property and casualty premiums decreased $116 million (8%) in 1994 reflecting the deconsolidation of American Premier's insurance operations. Insurance premiums for the remainder of AFC's insurance group increased $138 million due to an increase in sales of specialized niche products and workers' compensation and an increase in the percentage of business retained in specialty lines.
1993 compared to 1992 Property and casualty insurance premiums decreased $657 million (31%) in 1993 reflecting the deconsolidation of American Premier. 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.
1994 compared to 1993 Excluding American Premier, investment income increased $20 million (4%) due to an increase in average investments held.
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.
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.
1994 compared to 1993 AFC's equity in net earnings (losses) of investee corporations in 1994 includes its share ($28 million) of American Premier's loss on the sale of General Cable notes and its share ($52 million) of American Premier's tax benefit in 1993. Chiquita's loss before extraordinary items was comparable in 1994 and 1993 as improvements in Meat Division operations and banana pricing were offset by charges and losses relating to farm closings and banana cultivation write-downs in Honduras and a substantial reduction of Chiquita's Japanese banana trading operations.
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 $107 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%.
Gains on Sales of Investees The gain on sale of investees in 1994 represents a pretax gain on the sale of General Cable common stock.
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 fourth quarter pretax gains of (i) $44 million from the sale of American Business Insurance, Inc. and (ii) $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.
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), Spelling Entertainment Inc. (through June 1992) and Kings Island Theme Park (through September 1992).
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. Entertainment revenues reflect Spelling's television production and distribution operations.
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 compared to 1992.
Benefits to Annuity Policyholders 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 rate at which GALIC credits interest on annuity policyholders' funds is subject to change based on management's judgment of market conditions.
Annuity receipts totaled $443 million in 1994, $400 million in 1993 and $360 million in 1992. Annuity receipts in 1994 increased 10.6% over 1993 due to strong growth in sales of single premium products. Receipts in 1993 increased primarily due to the introduction of new single premium products in the second half of 1992. Annuity surrender payments have averaged approximately 8% of statutory reserves over the past three years.
1994 compared to 1993 Benefits to annuity policyholders increased $13 million (6%) primarily due to an increase in average annuity policyholder funds accumulated.
1993 compared to 1992 Benefits to annuity policyholders 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.
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):
AFC Parent's interest expense decreased in 1994 due to (i) the issuance of $204 million of 9-3/4% Debentures in exchange for higher rate debt and (ii) the repurchase of $79 million principal amount of debentures. GAHC's interest expense decreased in 1993 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):
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 See Note L to the Financial Statements for an analysis of other items affecting AFC's effective tax rate. Certain subsidiaries were not able to recognize tax benefits on significant operating losses in 1992, accordingly, AFC's effective tax rate was greater than the normal rate of 34%.
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 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.
Recent Accounting Standards The following Statements of Financial Accounting Standards ("SFAS") have been implemented by AFC in 1992, 1993 or 1994 or will be implemented in 1995. The implementation of these standards is discussed under various subheadings of Note B to the Financial Statements; effects of each are shown in relevant Notes. Implementation of SFAS No. 114 in the first quarter of 1995 is not expected to have a significant effect on AFC.
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
"Selected Quarterly Financial Data" has been included in Note Q to the Consolidated Financial Statements.
PART III
ITEM 10
ITEM 10
Directors and Executive Officers of the Registrant
The directors and executive officers of AFC at March 1, 1995, are:
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"), American Premier, Chiquita and Citicasters. AFC owns a substantial beneficial interest (over 20%) in all of these companies.
Richard E. Lindner was owner, Chairman of the Board of Directors, President and Chief Executive Officer of Thriftway, Inc., a supermarket chain otherwise unaffiliated with AFC, and had been associated with that company for over five years prior to its sale in March 1995.
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 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 and an executive officer of AMM 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.
In December 1993, Great American Communications completed a comprehensive financial restructuring which included a prepackaged plan of reorganization filed in November of that year under Chapter 11 of the Bankruptcy Code. Carl H. Lindner, Thomas E. Mischell and Fred J. Runk were executive officers of that company within two years before its bankruptcy reorganization.
The information required by the following Items will be provided within 120 days after the 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, 1994 and 1993, 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, 1994. 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. and General Cable Corporation (1993 and 1992). Those statements were audited by other auditors whose reports have been furnished to us. The reports pertaining to the statements of American Premier Underwriters, Inc. and General Cable Corporation 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 F, 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note B 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 LLP
Cincinnati, Ohio March 28, 1995
REPORT OF AMERICAN PREMIER'S INDEPENDENT AUDITORS
American Premier Underwriters, Inc.
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, 1994 (not presented separately herein). These financial statements and the 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, 1994 and 1993 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, 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 7 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 LLP
Cincinnati, Ohio February 15, 1995 (March 23, 1995 with respect to the acquisition of American Financial Corporation as discussed in Note 2 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
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands)
See notes to consolidated financial statements.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands)
See notes to consolidated financial statements.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL ACCOUNTS (In Thousands)
See notes to consolidated financial statements.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands)
See notes to consolidated financial statements.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________________________________________________________
INDEX TO NOTES
_____________________________________________________________
A. 1995 Merger On March 23, 1995, shareholders of American Premier Underwriters, Inc. ("American Premier") approved the merger of American Financial Corporation ("AFC") with a newly formed subsidiary of American Premier Group, Inc. ("New American Premier"), another new company formed to own 100% of the common stock of both AFC and American Premier. In the transaction, Carl H. Lindner and members of his family, who own 100% of the Common Stock of AFC, will exchange their AFC Common Stock for approximately 55% of New American Premier voting common stock. Shareholders of American Premier, including AFC and its subsidiaries, will receive shares of New American Premier stock on a one-for-one basis. No gain or loss will be recorded on the exchange of shares.
AFC will continue to be a separate SEC reporting company with publicly traded debentures and preferred stock. Holders of AFC Series F and G Preferred Stock will be granted voting rights equal to approximately 21% of the total voting power of AFC shareholders immediately prior to the merger. AFC and New American Premier have stated that they will likely redeem substantial amounts of the debt of American Premier, AFC and AFC's wholly-owned subsidiaries.
B. Accounting Policies
Basis of Presentation The consolidated financial statements include the accounts of AFC and its subsidiaries. Changes in ownership levels of 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.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AFC's ownership of subsidiaries and significant investees with publicly traded shares at December 31, was as follows:
(a) Sold in June 1994. (b) Sold in March 1993.
Investments AFC implemented Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," beginning December 31, 1993. This standard requires (i) debt securities be classified as "held to maturity" and reported at amortized cost if AFC has the positive intent and ability to hold them to maturity, (ii) debt and equity securities be classified as "trading" and reported at fair value, with unrealized gains and losses included in earnings, if they are bought and held principally for selling in the near term and (iii) debt and equity securities not classified as held to maturity or trading be classified as "available for sale" and reported at fair value, with unrealized gains and losses reported as a separate component of shareholders' equity. Only in certain limited circumstances, such as significant issuer credit deterioration or if required by insurance or other regulators, may a company change its intent to hold a certain security to maturity without calling into question its intent to hold other debt securities to maturity in the future. Implementation of SFAS No. 115 had no effect on net earnings.
Premiums and discounts on mortgage-backed securities are amortized over their expected average lives using the interest method. Gains or losses on sales of securities are recognized at the time of disposition with the amount of gain or loss determined on the specific identification basis. 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.
Short-term investments are carried at cost; loans receivable are stated primarily at the aggregate unpaid balance.
Investment in Investee Corporations Investments in securities of 20%- to 50%-owned companies are carried at cost, adjusted for AFC's proportionate share of their undistributed earnings or losses. Investments in less than 20%-owned companies are accounted for by the equity method when, in the opinion of management, AFC can exercise significant influence over operating and financial policies of the investee.
Due to financial difficulties experienced by GACC, AFC ceased accounting for it as an investee, transferred all GACC securities and loans to the investee account and reduced the carrying value of the aggregate 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.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Cost in Excess of Net Assets Acquired The excess of cost of subsidiaries and investees (purchased subsequent to October 1970) over AFC's equity in the underlying net assets ("goodwill") is being amortized over 40 years. The excess of AFC's equity in the net assets of other subsidiaries and investees over its cost of acquiring these companies ("negative goodwill") has been allocated to AFC's basis in these companies' fixed assets, goodwill and other long-term assets and is amortized on a 10- to 40-year basis.
Insurance As discussed under "Reinsurance" below, unpaid losses and loss adjustment expenses and unearned premiums have not been reduced for reinsurance recoverable.
Reinsurance In the normal course of business, AFC's insurance subsidiaries cede reinsurance to other companies to diversify risk and limit maximum loss arising from large claims. To the extent that any reinsuring companies are unable to meet obligations under the agreements covering reinsurance ceded, AFC's insurance subsidiaries would remain liable. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsurance policies. AFC's insurance subsidiaries report as assets (a) the estimated reinsurance recoverable on unpaid losses, including an estimate for losses incurred but not reported, and (b) amounts paid to reinsurers applicable to the unexpired terms of policies in force. AFC's insurance subsidiaries also assume reinsurance from other companies. Income on reinsurance assumed is recognized based on reports received from ceding reinsurers.
Deferred Policy Acquisition Costs Policy acquisition costs (principally commissions, premium taxes and other underwriting expenses) related to the production of new business are deferred and included in "Prepaid expenses, deferred charges and other assets". For the property and casualty companies, the deferral of acquisition costs is limited based upon their recoverability without any consideration for anticipated investment income. Deferred policy acquisition costs ("DPAC") are charged against income ratably over the terms of the related policies. For the annuity company, DPAC is amortized, with interest, in relation to the present value of expected gross profits on the policies.
Unpaid Losses and Loss Adjustment Expenses The net liabilities stated for unpaid claims and for expenses of investigation and adjustment of unpaid claims are based upon (a) the accumulation of case estimates for losses reported prior to the close of the accounting period on the direct business written; (b) estimates received from ceding reinsurers and insurance pools and associations; (c) estimates of unreported losses based on past experience and (d) estimates based on experience of expenses for investigating and adjusting claims. These liabilities are subject to the impact of changes in claim amounts and frequency and other factors. In spite of the variability inherent in such estimates, management believes that the liabilities for unpaid losses and loss adjustment expenses are adequate. Changes in estimates of the liabilities for losses and loss adjustment expenses are reflected in the Statement of Operations in the period in which determined.
Premium Recognition Premiums are earned over the terms of the policies on a pro rata basis. Unearned premiums represent that portion of premiums written
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
which is applicable to the unexpired terms of policies in force. On reinsurance assumed from other insurance companies or written through various underwriting organizations, unearned premiums are based on reports received from such companies and organizations.
Annuity Policyholders' Funds Accumulated Annuity receipts and benefit payments are generally recorded as increases or decreases in "annuity policyholders' funds accumulated" rather than as revenue and expense. Increases in this liability for interest credited are charged to expense and decreases for surrender charges are credited to other income.
Income Taxes AFC files consolidated federal income tax returns which include all 80%-owned U.S. subsidiaries. Effective January 1, 1992, AFC implemented SFAS No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases and are measured using enacted tax rates. Deferred tax assets are recognized if it is more likely than not that a benefit will be realized.
Benefit Plans AFC's Employee Stock Ownership Retirement Plan ("ESORP") is a noncontributory, trusteed plan which invests in securities of AFC and affiliates for the benefit of the employees of AFC and certain of its subsidiaries. The ESORP covers all employees of participating companies who are qualified as to age and length of service. Contributions are discretionary by the directors of participating companies and are charged against earnings in the year for which they are declared.
Under AFC's Book Value Incentive Plan, units were granted at initial values between 80% and 120% of "book value" to key employees. Units were exercisable at any time, to the extent vested. Prior to 1995, (i) payments were made to the holder 50% in cash and the remainder in installments over a ten-year period with an assumed interest factor of 12% per annum and (ii) the value of the units (the excess of the current book value of a share of AFC Common Stock, as defined, over the initial value of the units at the date of grant) was being accrued over the vesting period (five years). In connection with the 1995 merger, full vesting will be granted and the plan terminated. Cash payments to be made to holders of the units were accrued at December 31, 1994.
AFC and many of its subsidiaries provide health care and life insurance benefits to eligible retirees. The projected future cost of providing these benefits is expensed over the period the employees qualify for such benefits.
Effective January 1, 1994, AFC implemented SFAS No. 112, "Employers' Accounting for Postemployment Benefits" which covers benefits provided to former or inactive employees (primarily those on disability) who were not deemed retired under other company plans. This standard requires companies to accrue the projected future cost of providing postemployment benefits instead of recognizing an expense for these benefits when paid. The implementation of SFAS No. 112 did not have a material effect on AFC's financial position or results of operations.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Debt Discount Debt discount and expenses are being amortized over the lives of respective borrowings, generally on the interest method. Unamortized balances are charged off in the event of early retirement of the related debt.
Statement of Cash Flows For cash flow purposes, "investing activities" are defined as making and collecting loans and acquiring and disposing of debt or equity instruments and property and equipment. "Financing activities" include obtaining resources from owners and providing them with a return on their investments, borrowing money and repaying amounts borrowed. Annuity receipts, benefits and withdrawals are also reflected as financing activities. All other activities are considered "operating". Short-term investments having original maturities of three months or less when purchased are considered to be cash equivalents for purposes of the financial statements.
Fair Value of Financial Instruments Methods and assumptions used in estimating fair values are described in Note R to the financial statements. These fair values represent point-in-time estimates of value that might not be particularly relevant in predicting AFC's future earnings or cash flows.
C. Acquisitions and Sales of Subsidiaries and Investees
General Cable In June 1994, AFC sold its investment in General Cable common stock to an unaffiliated company for $27.6 million in cash. AFC realized a $1.7 million pretax gain on the sale (excluding its share of American Premier's loss on its sale of General Cable notes).
American Business Insurance In October 1993, AFC sold its insurance brokerage operation, American Business Insurance, Inc., to Acordia, Inc., an Indianapolis-based insurance broker. 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 recognized a pretax gain of approximately $44 million on the sale.
American Premier In August 1993, AFEI, whose assets consisted primarily of investments in American Premier, General Cable and AAG, sold 4.5 million shares of American Premier common stock in a secondary public offering. AFEI used the net proceeds of approximately $151 million to retire most of its debt. AFC recognized a pretax gain of $28.3 million, before minority interest, on the sale, including recognition of a portion of previously deferred gains related to sales of assets to American Premier from AFC subsidiaries. In anticipation of the reduction of AFC's ownership of American Premier below 50%, AFC ceased accounting for it as a subsidiary and began accounting for it as an investee in April 1993.
In December 1993, American Premier paid AFC $52.8 million (including $12.8 million in interest) representing an adjustment on the 1990 sale of AFC's non-standard automobile group to American Premier. AFC recorded an additional pretax gain of $31.4 million on this transaction after deferring $21.4 million based on its ownership of American Premier.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Citicasters In connection with the completion of GACC's plan of reorganization in December 1993, AFC received 2.3 million shares of new common stock in exchange for its previous holdings of GACC stock and debt. In connection with the plan, AFC also invested an additional $7.5 million in GACC common stock and debt securities.
In June 1994, AFEI purchased 1.2 million shares of Citicasters common stock for $23.9 million in cash.
Great American Life Insurance Company In December 1992, AFC sold Great American Life Insurance Company ("GALIC") to American Annuity Group for $468 million in cash. In connection with the sale, AFC purchased 5.1 million shares of AAG's common stock pursuant to a tender offer and an additional 17.1 million newly issued shares, increasing AFC's ownership from 39% to approximately 82%. No gain or loss was recorded on the sale of GALIC. Following the transaction, AFC began accounting for AAG as a subsidiary.
Spelling In 1992, AFC's ownership of Spelling decreased below 50% and, accordingly, AFC ceased accounting for Spelling as a subsidiary and began accounting for it as an investee. In March 1993, AFC sold its common stock investment in Spelling to Blockbuster Entertainment in exchange for Blockbuster common stock and warrants. AFC realized a $52 million pretax gain on the sale.
Kings Island Theme Park In 1992, AFC sold Kings Island to an unaffiliated party for approximately $210 million in cash. AFC realized a $64.5 million pretax gain on the transaction.
D. Segments of Operations Through subsidiaries, AFC is engaged in several financial businesses, including property and casualty insurance, annuities and portfolio investing. AFC also owns significant portions of the voting equity securities of certain companies (investee corporations - see Note F).
The following tables (in thousands) show AFC's assets, revenues and operating profit (loss) by significant business segment. Capital expenditures, depreciation and amortization are not significant. Operating profit (loss) represents total revenues less operating expenses. Goodwill and its amortization have been allocated to the various segments to which they apply. General corporate assets and expenses have not been identified or allocated by segment since they are not material.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(a) Not allocable to lines of insurance. (b) Includes American Premier's non-insurance operations and Spelling for the periods they were accounted for as consolidated subsidiaries. (c) Revenues include sales of products and services as well as other income earned by the respective segments. (d) Represents primarily investment income and realized gains. (e) Includes holding company expenses.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. 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, 1994. Data based on market value is generally the same. Mortgage-backed securities had an average life of approximately 8 years at December 31, 1994.
________________ (*) less than 1%
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Realized gains (losses) and changes in unrealized appreciation (depreciation) on fixed maturity and equity security investments are summarized as follows (in thousands):
(*) Gross gains of $12.7 million, $69.4 million and $85.2 million and gross losses of $13.8 million, $16.5 million and $4.7 million were realized on sales of fixed maturity investments during 1994, 1993 and 1992, respectively.
As of February 28, 1995, the pretax unrealized losses on AFC's "available for sale" portfolio and "held to maturity" portfolio had decreased approximately $60 million and $180 million, respectively.
Transactions in fixed maturity investments included in the Statement of Cash Flows for 1994 consisted of the following (in thousands):
(a) Securities classified as "held to maturity" having an amortized cost of $8.7 million were sold for a loss of $712,000 in 1994 due to significant deterioration in the issuer's creditworthiness.
(b) Gross gains of $9.4 million and gross losses of $11.2 million were realized on sales of fixed maturity securities classified as "available for sale".
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. 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 was approximately $890 million and $940 million at December 31, 1994 and 1993, respectively.
AFC's investment (and common stock ownership percentage) and equity in net earnings and losses of investees are stated below (dollars in thousands):
(a) Accounted for as an investee beginning April 1, 1993. (b) AFC's equity in Chiquita's 1994 net loss excludes AFC's share of Chiquita's extraordinary loss on prepayment of debt. (c) Spun-off from American Premier in July 1992. Sold in June 1994.
American Premier is a property and casualty insurance company. Chiquita is a leading international marketer, processor and producer of quality food products. Citicasters owns and operates television and radio stations. In May 1994, Citicasters changed its name from Great American Communications Company to reflect its identity as a pure broadcaster focused on metropolitan markets.
Due to financial difficulties experienced by GACC, 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.
Included in AFC's consolidated retained earnings at December 31, 1994, was approximately $290 million applicable to equity in undistributed net earnings of investees.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summarized financial information for AFC's investees at December 31, 1994, is shown below (in millions). See "Investee Corporations" in Management's Discussion and Analysis.
(*) Amounts for 1993 and 1992 were reclassified by Chiquita in 1994 to reflect the reconsolidation of its Meat Division.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. Cost in Excess of Net Assets Acquired At December 31, 1994 and 1993, accumulated amortization of the excess of cost over net assets of purchased subsidiaries amounted to approximately $100 million and $94 million, respectively. Amortization expense was $6.1 million in 1994, $15.0 million in 1993 and $25.0 million in 1992.
H. Long-Term Debt Long-term debt consisted of the following at December 31, (in thousands):
See Note A - 1995 Merger. At December 31, 1994, sinking fund and other scheduled principal payments on debt for the subsequent five years were as follows (in thousands):
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Debentures purchased in excess of scheduled payments may be applied to satisfy any sinking fund requirement. The scheduled principal payments shown above assume that debentures purchased are applied to the earliest scheduled retirements.
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 anticipation of the offer, 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.
In the exchange offer (completed in April 1994), AFC issued approximately $203.8 million of the 9-3/4% Debentures. A cash premium of $6.5 million on the debentures exchanged is included in Extraordinary Items in the Statement of Operations. AFC also redeemed at par all 13-1/2% Debentures not tendered in the exchange for approximately $63.2 million in cash.
GAHC has a 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 property and casualty 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 1994, AAG entered into a $50 million revolving credit agreement with three banks. Loans under the credit agreement bear interest at floating rates based on prime or Eurodollar rates and are collateralized by 20% of the common stock of GALIC.
During 1994, AAG repurchased $21.1 million principal amount of its 11-1/8% Notes and $56.0 million principal amount of its 9-1/2% Notes in exchange for approximately $69 million in cash and 810,000 shares of its common stock. Included in Extraordinary Items is a loss of $1.3 million (net of minority interest) realized as a result of the repurchases.
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.
AFEI redeemed all $102.5 million of 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 $115 million, $133 million and $206 million were made on long-term debt in 1994, 1993 and 1992, respectively.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
I. Capital Subject to Mandatory Redemption Capital subject to mandatory redemption includes AFC's Mandatory Redeemable Preferred Stock and, at December 31, 1993, capital subject to a put option.
Mandatory Redeemable Preferred Stock At December 31, 1994, the outstanding shares of Mandatory Redeemable Preferred Stock were nonvoting, cumulative and consisted 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 1995; 274,242 shares (stated value - $2.9 million) and 504,711 shares (stated value - $5.3 million) outstanding at December 31, 1994 and 1993, respectively.
Series I, $.01 par value - authorized 700,000 shares; annual dividends per share $2.66; retired in 1994; 150,212 shares (stated value - $4.2 million) outstanding at December 31, 1993.
During 1994, AFC redeemed the outstanding shares of Series I Preferred Stock and 230,469 shares of Series E Preferred Stock for approximately $6.6 million. 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.
Capital Subject to Put Option Under an agreement entered into in 1983, certain members of the Lindner family (the "Group") were granted options to purchase additional AFC Common shares. Holders had the right to "put" to AFC any shares of AFC Common Stock or options at any time at a price equal to AFC's book value per share, as defined. At December 31, 1994 and 1993, the Group owned 1,533,767 shares of AFC Common Stock and options to purchase an additional 762,500 shares. Immediately prior to consummation of the 1995 merger discussed in Note A, the AFC options will be exercised at approximately $11.43 per share. The aggregate purchase price for all shares covered by the put is included in "capital subject to mandatory redemption" at December 31, 1993, and amounted to $40 million. Since the group's rights under the put agreement will be extinguished in connection with the merger, the amount of capital equal to the purchase price for shares covered by the put at December 31, 1994, has been reclassified to Retained Earnings.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
J. Other Preferred Stock Under provisions of both the Nonvoting (55.8 million shares authorized, including the redeemable issues) and Voting (3.5 million 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. In connection with the merger discussed in Note A, the aggregate number of shares authorized will be reduced to 38.1 million and voting rights will be granted to the Series F and G shares.
At December 31, 1994, the outstanding shares of other preferred stock were nonvoting, cumulative and consisted 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 in 1995 and 1996; 13,744,754 shares (stated value - $167.9 million) and 13,753,254 shares (stated value - $168.0 million) outstanding at December 31, 1994 and 1993, respectively.
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, 1994 and 1993.
In 1994, AFC purchased 8,500 shares of Series F Preferred Stock from a subsidiary's profit sharing plan for $159,000. In 1992, AFC sold 1.0 million shares of Series F Preferred Stock to its ESORP for $15.0 million in cash.
K. Common Stock At December 31, 1994, 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, 1994, 762,500 shares were reserved for issuance upon exercise of options. In connection with the merger discussed in Note A, AFC will increase the number of authorized common shares to 53.5 million.
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 1994 and 1993 and 34% in 1992 and income taxes as shown in the Statement of Operations (in thousands):
Adjusted earnings (loss) before income taxes consisted of the following
The total income tax provision consists of (in thousands):
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
For income tax purposes, certain members of the AFC consolidated tax group had approximately $229 million of operating loss carryforwards available at December 31, 1994. The carryforwards are scheduled to expire as follows: $6 million in 1995, $10 million in 1996 through 2000, $176 million in 2001 through 2005 and $37 million in 2006 through 2009.
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 $30.0 million, $49.6 million and $9.6 million for 1994, 1993 and 1992, respectively.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
M. Extraordinary Items Extraordinary items consisted of the following (in thousands):
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 $6.2 million in 1994, $9.4 million in 1993 and $7.4 million in 1992.
In 1993, AFC began accruing postretirement benefits over the period employees qualify for such benefits. Expense for 1994 and 1993 was $2.4 million and $3.1 million, respectively. 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 1994, 1993 and 1992.
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.
At December 31, 1993, an AFC resort real estate subsidiary owed $452,000 to The Provident Bank under a loan purchased by Provident in 1991 from an unrelated bank. The loan was repaid in 1994. 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. See Note C 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 and investees in individual quarters. The following are quarterly results of consolidated operations for the two years ended December 31, 1994 (in millions).
Results for 1994 included credits of $3.9 million and $5.3 million in the second and third quarters and a fourth quarter charge of $43.9 million for units outstanding under AFC's Book Value Incentive Plan.
Realized gains on sales of securities for the respective quarters amounted to (in millions):
R. Additional Information Total rental expense for various leases of railroad rolling stock, office space and data processing equipment was $22 million, $24 million and $52 million for 1994, 1993 and 1992, respectively. Sublease rental income related to these leases totaled $6.4 million in 1994, $6.6 million in 1993 and $8.2 million in 1992.
Future minimum rentals, related principally to office space and railroad rolling stock, required under operating leases having initial or remaining noncancelable lease terms in excess of one year at December 31, 1994, were as follows: 1995 - $32 million, 1996 - $27 million, 1997 - $20 million, 1998 - $14 million; 1999 - $9 million and $20 million thereafter. At December 31, 1994, minimum sublease rentals to be received through the expiration of the leases aggregated $32 million.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Other operating and general expenses included charges (credits) for possible losses on agents' balances, reinsurance recoverables and other receivables in the following amounts: 1994 - $18 million, 1993 - $10 million and 1992 - ($3 million). The aggregate allowance for such losses amounted to approximately $109 million and $91 million at December 31, 1994 and 1993, respectively.
Insurance Securities owned by insurance subsidiaries having a carrying value of approximately $424 million at December 31, 1994, were on deposit as required by regulatory authorities. Included in "Prepaid expenses, deferred charges and other assets" at December 31, 1994 and 1993 were $231 million and $176 million, respectively, of insurance company deferred policy acquisition costs.
The following table shows (in millions) investment income earned and investment expenses incurred by AFC's insurance companies.
(*) Included in "Other operating and general expenses" in the Statement of Operations.
AFC's insurance subsidiaries are required to file financial statements with state insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). Net earnings and policyholders' surplus on a statutory basis for the insurance subsidiaries were as follows (in millions):
During the third quarter of 1994, the California Supreme Court upheld Proposition 103, an insurance reform measure passed by California voters in 1988. In addition to increasing rate regulation, Proposition 103 gives the California insurance commissioner power to mandate rate rollbacks for most lines of property and casualty insurance. GAI recorded a charge of $26 million (included in "Other Operating and General Expenses") in the third quarter of 1994 in response to the California court decision. This charge was revised at December 31, 1994 to reflect a settlement agreement signed in March 1995 setting GAI's refund obligation at $19 million. The agreement is expected to become final in April 1995 following a required waiting period.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
Fair Value of Financial Instruments The following table presents (in millions) the carrying value and estimated fair value of AFC's financial instruments at December 31.
When available, fair values are based on prices quoted in the most active market for each security. If quoted prices are not available, fair value is estimated based on present values, discounted cash flows, fair value of comparable securities, or similar methods. 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.
Financial Instruments with Off-Balance-Sheet Risk On occasion, AFC and its subsidiaries have entered into financial instrument transactions which may present off-balance-sheet risks of both credit and market risk nature. These transactions include commitments to fund loans, loan guarantees and commitments to purchase and sell securities or loans. At December 31, 1994, AFC and its subsidiaries had commitments to fund credit facilities and contribute limited partnership capital totalling $12 million.
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 (without prior approval from state insurance regulators) in 1995 from GAI based on 10% of its policyholders' surplus is approximately $95 million. Total "restrictions" on intercompany transfers from AFC's subsidiaries cannot be quantified due to the discretionary nature of the restrictions.
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 1994, 1993 and 1992: Page
I - Condensed Financial Information of Registrant S-2
V - Supplemental Information Concerning S-4 Property-Casualty Insurance Operations
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.
3. Exhibits - see Exhibit Index on page E-1.
(b) Reports on Form 8-K:
Date of Report Item Reported December 9, 1994 Proposed merger between AFC and American Premier
S-1
AMERICAN FINANCIAL CORPORATION - PARENT ONLY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (In Thousands) ________________________________________________________________________________
Condensed Balance Sheet
Condensed Statement of Operations
S-2
AMERICAN FINANCIAL CORPORATION - PARENT ONLY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED (In Thousands)
________________________________________________________________________________ _
Condensed Statement of Cash Flows
S-3
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES SCHEDULE V - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS THREE YEARS ENDED DECEMBER 31, 1994 (IN MILLIONS)
AMERICAN PREMIER INSURANCE GROUP
Information for American Premier 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 29, 1995 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:
* Member of the Audit Committee
INDEX TO EXHIBITS
AMERICAN FINANCIAL CORPORATION
(*) Copy included in Report filed electronically with the Securities and Exchange Commission.
E-1