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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended JuneSeptember 30, 1996 or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition period from to
------------------ ---------------------______________to _________________
Commission file number 1-12922
AMERICAN EAGLE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2100622
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12801 North Central Expressway,
Suite 800, Dallas, Texas 75243
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 448-1400
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last year.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------- ---------------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of AugustNovember 8, 1996, the number of shares outstanding of each of the
issuer's classes of common stock was as follows:
Common Stock .......... 7,049,398. . . . . . . . . . 7,047,398 shares, par value $.01 per share
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AMERICAN EAGLE GROUP, INC.
INDEX TO FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets as of
JuneSeptember 30, 1996 (unaudited) and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . 3
Condensed consolidated statements of operationsincome
for the periods ended JuneSeptember 30, 1996
(unaudited) and JuneSeptember 30, 1995 (unaudited) . . . . . . . . . . 4
Condensed consolidated statements of cash flows
for the periods ended JuneSeptember 30, 1996
(unaudited) and JuneSeptember 30, 1995 (unaudited) . . . . . . . . . . 5
Notes to condensed consolidated financial
statements (unaudited) . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 1015
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1116
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AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
(Unaudited)
ASSETS December 31, JuneSeptember 30,
1995 1996
------------ ------------------- --------
Cash and investments $106,792 $ 82,57869,178
Accounts receivable 56,890 54,89655,229
Reinsurance recoverable, net 101,125 95,90487,670
Deferred policy acquisition costs 15,296 14,70114,670
Deferred reinsurance premiums 19,829 16,09029,355 22,594
Other assets 18,337 16,43715,969
-------- --------
Total assets $318,269 $280,606$327,795 $265,310
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserve for losses and loss adjustment expenses $136,528 $129,800$123,203
Unearned premiums 79,605 69,86565,996
Other policy liabilities 20,196 3,68929,722 1,180
Agency payables to insurance companies, net 1,736 1,359751
Note payable 11,250 13,250
Accounts payable and other liabilities 13,859 12,79812,195
-------- --------
Total liabilities 263,174 230,761272,700 216,575
-------- --------
Commitments and contingent liabilities
Series B Cumulative Preferred Stock, $.01 par value; 162,857 shares
authorized, 162,857 shares issued and outstanding 1,629 1,629
Stockholders' equity:
Common Stock, $.01 par value, 21,000,000 shares authorized, 7,123,3807,121,380 shares
issued 71 71
Additional paid-in-capital 45,532 45,54845,555
Unrealized apprec.(deprec.) on investment securities, net of deferred taxes 1,029 (317)(252)
Retained earnings 6,921 3,0011,819
Less - 73,882 shares of common stock held in the treasury, at cost (87) (87)
-------- --------
Total stockholders' equity 53,466 48,21647,106
-------- --------
Total liabilities and stockholders' equity $318,269 $280,606$327,795 $265,310
======== ========
The accompanying notes are an integral part of these financial statements.
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AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30, JuneSeptember 30, JuneSeptember 30,
1995 1996 1995 1996
---------- ---------- --------- ------------------- --------- ---------
Revenues
Earned premiums, net of reinsurance $ 24,595 $ 33,497 $ 45,244 $ 66,331$27,171 $27,634 $72,415 $93,965
Agency operations, net 41 (20) 292 (53)215 225 507 172
Investment income, net 1,466 1,044 2,810 2,4471,351 1,031 4,161 3,478
Realized investment gains (losses), net 0 (55) 6 98
---------- ----------452 (46) 458 52
--------- ------------------- --------- ---------
Total revenues 26,102 34,466 48,352 68,823
---------- ----------29,189 28,844 77,541 97,667
--------- ------------------- --------- ---------
Expenses
Losses and loss adjustment expenses, net of
reinsurance 15,642 21,140 29,247 48,65916,347 17,596 45,594 66,255
Policy acquisition and other underwriting
expenses 7,552 13,716 14,505 24,4749,109 12,371 23,614 36,845
Interest expense 237 285 477 535
---------- ----------256 299 733 834
--------- ------------------- --------- ---------
Total expenses 23,431 35,141 44,229 73,668
---------- ----------25,712 30,266 69,941 103,934
--------- ------------------- --------- ---------
Income (loss) before income tax expense 2,671 (675) 4,123 (4,845)3,477 (1,422) 7,600 (6,267)
Income tax expense (benefit) 815 (119) 1,280 (1,537)
---------- ----------1,078 (263) 2,358 (1,800)
--------- ------------------- --------- ---------
Net income (loss) $ 1,856 $ (556) $ 2,843 $ (3,308)
========== ==========$2,399 ($1,159) $5,242 ($4,467)
========= =================== ========= =========
Net income (loss) available for common stockholders (1) $ 1,831 $ (580) $ 2,794 $ (3,357)
========== ==========$2,375 ($1,183) $5,169 ($4,540)
========= =================== ========= =========
Weighted average number of common shares
outstanding 7,053,998 7,049,898 7,054,498 7,050,098
========== ==========7,052,898 7,048,498 7,053,698 7,049,098
========= =================== ========= =========
Net income (loss) per share of common stock (1) $ 0.26 $ (0.08) $ 0.40 $ (0.48)$0.34 ($0.17) $0.73 ($0.64)
(1) After deduction of preferred dividends
The accompanying notes are an integral part of these financial statements.
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AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXNINE MONTHS ENDED
(UNAUDITED)
(IN THOUSANDS)
JuneSeptember 30, JuneSeptember 30,
1995 1996
-------- ---------------
Cash and cash equivalents derived from:
Total provided by (used in) operatingprovid)doperating activities $ 544 $(22,637)2,198 $(35,521)
Investing activities-
Net proceeds (purchases) of short-term investments 9,748 26,688(3,917) 24,743
Purchases of fixed income securities (13,297) (22,677)(18,345) (23,715)
Proceeds from sales of fixed income securities 2,969 16,46816,862 26,882
Proceeds from maturities of fixed income securities 2,249 1,7103,009 6,885
Purchases of property and equipment (624) (849)(1,308) (1,049)
-------- --------
Total provided by investing activities 1,045 21,340(3,699) 33,746
-------- --------
Financing activities-
Dividends paid on Series B and C Cumulative Preferred Stock (49) (49)(73) (73)
Dividends paid on common stock (423) (564)(635) (846)
Proceeds of note payable 2,000 2,000
Increase in common stock outstanding 16 -----26 --
-------- --------
Total provided by financing activities 1,544 1,3871,318 1,081
-------- --------
Net change in cash and cash equivalents 3,133 90(183) (694)
Cash and cash equivalents, beginning of period 1,530 2,922
-------- --------
Cash and cash equivalents, end of period $ 4,6631,347 $ 3,0122,228
======== ========
The accompanying notes are an integral part of these financial statements.
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AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS ENDED
JUNESEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
the American Eagle Group, Inc. (the "Company") and subsidiaries for the periods
ended JuneSeptember 30, 19961995 and 19951996 have been prepared in accordance with the
instructions to the Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation of the
results for the interim period have been included. Operating results for
the periods ended JuneSeptember 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. These
statements should be read in conjunction with the financial statements and
notes thereto for the year ended December 31, 1995 included in the
Company's Annual Report.
SUBSEQUENT EVENT
On November 6, 1996, the Company announced the terms of a $35 million
investment in the Company and the formation of a strategic alliance with
American Financial Group, Inc. ("American Financial Group").
Under the capital terms of the strategic alliance, American Financial Group
has agreed to purchase 350,000 shares of the Company's Series D Preferred
Stock for $35 million. This security will have a 9% dividend, with an
option for the first five years to pay the dividends in kind with
additional shares of Series D Preferred Stock. The preferred stock is
convertible at a conversion price of $5.25 per share into common stock of
the Company. At the time of issuance, the Series D Preferred Stock will be
convertible into approximately 48% of the outstanding common stock
(calculated on a fully converted basis). The preferred stock matures in 20
years with mandatory redemption of 10% of principal per year beginning in
year eleven. The preferred stock is callable at par at any time. In the
event that the preferred stock is called prior to the seventh anniversary
of its issuance, the holder will receive warrants to purchase the Company's
common stock at $5.25 per share exercisable any time during the period
between the call date and the seventh anniversary of the issuance of the
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preferred stock. The preferred stock carries limited voting rights equal to
20% of the total votes eligible to be cast on matters submitted to holders
of common stock. Until the seventh anniversary of the issuance of the
preferred stock, American Financial Group has the right to nominate for
election to the Company's Board of Directors 30% of the number of
directors. As part of the overall transaction, the Company has granted to
American Financial Group warrants for 800,000 shares of the Company's
common stock with an exercise price of $3.45 per share. Such warrants will
become exercisable in the event that the Company terminates its agreement
with American Financial Group and enters into a competing transaction with
another party. These warrants will be canceled upon closing of the
transaction with American Financial Group.
Proceeds from the transaction will be utilized to contribute capital to the
Company's insurance company subsidiary, to reduce bank debt, and for other
general corporate purposes.
In connection with the transaction, the company would record, at the time
of closing of the transaction, a recapitalization charge of $15 million
before federal income tax. This recapitalization charge will provide
additional strengthening of American Eagle's balance sheet and overall
reserve levels and is intended to cover contingencies and estimated
exposures associated with various previously reported strategic actions and
product line discontinuations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SECONDTHIRD QUARTER OF 1996 COMPARED TO THE SECONDTHIRD QUARTER OF 1995
Gross Premiums Produced
Gross premiums produced for the secondthird quarter of 1996 compared to the secondthird
quarter of 1995 were as follows (in millions):
SECONDTHIRD QUARTER
1995 1996
----- --------- ----
Gross premiums produced $49.1 $41.3$48.0 $37.4
For other companies (4.2) (3.4)(4.9) (7.4)
Assumed from other companies 1.9 2.72.0 4.6
----- -----
Gross premiums written 46.8 40.645.1 34.6
Ceded premiums (14.6) (12.8)(15.0) (7.7)
----- -----
Net premiums written $32.2 $27.8$30.1 $26.9
===== =====
Gross premiums produced decreased 15.8%22.1% to $41.3$37.4 million for the secondthird
quarter of 1996 from $49.1$48.0 million in the secondthird quarter of 1995. Of this
decrease, 10.9%14.0% was in the Aviation Division and 7.6%8.5% was in the Property &
Casualty Division (the "P&C Division"), while the Marine Division had an
increase of 2.7%0.4%. The decreases in the Aviation and P&C DivisionsDivisions' gross
premiums produced resulted primarily from previously announced actions
taken during 1995 and the first sixnine months of 1996 to eliminate
unprofitable segments of the operations. In addition, in the Aviation
Division, primarily in the airport segment, certain insureds require
insurance written by an insurer with an A.M. Best Company rating of "A-" or
better, which resulted in a portion of the decrease in gross premiums
produced. The Company is completing arrangements and regulatory filings
that will permit it to offer insureds the financial security of an insurer
rated "A-" or better. The increase in the Marine DivisionDivision's gross premiums
produced is due to an increase in policies in force.
The gross premiums produced for other companies decreased 18.2%increased 51.0% to $3.4$7.4
million in the secondthird quarter of 1996 from $4.2$4.9 million in the secondthird quarter
of 1995. This decreaseincrease is primarily a result of a decline in the airport segment in which certain coverages are placedincreased use of
arrangements that provide the Company the ability to offer its insureds the
financial security of insurance companies with other companies
in the excess and surplus lines market.an A.M. Best Company rating
of "A-" or better.
The gross premiums assumed from other companies increased 39.3%130.0% to $2.7$4.6
million in the secondthird quarter of 1996 from $1.9$2.0 million in the secondthird quarter
of 1995 primarily as a result of increased use ofthe increase in business produced for
other companies'
policies, where insureds require policies issued by companies with an A.M.
Best rating of "A-" or better.companies.
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Gross premiums written decreased 13.4%23.3% to $40.6$34.6 million in the secondthird
quarter of 1996 from $46.8$45.1 million in the secondthird quarter of 1995 as a result
of the decrease in gross premiums produced.
Ceded premiums decreased 12.3%48.7% to $12.8$7.7 million in the secondthird quarter of
1996, compared to $14.6$15.0 million in the secondthird quarter of 1995. This
decrease is primarily a result of a
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airport segment that is reinsured with other companies under a facultative
reinsurance agreement and, also, a decrease in ceded excess of loss
reinsurance premiums for both Aviation and P&C Divisions.
Net premiums written decreased 13.8%10.6% to $27.8$26.9 million in the secondthird quarter
of 1996, compared to $32.2$30.1 million in the secondthird quarter of 1995.
Revenues
Earned premiums, net of reinsurance, increased 36.2%1.5% to $33.5$27.6 million in the
secondthird quarter of 1996 from $24.6$27.2 million in the secondthird quarter of 1995. Of
this increase, 26.6%0.4% was related to the Aviation Division, 3.9%
toin the P&C Division and 5.7% to2.6% in the Marine
Division.Division, while the Aviation Division had a decrease of 1.5%. The growth
in earned premiums, net of reinsurance, in comparison to the decline in net
premiums written, is due to a higher level of written premiums in earlier
quarters, which is now becoming earned premiums.
Agency operations, net, decreased to a minimal lossincreased 5% in the secondthird quarter of 1996 from a
minimal gain in the secondthird quarter of 1995.
Investment income, net, decreased 28.8%23.7% to $1.0 million in the secondthird
quarter of 1996 from $1.5$1.4 million in the secondthird quarter of 1995. The net
tax-effected investment yield on average invested assets for the secondthird
quarter of 1996 decreasedincreased to 5.2%6.0% from 6.3%5.6% in the comparable quarter of
1995. This decrease is the result of the general market decline in
investment yields for fixed maturities. Average invested assets decreased $16.8$27.7 million in the secondthird quarter
of 1996, compared to the secondthird quarter of 1995, primarily as a result of
cash flow used in operating activities, as discussed below.
Realized investment gains (losses), net, were insignificant in the secondthird
quarter of 1996 andas compared to a gain of $0.5 million in the third quarter
of 1995.
Operating Expenses
Losses and loss adjustment expenses, net of reinsurance, were 63.1%63.7% of
earned premiums, net of reinsurance, in the secondthird quarter of 1996, compared
to 63.6%60.2% in the secondthird quarter of 1995. The secondresults in the third quarter of
1996 results were largely driven by the continued improvement in the
underwriting results of the Aviation Division as a result of previous
underwriting actions in the under-performing segments of the commercial
aviation line of business. Second quarter results were negatively affected by a continued high level of reported claims
for the transportation segment of the P&C Division. The Aviation Division
loss ratio decreased 9.713.1 percentage points to 53.3%45.0% in the secondthird quarter
1996, from 63.0%58.1% in the secondthird quarter of 1995, and the P&C Division loss
ratio increased 22.532.3 percentage points to 88.1%94.5% in the secondthird quarter of
1996, from 65.6%62.2% in the secondthird quarter of
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1995. The Marine Division loss ratio in the secondthird quarter of 1996 was
47.2%.
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9117.4% as a result of substantial storm- related losses. In the third
quarter of 1996 the Aviation and Marine Divisions incurred storm losses of
$0.8 million before income tax benefits.
Policy acquisition and other underwriting expenses were 40.9%44.8% of earned
premiums in the secondthird quarter of 1996 and 30.7%33.5% of earned premiums in the
secondthird quarter of 1995. The increase in the expense ratio in the secondthird
quarter of 1996 results from the increased amortization of previously
deferred acquisition costs due to the decline in the level of net premiums
written in the secondthird quarter of 1996 compared to the secondthird quarter of 1995.1995
and an adjustment of estimated reinsurance ceding commission income to
actual.
The Company's combined ratio increased 9.714.8 percentage points to 104.0%108.5% in
the secondthird quarter of 1996 from 94.3%93.7% in the secondthird quarter of 1995 as a
result of the factors discussed above. A combined ratio below 100%
generally indicates profitable underwriting prior to the consideration of
investment income.
Interest expense increased 20.3%16.8% to $0.29$0.30 million in the secondthird quarter of
1996, from $0.24$0.26 million in the secondthird quarter of 1995, due primarily to an
increase in the Company's note payable of $2.0 million.
Income
The income tax benefit was 17.6%18.5% of loss before tax benefit in the secondthird
quarter of 1996 and income tax expense was 30.5%31.0% of income before tax
expense in the secondthird quarter of 1995. The decrease in the effective tax
rate in the secondthird quarter of 1996 is due, in part, to adjusting the
year-end estimated tax provision to equal the actual filed 1995 federal
income tax return.
The secondthird quarter of 1996 net loss was $0.6$1.2 million, as compared to net
income of $1.9$2.4 million in the secondthird quarter of 1995.
Net income (loss) available for common stockholders in the secondthird quarter of
1996 was ($0.6)1.2) million, or ($0.08)0.17) per share, as compared to net income of
$1.8$2.4 million, or $0.26$0.34 per share, in the secondthird quarter of 1995.
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FIRST SIXNINE MONTHS OF 1996 COMPARED TO THE FIRST SIXNINE MONTHS OF 1995
Gross Premiums Produced
Gross premiums produced for the first sixnine months of 1996 as compared to
the first sixnine months of 1995 were as follows (in millions):
FIRST SIXNINE MONTHS
1995 1996
----- --------- ----
Gross premiums produced $ 90.7 $ 83.7$138.7 $121.1
For other companies (7.6) (6.0)(12.4) (13.4)
Assumed from other companies 3.1 4.25.1 8.8
------ ------
Gross premiums written 86.2 81.9131.4 116.5
Ceded premiums (27.7) (21.5)(42.8) (29.2)
------ ------
Net premiums written $ 58.588.6 $ 60.487.3
====== ======
Gross premiums produced decreased 7.7%12.7% to $83.7$121.1 million for the first
sixnine months of 1996 from $90.7$138.7 million in the first sixnine months of 1995.
Of this decrease, 5.3%8.4% was in the Aviation Division, and 5.0%6.2% was in the
P&C Division. The Marine Division gross premium produced increased 2.6%1.9%.
The decreases in the Aviation and P&C Divisions' gross premiums produced
result primarily from previously announced actions taken during 1995 and
the first sixnine months of 1996 to eliminate unprofitable segments of the
operations. In addition, in the Aviation Division, primarily in the airport
segment, certain insureds require insurance written by an insurer with an
A.M. Best Company rating of "A-" or better, which resulted in a portion of
the decrease in gross premiums produced. The Company is completing
arrangements and regulatory filings that will permit it to offer insureds
the financial security of an insurer rated "A-" or better. The increase in
the Marine DivisionDivision's gross premiums produced is due to an increase in
policies in force.
The gross premiums produced for other companies decreased 20.4%increased 8.1% to $6.0$13.4
million in the first sixnine months of 1996 from $7.6$12.4 million in the first
sixnine months of 1995. This decreaseincrease is primarily a result of a decline in the airport segment, in which certain coverages are placedincreased
use of arrangements that provide the Company the ability to offer its
insureds the financial security of insurance companies with other
companies in the excess and surplus lines market.an A.M. Best
Company rating of "A-" or better.
The gross premiums assumed from other companies increased 34.7%72.5% to $4.2$8.8
million in the first sixnine months of 1996 from $3.1$5.1 million in the first
sixnine months of 1995, primarily as a result of the increased use ofincrease in business
produced for other companies' policies, where insureds require policies issued by companies
with an A.M. Best rating of "A-" or better.companies.
Gross premiums written decreased 5.1%11.3% to $81.9$116.5 million in the first sixnine
months of 1996 from $86.3$131.4 million in the first sixnine months of 1995
primarily as a result of the decrease in gross premiums produced.
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Ceded premiums decreased 22.6%31.8% to $21.5$29.2 million in the first sixnine months of
1996, compared to $27.8$42.8 million in the first sixnine months of 1995. This
decrease is a result of a decline in business written in the airport
segment that is reinsured with other companies under a facultative
reinsurance agreement and, also, a decrease in ceded excess of loss
reinsurance premiums for both Aviation and P&C Divisions.
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Net premiums written increased 3.3%decreased 1.5% to $60.4$87.3 million in the first sixnine
months of 1996, compared to $58.5$88.6 million in the first sixnine months of 1995,
as a result of the decrease in cededgross premiums.
Revenues
Earned premiums, net of reinsurance, increased 46.6%29.8% to $66.3$94.0 million in
the first sixnine months of 1996 from $45.2$72.4 million in the first sixnine months
of 1995. Of this increase, 37.1%22.4% was related to the Aviation Division,
3.4%3.3% to the Marine Division, and 6.1%4.1% to the P&C Division. The growth in
earned premiums, net of reinsurance, in comparison to the decline in net
written premiums, is due to a higher level of written premiums in earlier
quarters, which is now becoming earned premiums.
Agency operations, net, decreased 118.2%66.1% to a minimal lossgain in the first sixnine
months of 1996 from a gain of $0.3$0.5 million in the first sixnine months of
1995.
Investment income, net, decreased 12.9%16.4% to $2.4$3.5 million in the first sixnine
months of 1996 from $2.8$4.2 million in the first sixnine months of 1995. The net
tax-effected investment yield on average invested assets for the first sixnine
months of 1996 decreased to 5.7%4.3% from 6.1%4.4% for the comparable period in
1995. This decrease was a result of a decrease of $6.8$14.4 million in average
invested assets in the first sixnine months of 1996 compared to the first sixnine
months of 1995 primarily as a result of cash flow used in operating
activities, as described below, and a general market decline in investment
yields for fixed maturities.
Realized investment gains, net, were insignificant in the first sixnine months
of 1996 andas compared to a gain of $0.5 million in the first nine months of
1995.
Operating Expenses
Losses and loss adjustment expenses, net of reinsurance, were 73.4%70.5% of
earned premiums, net of reinsurance, in the first sixnine months of 1996,
compared to 64.6%63.0% in the first sixnine months of 1995. The Aviation Division
loss ratio decreased 2.04.4 percentage points to 62.5%57.6% in the first sixnine
months 1996, from 64.5%62.0% in the first sixnine months of 1995, and the P&C
Division loss ratio increased 37.936.2 percentage points to 103.3%100.4% in the first
sixnine months of 1996 from 65.4%64.2% in the first sixnine months of 1995. The
increase in the P&C Division loss ratio is driven primarily by a high level
of reported claims for the transportation segment of the P&C Division. The
Marine Division loss ratio for the first sixnine months of 1996 was 47.9%74.4%.
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Policy acquisition and other underwriting expenses were 36.9%39.2% of earned
premiums in the first sixnine months of 1996 and 32.1%32.6% of earned premiums in
the first sixnine months of 1995. The increase in the expense ratio in the
first sixnine months of 1996 results from the increased amortization of
previously deferred policy acquisition costs due to the decline in the
level of net premiums written in the first sixnine months of 1996, compared to
1995.
11
121995, and an adjustment of estimated reinsurance ceding commission income
to actual.
The Company's combined ratio increased 13.614.1 percentage points to 110.3%109.7% in
the first sixnine months of 1996 from 96.7%95.6% in the first sixnine months of 1995
as a result of the factors discussed above. A combined ratio below 100%
generally indicates profitable underwriting prior to the consideration of
investment income.
Interest expense increased 12.2%13.8% to $0.54$0.83 million in the first sixnine months
of 1996 from $0.48$0.73 million in the first sixnine months of 1995 due primarily
to an increase in the Company's note payable of $2.0 million.
Income
The income tax benefit was 31.7%28.7% of loss before tax benefit in the first
sixnine months of 1996, and income tax expense was 31.0% of income before tax
expense in the first sixnine months of 1995. The decrease in the effective
tax rate in the third quarter of 1996 is due to adjusting the year-end
estimated tax provision to equal the actual filed 1995 federal income tax
return.
Net loss for the first sixnine months of 1996 was $3.3$4.5 million, compared to
net income of $2.8$5.2 million in the first sixnine months of 1995. The decrease
resulted from the factors discussed above. Operating income (loss), defined
as net income (loss) less net realized investment gains or losses, net of
the associated income tax effect, was a loss of $3.4$4.5 million in the first
sixnine months of 1996, compared to income of $2.8$4.9 million in the first sixnine
months of 1995.
Net income (loss) available for common stockholders was ($3.4)4.5) million, or
($0.48)0.64) per share in the first sixnine months of 1996, compared to $2.8$5.2
million, or $0.40$0.73 per share, in the first sixnine months of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flow used in operations was $22.6$35.5 million
in the first sixnine months of 1996, compared to cash flow provided by
operations of $0.5$2.2 million in the first sixnine months of 1995. The funds
used in the first sixnine months of 1996 relate primarily to the settlement of
a large claim incurred in 1995 and the payment of prior periods'
13
14
retrospectively rated reinsurance premiums.
12premiums and the reduction in written
premiums, which was not offset by an equal reduction in claim payments.
As described in the Notes to Condensed Consolidated Financial Statements
(Pages 6 and 7), the Company announced the terms of a $35 million
investment in the Company's Series D Preferred Stock and the formation of a
strategic alliance with American Financial Group, Inc.
The Company and its bank have amended the Company's credit facility to,
among other things, revise certain financial covenants so that no default
would occur thereunder at September 30, 1996, and to add certain covenant
and default provisions requiring the Company to close the transaction with
American Financial Group by March 31, 1997. In addition, the new covenants
require that, upon closing of such transaction, the principal amount of the
loan will be reduced to $10 million, that additional principal payments
will reduce the bank's commitment by an equal amount, and that the Company
must hold $10 million of proceeds from such transaction for use only to pay
loan obligations, dividends and redemptions required by the terms of the
Company's Series B Cumulative Preferred Stock and operating expenses.
14
1315
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits attached hereto and incorporated herein
by reference.
(b) Reports on Form 8-K
None.
13On November 7, 1996, American Eagle filed a Form 8-K regarding
the agreement to sell Series D Preferred Stock to American
Financial Group, Inc., as discussed above. There were no
financial statements filed with the Form 8-K.
15
1416
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN EAGLE GROUP, INC.
Date: August 12,November 13, 1996 By: /s/ M. Philip Guthrie
- ---------------------- -----------------------------------------------------------------------------------------
M. Philip Guthrie, Chairman of the Board and
Chief Executive Officer
Date: August 12,November 13, 1996 By: /s/ Richard M. Kurz
- ---------------------- -----------------------------------------------------------------------------------------
Richard M. Kurz, Senior Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
1416
1517
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------EXHIBIT
NUMBER EXHIBIT
- ------- -------
4.1 -- Specimen Certificate for shares of Common Stock, $.01
par value, of American Eagle (Previously filed on May
11, 1994 with Registrant's Amendment No. 2 to
Registration Statement on Form S-1, File No. 33-75490,
and incorporated herein by reference).
4.2 -- Registration Rights Agreement, dated as of March 21,
1995, by and among American Eagle, Mason Best and Nelson
Hurst (Previously filed on March 29, 1994 with
Registrant's Amendment No. 1 to Registration Statement
on Form S-1, File No. 33-75490, and incorporated herein
by reference).
4.3 -- Warrant Registration Rights Agreement, dated as of
November 5, 1996, by and between American Eagle and
American Financial Group, Inc.
10.1 -- American Eagle Group, Inc. 1991 Non-Qualified Stock
Option Plan (Previously filed on February 18, 1994 with
Registrant's Registration Statement on Form S-1, File
No. 33-75490, and incorporated herein by reference).
10.2 -- Amended and Restated P&C Stock Option Plan - Wise
(Previously filed on February 18, 1994 with Registrant's
Registration Statement on Form S-1, File No. 33-75490,
and incorporated herein by reference).
10.3 -- Amended and Restated P&C Stock Option Plan - Hill
(Previously filed on February 18, 1994 with Registrant's
Registration Statement on Form S-1, File No. 33-75490,
and incorporated herein by reference).
10.4 -- Amended and Restated P&C Stock Option Plan - Perkins
(Previously filed on February 18, 1994 with Registrant's
Registration Statement on Form S-1, File No. 33-75490,
and incorporated herein by reference).
10.5 -- Amendment No. 1 to Amended and Restated P&C Stock Option
Plan - Perkins, dated as of August 16, 1994, between
American Eagle and J.B. Perkins (Previously filed on
March 30, 1995 with Registrant's Annual Report on Form
10-K, File No. 1-12922, and incorporated herein by
reference).
10.6 -- American Eagle Group, Inc. 1994 Stock Incentive Plan
(Previously filed on March 29, 1994 with Registrant's
Amendment No. 1 to Registration Statement on Form S-1,
File No. 33-75490, and incorporated herein by
reference).
10.7 -- American Eagle Group, Inc. 1994 Directors' Stock Option
Plan, as amended. (Previously filed on November 11,
1995 with Registrant's Quarterly Report on Form 10-Q,
File No. 1-12922, and incorporated herein by reference.)
10.8 -- American Eagle Group, Inc. 1994 Employee Restricted
Stock Plan (Previously filed on March 29, 1994 with
Registrant's Amendment No. 1 to Registration Statement
on Form S-1, File No. 33-75490, and incorporated herein
by reference).
10.9 -- American Eagle Group, Inc. Employee Profit Sharing and
Savings Plan (Previously filed on February 18, 1994 with
Registrant's Registration Statement on Form S-1, File
No. 33-75490, and incorporated herein by reference).
10.10 -- American Eagle Group, Inc. Employee Stock Purchase Plan
(Previously filed on March 30, 1995 with Registrant's
Annual Report on Form 10-K, File No. 1-12922, and
incorporated herein by reference.
17
18
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10.11 -- Amended and Restated Credit Agreement dated as of
December 29, 1994 (the "Restated Credit Agreement"),
among American Eagle, the Lenders and The First National
Bank of Chicago, as Agent (Previously filed on March 30,
1995 with Registrant's Annual Report on Form 10-K, File
No. 1- 12922, and incorporated herein by reference).
15
16
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10.12 -- Amendment to the Restated Credit Agreement dated as of
February 23, 1996 by and between American Eagle and The
First National Bank of Chicago, individually and as
agent. (Previously filed on March 28, 1996 with
Registrant's Annual Report on Form 10-K, File No.
1-12922, and incorporated herein by reference).
10.13 -- Employment Agreement, dated as of December 31, 1994,
between American Eagle and M. Philip Guthrie (Previously filed on March 30, 1995 with Registrant's Annual Report on Form 10-K, File
No. 1-12922, and incorporated herein by reference).
10.14 -- Employment Agreement, dated as of December 31, 1994, between American Eagle and George F. Cass (Previously
filed on March 30, 1995 with Registrant's Annual Report
on Form 10-K, File No. 1- 12922, and incorporated herein
by reference).
10.14 -- Employment Agreement, dated as of August 15, 1996,
between American Eagle and Robert W. Conrey.
10.15 -- Employment Agreement, dated as of December 31, 1994,
between AEIC and George C. Hill (Previously filed on
March 30, 1995 with Registrant's Annual Report on Form
10-K, File No. 1-12922, and incorporated herein by
reference).
10.16 -- Employment Agreement, dated as of December 31, 1994,
between AEIC and David O. Daniels (Previously filed on
March 30, 1995 with Registrant's Annual Report on Form
10-K, File No. 1- 12922, and incorporated herein by
reference).
10.17 -- Employment Agreement, dated as of December 31, 1994,
between American Eagle and Frederick G. Anderson
(Previously filed on March 30, 1995 with Registrant's
Annual Report on Form 10-K, File No. 1-12922, and
incorporated herein by reference).
10.18 -- Employment Agreement, dated as of December 31, 1994,
between American Eagle and Richard M. Kurz (Previously
filed on March 30, 1995 with Registrant's Annual Report
on Form 10-K, File No. 1- 12922, and incorporated herein
by reference).
10.19 -- Employment Agreement, dated as of December 31, 1994,
between American Eagle and Allen N. Walton III
(Previously filed on March 30, 1995 with Registrant's
Annual Report on Form 10-K, File No. 1- 12922, and
incorporated herein by reference).
10.20 -- Consulting Agreement, dated as of December 24, 1992,
between American Eagle and Don D. Hutson (Previously
filed on February 18, 1994 with Registrant's
Registration Statement on Form S-1, File No. 33-75490,
and incorporated herein by reference).
10.21 -- Agreement dated as of February 15, 1991, between Luther
King Capital Management Corporation and AEIC (Previously
filed on February 18, 1994 with Registrant's
Registration Statement on Form S-1, File No. 33-75490,
and incorporated herein by reference).
10.22 -- Investment Management Agreement, dated as of June 17,
1994, between American Eagle Insurance Company and Aon
Advisors, Inc. (Previously filed on March 30, 1995 with
Registrant's Annual Report on Form 10-K, File No.
1-12922, and incorporated herein by reference).
18
19
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.23 -- Agreement for the Purchase of all of the Outstanding
Capital Stock of Aviation Office of America, Inc. and
American Eagle Insurance Company dated as of May 7,
1986, among Folmar Corporation, Crum and Forster, Inc.
and United States Fire Insurance Company (the "Purchase
Agreement") (Previously filed on March 29, 1994 with
Registrant's Amendment No. 1 to Registration Statement
on Form S-1, File No. 33-75490, and incorporated herein
by reference).
16
17
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10.24 -- Amendment to Purchase Agreement dated as of June 6, 1987
(Previously filed on March 29, 1994 with Registrant's
Amendment No. 1 to Registration Statement on Form S-1,
File No. 33-75490, and incorporated herein by
reference).
10.25 -- Amendment to Purchase Agreement dated as of December 11,
1987 (Previously filed on March 29, 1994 with
Registrant's Amendment No. 1 to Registration Statement
on Form S-1, File No. 33-75490, and incorporated herein
by reference).
10.26 -- First through Fifth General Aviation Liability Excess of
Loss Reinsurance Agreement AR #4222 1994 Final Placement
Slip (Previously filed on March 30, 1995 with
Registrant's Annual Report on Form 10-K, File No.
1-12922, and incorporated herein by reference).
10.27 -- Casualty First and Second Excess of Loss Reinsurance
Agreement AR #4038-94 1994 Final Placement Slip
(Previously filed on March 30, 1995 with Registrant's
Annual Report on Form 10-K, File No. 1-12922, and
incorporated herein by reference).
10.28 -- Special Underlying General Aviation Liability Excess of
Loss Reinsurance Agreement AR #4221 1994 Final Placement
Slip (Previously filed on March 30, 1995 with
Registrant's Annual Report on Form 10-K, File No.
1-12922, and incorporated herein by reference).
10.29 -- General Aviation Hull Special Underlying Excess of Loss
Reinsurance Agreement AR #4227 1994 Final Placement Slip
(Previously filed on March 30, 1995 with Registrant's
Annual Report on Form 10-K, File No. 1-12922, and
incorporated herein by reference).
10.30 -- First Through Fifth General Aviation Liability Excess of
Loss Reinsurance Agreement AR #4222 1995 Final Placement
Slip (Previously filed on March 28, 1996 with
Registrant's Annual Report on Form 10-K, File No.
1-12922, and incorporated herein by reference).
10.31 -- Special Underlying General Aviation Liability Excess of
Loss Reinsurance Agreement AR #4221 1995 Final Placement
Slip (Previously filed on March 28, 1996 with
Registrant's Annual Report on Form 10-K, File No.
1-12922, and incorporated herein by reference).
10.32 -- General Aviation Hull Special Underlying Excess of Loss
Reinsurance Agreement AR #4227 1995 Final Placement Slip
(Previously filed on March 28, 1996 with Registrant's
Annual Report on Form 10-K, File No. 1-12922, and
incorporated herein by reference).
10.33 -- First and Second Property Excess of Loss Reinsurance
Agreement--ARA #4039-91 (subject to a request for
confidential treatment) (Previously filed on March 28,
1996 with Registrant's Annual Report on Form 10-K, File
No. 1-12922, and incorporated herein by reference).
19
20
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.34 -- First and Second Casualty Excess of Loss Reinsurance
Agreement--ARA #4038-91 (subject to a request for
confidential treatment) (Previously filed on March 28,
1996 with Registrant's Annual Report on Form 10-K, File
No. 1-12922, and incorporated herein by reference).
17
18
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10.35 -- Casualty First and Second Excess of Loss Reinsurance
Agreement--AR #4038-95 (subject to a request for
confidential treatment) (Previously filed on March 28,
1996 with Registrant's Annual Report on Form 10-K, File
No. 1-12922, and incorporated herein by reference).
10.36 -- First and Second Casualty Excess of Loss Reinsurance
Agreement--AR #4038-95 (subject to a request for
confidential treatment) (Previously filed on March 28,
1996 with Registrant's Annual Report on Form 10-K, File
No. 1-12922, and incorporated herein by reference).
10.37 -- General Aviation Hill Special Underlying Excess of Loss
Reinsurance Agreement--AR #4227-94 (subject to a request
for confidential treatment) (Previously filed on March
28, 1996 with Registrant's Annual Report on Form 10-K,
File No. 1-12922, and incorporated herein by reference).
10.38 -- Special Underlying General Aviation Liability Excess of
Loss Reinsurance Agreement--AR #4221-94 (subject to a
request for confidential treatment) (Previously filed on
March 28, 1996 with Registrant's Annual Report on Form
10-K, File No. 1-12922, and incorporated herein by
reference).
10.39 -- First Through Fifth General Aviation Liability Excess of
Loss Reinsurance Agreement--AR #4222-94 (subject to a
request for confidential treatment) (Previously filed on
March 28, 1996 with Registrant's Annual Report on Form
10-K, File No. 1-12922, and incorporated herein by
reference).
10.40 -- Amendment to the Restated Credit Agreement, as amended,
dated as of March 18, 1996, by and between American
Eagle and The First National Bank of Chicago,
individually and as Agent (Previously filed on March 28,
1996 with Registrant's Annual Report on Form 10-K, File
No. 1- 12922, and incorporated herein by reference).
10.41 -- Amendment to the Restated Credit Agreement, as amended,
dated as of May 3, 1996, by and between American Eagle
and The First National Bank of Chicago, individually and
as Agent (Previously filed on May 10, 1996 with
Registrant's Report on Form 10-Q for the period ended
March 31, 1996, File No. 1-12922, and incorporated
herein by reference).
10.42 -- Amendment to the Restated Credit Agreement, dated as of
November 5, 1996, by and between American Eagle and The
First National Bank of Chicago, individually and as
agent.
10.43 -- Securities Purchase Agreement, dated as of November 5,
1996, by and between American Eagle and American
Financial Group, Inc.
10.44 -- Warrant Subscription Agreement, dated as of November 5,
1996, by and between American Eagle and American
Financial Group, Inc.
10.45 -- Warrant to Purchase Common Stock, dated as of November
5, 1996, issued by American Eagle to American Financial
Group, Inc.
20
21
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.46 -- Special Underlying General Aviation Liability Excess of
Loss Reinsurance Agreement -- AR #4221 -- 1996 Final
Placement Slip (subject to a request for confidential
treatment).
10.47 -- First through Fifth General Aviation Liability Excess of
Loss Reinsurance Agreement -- AR #4222 - - 1996 Final
Placement Slip (subject to a request for confidential
treatment).
10.48 -- General Aviation Hull Special Underlying Excess of Loss
Reinsurance Agreement -- AR #4227 -- 1996 Final
Placement Slip (subject to a request for confidential
treatment).
27 -- Financial Data Schedule.
1821