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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

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           (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
2 3 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. 3 4 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. 4 5 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. 5 6 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 6 7 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. 7 8 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. 8 9 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 7 8 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. 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 9 10 1995. The Marine Division loss ratio in the secondthird quarter of 1996 was 47.2%. 8 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. 910 1011 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. 11 12 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. 10 11 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%. 12 13 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.
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