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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1993 Commission file
number 1-1569
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
AMERICAN PREMIER UNDERWRITERS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-6000765
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One East Fourth Street
Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513)
579-6600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, $1 par value . . . . . . . New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
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___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to
the
best of registrant's knowledge, in definitive proxy or
information
statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
At March 15, 1994, the aggregate market value of the regist-
rant's voting stock held by non-affiliates was $670 million.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practica-
ble date.
Class Outstanding at March 15, 1994
----- -----------------------------
Common Stock, $1 par value 46,092,718 shares*
The following documents have been incorporated by reference
into the Parts of this Report indicated:
(1) Certain parts of the 1993 Annual Report to Shareholders, as
indicated herein (Parts I and II)
(2) Proxy statement involving the election of directors which
the registrant intends to file with the Commission within 120
days after December 31, 1993 (Part III)
__________________________
* As of March 15, 1994, 1,376,948 additional shares of
Common Stock remained to be distributed pursuant to the registr-
ant's 1978 Plan of Reorganization.
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TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . 1
Introduction. . . . . . . . . . . . . . . . . . 1
Description of Businesses . . . . . . . . . . . 2
Insurance . . . . . . . . . . . . . . . . 2
Non-Insurance Operations. . . . . . . . . 12
General . . . . . . . . . . . . . . . . . . . . 14
Employees . . . . . . . . . . . . . . . . . . . 14
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . 14
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . 16
EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . . . . 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . 18
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT. . . . . . . . . . . . . . . . . . 18
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. . . . . . . . . . . . . . . . . 18
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . 19
PART I
ITEM 1. BUSINESS
INTRODUCTION
American Premier Underwriters, Inc. (the "Company"), the
Registrant, was incorporated in the Commonwealth of Pennsylvania
in 1846. Effective March 25, 1994, the Company changed its
corporate name from The Penn Central Corporation to American
Premier Underwriters, Inc. in order to better reflect its new
identity as a property and casualty insurance specialist.
Formerly a diversified company, the Company has reoriented
its corporate focus on specialty property and casualty insurance
through a number of strategic acquisitions and divestitures. Its
principal operations are conducted by a group of non-standard
private passenger automobile insurance companies (the "NSA
Group") that were purchased in 1990 and by Republic Indemnity
Company of America ("Republic Indemnity"), a California workers'
compensation insurance company that the Company purchased in
1989. See "Description of Businesses--Insurance".
In furtherance of its acquisition strategy, on February 10,
1994, the Company announced that it is considering a proposal
from American Financial Corporation ("AFC") for the purchase by
the Company of the personal lines insurance businesses owned by
Great American Insurance Company ("GAI"), a wholly owned subsid-
iary of AFC, for a proposed purchase price of approximately
$380 million in cash. GAI's personal lines businesses reported
net earned premiums of $342 million in 1993 and $322 million in
1992. Approximately 70% of these premiums came from standard
private passenger automobile insurance, 25% from multiperil
homeowners' insurance and 5% from other lines. GAI has advised
the Company that separate income statements for the personal
lines businesses are not available because these lines have been
included with GAI's other insurance lines for financial reporting
purposes. However, GAI estimates that on a stand-alone basis the
personal lines businesses had pro forma accident year statutory
combined ratios of 99.0% in 1993 and 99.1% in 1992. AFC's
proposal for the sale of the personal lines businesses to the
Company would include the transfer by GAI of an investment
portfolio of securities with a market value of approximately $450
million, consisting principally of investment grade bonds. GAI
estimates that the generally accepted accounting principles
("GAAP") net book value of the businesses that would be trans-
ferred at closing would be approximately $200 million.
The Company's Board of Directors (the "Board") has at this
stage concluded that the proposed acquisition merits serious
consideration, in part because it could further the Company's
strategy of achieving higher returns by investing its substantial
cash resources in profitable property and casualty insurance
businesses. The Board also concluded that the proposed acquisi-
tion is potentially attractive in that it could provide the
Company with the opportunity to become a full-service provider of
private passenger automobile insurance on a nationwide basis that
can take advantage of the Company's existing auto insurance
management and underwriting skills.
The Board has appointed a special committee of its outside
directors to review the proposal. The special committee is
empowered to negotiate all aspects of the proposed transaction,
including the purchase price proposed by AFC. Completion of a
transaction would be subject to certain conditions, including
approval by the special committee, receipt by the Company of an
appropriate fairness opinion from an investment banking firm and
any required regulatory approvals. AFC owns 40.5% of the Com-
pany's Common Stock and AFC's principal shareholder, Carl H.
Lindner, is Chairman of the Board and Chief Executive Officer of
the Company.
On May 20, 1993, the Company purchased Leader National
Insurance Company ("Leader National") from The Dyson-Kissner-
Moran Corporation for $38 million in cash. Leader National
writes non-standard private passenger automobile insurance and,
to a lesser extent, non-standard commercial automobile insur-
ance.
The Company continues to seek acquisitions and investment
opportunities, primarily in the property and casualty insurance
area. At December 31, 1993, the Company had $611.2 million of
cash, temporary investments and marketable securities (other than
those held by its insurance operations) that could be available
for such purposes. It is not possible to predict the nature or
impact on the Company of any other acquisition or investment that
might be made.
In furtherance of its strategy to sell all of its wholly
owned non-insurance operating subsidiaries, the Company sold in
August 1993 the defense services operations conducted by Vitro
Corporation for approximately $94 million and also sold in 1993
and the first quarter of 1994 units that install satellite commu-
nications networks, provide engineering services to the nuclear
energy industry and provide rail testing services, respectively,
for an aggregate of approximately $17.8 million.
During 1993, the Company, in underwritten public offerings,
sold its 19.3% position in the common shares of Tejas Gas Corpo-
ration for net proceeds of $106.6 million (resulting in a pre-tax
gain to the Company of $80.0 million) and sold its 20% position
in the limited partnership units of Buckeye Partners, L.P. for
net proceeds of $71.6 million (resulting in a pre-tax gain of
$18.5 million).
In December 1993, the Company signed an agreement in princi-
ple with the Metropolitan Transportation Authority of the State
of New York (the "MTA") that provides for an extension of the end
of the Company's lease to the MTA of Grand Central Terminal
("GCT") and the Harlem and Hudson commuter rail lines from the
year 2032 to 2274. It also provides for the grant of an option
to the MTA to purchase the leased property in 25 years. In
return, the Company would receive consideration having an esti-
mated present value of $55 million, principally in the form of
increased future lease rental payments. See "Description of
Businesses--Non-Insurance Operations--Other--GCT and Related
Development Rights".
The Company has reported, as of the beginning of its 1993
tax year, an aggregate consolidated net operating loss carry-
forward for Federal income tax purposes of $825 million and an
aggregate capital loss carryforward of $384 million. The 1993
consolidated Federal income tax return will report a remaining
net operating loss carryforward currently estimated at $610
million, which will expire at the end of 1996 unless previously
utilized, and a remaining capital loss carryforward estimated at
$262 million, which will expire at the end of 1997 unless previ-
ously utilized. See Note 7 of the Notes to Financial Statements
of the Company and its subsidiaries ("Notes to Financial State-
ments") that are incorporated herein by reference to the Com-
pany's 1993 Annual Report to Shareholders.
DESCRIPTION OF BUSINESSES
Set forth below is a narrative description of the business
operations of the Company's Insurance segment, which is the only
reportable industry segment for which financial information is
presented in the financial statements referred to in Item 8 of
this Report. In addition, information is presented with respect
to the Company's "Non-Insurance Operations".
INSURANCE
Introduction
------------
The Company's principal operations are conducted through
specialty property and casualty insurance subsidiaries that
underwrite and market non-standard automobile and workers'
compensation insurance.
The Company's primary objective in its insurance operations
is to achieve underwriting profitability, in addition to earning
income from investment of premiums. The Company has met this
objective in each of the four full years that it has owned its
insurance operations. In 1993, these operations had an overall
GAAP combined ratio of 96.2% (representing a 3.8% underwriting
profit). On a statutory basis, the combined ratio was 94.0%, as
compared with a property and casualty statutory insurance average
of 109.2% (as estimated by A.M. Best). The Company experienced
net earned premium growth of 27.5% in 1993 while maintaining
underwriting profitability. Management's philosophy is to
refrain from writing business that is not expected to produce an
underwriting profit even if it is necessary to limit premium
growth to do so.
2
The overall profitability of the Company's insurance busi-
ness is a function of both its underwriting profitability and the
performance of its investment portfolio. See "Liquidity and
Capital Resources--Investing and Financing Activity" and "Analy-
sis of Continuing Operations--Insurance" in "Management's Discus-
sion and Analysis of Financial Condition and Results of
Operations"
("Management's Discussion and Analysis") that is incorporated
herein by reference to the Company's 1993 Annual Report to
Shareholders and Note 3 of the Notes to Financial Statements
for information regarding investments and investment income of
the Company's Insurance segment.
In October 1993, the Clinton Administration introduced in
Congress proposed legislation called the Health Security Act (the
"HSA"), which would guarantee all Americans access to comprehen-
sive health care services provided through health plans. If the
HSA were enacted, health plans would provide medical treatment
for injuries sustained in the workplace or in an automobile
accident. Workers' compensation and automobile insurers would
continue to be responsible for the costs of treatment covered by
their policies and would reimburse health plans for services
provided. The HSA also would create a Commission on Integration
of Health Benefits, which would study the feasibility and appro-
priateness of transferring to health plans financial responsi-
bility for all medical benefits covered under workers' compensa-
tion and automobile insurance and would submit a report to the
President by July 1, 1995 that would provide a detailed plan for
integration if integration is recommended. The Company is unable
to predict whether or in what form the HSA will be enacted or, if
enacted, what effect it would have on the Company's insurance
operations. However, depending on its actual terms, the HSA, and
any subsequent legislation mandating such integration, could
potentially have a material adverse effect on the Company's
future insurance operations.
Non-Standard Automobile Insurance
---------------------------------
General. The NSA Group is engaged in the writing of insur-
ance coverage on private passenger automobile physical damage and
liability policies for "non-standard risks". The NSA Group has
four principal operating units comprised of Atlanta Casualty
Company, Windsor Insurance Company, Infinity Insurance Company
and
Leader National Insurance Company and their respective
subsidiaries
("Atlanta Casualty", "Windsor", "Infinity" and "Leader National",
respectively) and includes a total of ten insurance companies.
Atlanta Casualty, Windsor, Infinity and Leader National are rated
A+ (Superior), A+ (Superior), A (Excellent) and A- (Excellent),
respectively, by A.M. Best, which rates insurance companies based
upon factors of concern to policyholders.
Non-standard risks are those individuals who are unable to
obtain insurance through standard market carriers due to factors
such as age, record of prior accidents, driving violations,
particular occupation or type of vehicle. Premium rates for
non-standard risks are generally higher than for standard risks.
Total private passenger automobile insurance premiums written by
insurance carriers in the United States in 1993 have been esti-
mated by A.M. Best to be approximately $93 billion. Since it can
be viewed as a residual market, the size of the non-standard
private passenger automobile insurance market changes with the
insurance environment and grows when standard coverage becomes
more restrictive. Although this factor, as well as industry
differences in the criteria which distinguish standard from non-
standard insurance, make it difficult to make estimates of
non-standard market size, NSA Group management believes that the
voluntary non-standard market has accounted for approximately 10%
to 15% of total private passenger automobile insurance premiums
written in recent years. State "assigned risk" plans also
service this market as an alternative to voluntary private
insurance.
The NSA Group's net written premiums increased from $660
million in 1992 to $902 million in 1993. The NSA Group attrib-
utes its premium growth in recent years primarily to entry into
new
states, increased market penetration in its existing states,
overall growth in the non-standard market and the inclusion of
$46.2 million of net written premiums following the May 1993
purchase of Leader National. Management of the Company believes
the non-standard market has experienced significant growth in
recent years as standard insurers have become more restrictive in
the types of risks they will write. The NSA Group writes busi-
ness in 38 states and holds licenses to write policies in 45
states and the District of Columbia.
3
The geographic distribution of the NSA Group gross written
premiums in 1993, including Leader National's gross written
premiums from its May 20, 1993 date of acquisition by the Compa-
ny, compared to 1992 was as follows:
Years Ended December 31,
---------------------------------
1993 1992
----------- -----------
(Dollars in millions)
Florida ................... $121.1 13.3% $131.7 19.8%
Georgia ................... 110.7 12.2 90.8 13.7
Texas ..................... 96.5 10.6 37.1 5.6
California ................ 54.0 5.9 52.2 7.9
Arizona ................... 53.7 5.9 39.2 5.9
Tennessee ................. 41.3 4.6 31.0 4.7
Alabama ................... 34.2 3.8 27.4 4.1
Connecticut ............... 33.5 3.7 23.4 3.5
Missouri .................. 31.2 3.4 14.8 2.2
Indiana ................... 29.3 3.2 22.6 3.4
All Other ................. 302.9 33.4 193.9 29.2
----- ---- ----- ----
TOTAL...................... $908.4 100.0% $664.1 100.0%
------ ------ ------ ------
------ ------ ------ ------
In early 1993, the Company acquired 51% of the stock of a start-
up insurance company in the United Kingdom which specializes in
non-standard automobile insurance. During 1993, this company had
gross written premiums of $23.7 million, of which $9.8 million
was reinsured by one of the Company's wholly owned insurance
subsidiaries.
Underwriting results of insurance companies are frequently
measured by their combined ratios. Underwriting results are
generally considered profitable when the combined ratio is under
100%. The following table sets forth information with respect to
the combined ratios for the NSA Group and the total private
passenger automobile insurance industry for the periods shown:
Years Ended December 31,
------------------------
1993 1992 1991
NSA Group
GAAP
Loss and Loss Adjustment
Expense ("LAE") Ratio... 71.6% 69.7% 69.9%
Underwriting Expense Ratio 25.4 26.4 25.2
----- ----- -----
Combined Ratio............ 97.0% 96.1% 95.1%
----- ----- -----
----- ----- -----
Statutory
Loss and LAE Ratio........ 72.5% 69.7% 70.5%
Underwriting Expense Ratio 24.4 26.1 26.5
----- ----- -----
Combined Ratio ........... 96.9% 95.8% 97.0%
----- ----- -----
Total Private Passenger Automobile
Insurance Industry Statutory
Combined Ratio(1) ..........102.0% (Est.) 102.0% 104.7%
---------------------
(1) Industry information was derived from Best's Insurance
Management Reports Property/Casualty Supplement (January 3,
1994 edition). The comparison shown is to the private
4
passenger automobile insurance industry. Although the Com-
pany believes that there is no reliable regularly published
combined ratio data for the non-standard automobile
insurance industry, the Company believes that such a com-
bined ratio would present a less favorable comparison in
that it would be lower than the private passenger automobile
industry average shown above.
The increase in the combined ratio for 1993 was primarily caused
by rate adjustments which more favorably affected 1992 underwrit-
ing results and an increase in losses in the 1993 first quarter
resulting from a more severe winter than in 1992. A decrease in
the underwriting expense ratio due to growth in earned premiums
which outpaced associated expenses partially offset such factors.
The NSA Group management believes that it has achieved
underwriting profits over the past several years as a result of
refinement of various risk profiles, thereby dividing the consum-
er market into more defined segments which can either be excluded
from coverage or surcharged adequately. Effective cost control
measures, both in the underwriting and claims handling areas,
have further contributed to the underwriting profitability of the
NSA Group. In addition, the NSA Group generally writes policies
of short duration, allowing more frequent evaluation of the rates
on individual risks.
Marketing. Each of the four principal units in the NSA
Group is responsible for its own marketing, sales, underwriting
and claims processing. Sales efforts are primarily directed
toward independent agents to convince them to select an NSA Group
insurance company for their customers. These units each write
policies through approximately 5,000 to 20,000 independent
agents.
Of the approximately 920,000 NSA Group policies in force at
December 31, 1993, fewer than 6% had policy limits in excess of
$50,000 per occurrence. Most NSA Group policies are written for
policy periods of six months or less, and some are as short as
one month.
Reinsurance. Due in part to the limited exposure on indi-
vidual policies, none of the insurance carriers in the NSA Group
is involved to a material degree in reinsuring risks with third
party insurance companies. Risks written by NSA Group companies
in excess of certain limits are in some cases reinsured with a
major reinsurance company. In general, the risk retained by the
NSA Group companies ranges from $100,000 to $500,000 of ultimate
net loss for each occurrence and certain portions of ultimate net
losses in excess of such limits. Reinsurance premiums paid by the
NSA Group in 1993 amounted to less than 1% of net written premi-
ums of the NSA Group for the period. See Notes 3 and 17 of the
Notes to Financial Statements for further information regarding
reinsurance.
Competition. A large number of national, regional and local
insurers write non-standard private passenger automobile insur-
ance coverage. Insurers in this market generally compete on the
basis of price (including differentiation on liability limits,
variety of coverages offered and deductibles), geographic avail-
ability and ease of enrollment and, to a lesser extent, reputa-
tion for claims handling, financial stability and customer
service. NSA Group management believes that sophisticated data
analysis for refinement of risk profiles has helped the NSA Group
to compete successfully on the basis of price without negatively
affecting underwriting profitability. The NSA Group attempts to
provide selected pricing for a wider spectrum of risks and with a
greater variety of payment options, deductibles and limits of
liability than are offered by many of its competitors. The NSA
Group does not issue any participating policies and does not pay
dividends to policyholders, except for Leader National, which
paid
policyholders $107,000 in dividends in 1993 pursuant to certain
commercial vehicle programs.
Regulation. Like all insurance companies, including
Republic Indemnity discussed below under "Workers' Compensation
Insurance", the NSA Group insurance companies are subject to
regulation in the jurisdictions in which they do business. In
general, the insurance laws of the various states establish
regulatory agencies with broad administrative powers governing,
among other things, premium rates, solvency standards, licensing
of insurers, agents and brokers, trade practices, forms of poli-
cies, maintenance of specified reserves and capital for the
protection of policyholders, deposits of securities for the
benefit of policyholders, investment activities and relationships
between insurance subsidiaries and their parents and affiliates.
Material transactions between insurance subsidiaries and their
parents andaffiliates generally must be disclosed and prior
approval of the applicableinsurance regulatory authorities
generally is required for any such transaction which may be
deemed to be extraordinary. In addition, while regulations
differ from state to state, they typically restrict the maximum
amount of dividends that may be paid by an insurer to its share-
holders in any twelve-month period without advance regulatory
5
approval. Such limitations are generally based on earnings or
statutory surplus. Under applicable restrictions, the maximum
amount of dividends that may be paid by the NSA Group to the
Company during 1994 without seeking regulatory clearance is $32.8
million.
Most states have created insurance guarantee associations to
provide for the payment of claims for which insolvent insurers
are liable but which cannot be paid out of such insolvent in-
surers' assets. In applicable states, insurance companies,
including the NSA Group companies, are subject to assessment by
such associations, generally to the extent of such companies' pro
rata share of such claims based on premiums written in the
particular line of business in the year preceding the assessment,
and subject to certain ceilings on the amount of such assessments
in any year. In 1993, the NSA Group companies paid assessments
to such associations aggregating approximately $1.2 million.
In addition, many states have created "assigned risk" plans,
jointunderwriting associations and other similar arrangements to
provide state mandated minimum levels of automobile liability
coverage to drivers whose driving records or other relevant
characteristics make it difficult for them to obtain insurance in
the voluntary market. Automobile liability insurers in those
states are required to sell such coverage to a proportionate
number (generally based on the insurer's share of the automobile
liability insurance market in such state) of those drivers
applying for placement as assigned risks. Assigned risks account-
ed for less than 1% of net written premiums of the NSA Group
companies in 1993. Premium rates for assigned risk business are
established by the regulators of the particular state plan and
are frequently inadequate in relation to the risks insured,
resulting in underwriting losses.
In 1993, the NSA Group received approximately $54.0 million
in net written premiums from California. Prior to 1989, automo-
bile insurance rates in California, other than assigned risk
rates discussed above, were not subject to approval by any
governmental agency and generally were determined by competitive
market forces. In November 1988, Proposition 103 was approved by
the California voters. It mandated important changes in the
California insurance market, including the requirement that
insurance companies roll back automobile insurance rates to 80%
of the November 1987 levels, maintain those rates for one year
and obtain prior approval of rates beginning in 1989. The
Company's acquisition of the NSA Group in 1990 was structured to
protect the Company against the consequences of any rate rollback
applied to the acquired operations. As for the prior approval
requirements, the company through which the NSA Group obtains its
net written premiums in California increased its rates in August
1989; disposition of its applications for additional rate
increases had, as with other companies, been suspended pending
adoption of regulations implementing Proposition 103. However,
recent legislation in California generally provides that applica-
tions for rate increases made on or after July 1, 1993 will be
deemed approved after 180 days unless disapproved by the Depart-
ment of Insurance. The Company is unable to predict whether or
at what level future rate increases, when applied for, may be
approved. Over time, the failure to receive appropriate rate
increases could result in reduced underwriting profitability in
California for the NSA Group. In addition, the Company could
experience loss of premium volume in California as a result of
actions it would take to maintain such profitability.
The operations of the NSA Group are dependent on the laws
and regulations of the states in which its insurance companies
are domiciled or licensed or otherwise conduct business, and
changes in those laws and regulations have the potential to
materially affect the revenues and expenses of the NSA Group.
The Company is unable to predict whether or when Proposition
103-type initiatives or similar laws or regulations may be
adopted or enacted in other states or what the impact of such
developments would be on the future operations and revenues of
its insurance businesses in such states.
Workers' Compensation Insurance
-------------------------------
General. Republic Indemnity is engaged in the sale of
workers' compensation insurance in California. In 1993, it also
began writing in Arizona. Republic Indemnity is currently rated
A+ (Superior) by A.M. Best.
Workers' compensation insurance policies provide coverage
for workers' compensation and employer's liability. The workers'
compensation portion of the coverage provides for statutorily
prescribed benefits that employers are required to pay to employ-
ees who are injured in the course of employment including, among
6
other things, temporary or permanent disability benefits, death
benefits, medical and hospital expenses and expenses of vocation-
al rehabilitation. The benefits payable and the duration of such
benefits are set by statute, and vary with the nature and severi-
ty of the injury or disease and the wages, occupation and age of
the employee. 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
Indemnity generally ssues policies for one-year periods.
Workers' compensation insurance operations are affected by
employment trends in their markets, the incidence of litigation
activities, legal and medical costs, the use of vocational reha-
bilitation programs and the filing of traditionally non-occupa-
tional injuries, such as stress and trauma claims. While higher
claims costs are ultimately reflected in premium rates, there
historically has been a time lag of varying periods between the
incurrence of higher claims costs and premium rate adjustments,
which may unfavorably affect underwriting results.
In California, minimum premium rates for workers' compensa-
tion insurance are determined by the California Insurance Commis-
sioner (the "Insurance Commissioner") based in part upon recom-
mendations of the Workers' Compensation Insurance Rating Bureau
of California (the "Bureau"). Such rates are set for over 400
categories of employment and generally are applied to the policy-
holder's payroll. The Bureau proposed a 12.6% rate increase for
new and renewal policies entered into on and after January 1,
1993, but the Insurance Commissioner did not grant any increase.
Moreover, as discussed under "--Regulation" below, on July 16,
1993, the California legislature enacted legislation reducing
workers' compensation insurance minimum premium rates by 7% with
immediate effect and, on July 28, 1993, enacted legislation
repealing the minimum rate law effective January 1, 1995. In
addition, on December 1, 1993, the Insurance Commissioner ordered
a 12.7% minimum premium rate decrease effective January 1, 1994
for new and renewal policies entered into on and after January 1,
1994.
The following table sets forth information with respect to
the combined ratios for Republic Indemnity and the total workers'
compensation industry for the periods shown:
Years Ended December 31,
-------------------------------
1993 1992
1991
---- ----
----
Republic Indemnity
GAAP
Loss and LAE Ratio ............. 59.0% 66.4%
66.4%
Underwriting Expense Ratio ..... 15.4 16.1
16.4
----- -----
-----
Total Loss and Expense Ratio ... 74.4 82.5
82.8
Policyholder Dividend Ratio ... 20.3 17.1
16.7
----- -----
-----
Combined Ratio ................ 94.7% 99.6%
99.5%
----- -----
-----
----- -----
-----
Statutory
Loss and LAE Ratio ............. 59.0% 69.1%
66.5%
Underwriting Expense Ratio ..... 15.4 16.0
16.2
----- -----
-----
Total Loss and Expense Ratio ... 74.4 85.1
82.7
Policyholder Dividend Ratio ... 13.7 11.6
17.7
----- -----
-----
Combined Ratio ................ 88.1% 96.7%
100.4%
----- -----
------
----- -----
------
Total Workers' Compensation Industry
Statutory Combined Ratio(1) ...... 111.5%(Est.) 121.5%
122.6%
------------------
(1) Industry information was derived from Best's Insurance
Management Reports Property/Casualty Supplement (January 3,
1994 edition).
7
The decrease in the combined ratio for 1993 was primarily caused
by a decrease in the frequency of losses, in part due to a
reduction in fraudulent claims, and a lower underwriting
expense ratio as compared with 1992.
Management believes that the sum of Republic Indemnity's
loss and LAE and underwriting expense ratios (together, its "loss
and expense ratio") has been relatively low compared to that of
other companies writing workers' compensation in California. As
a result of its lower loss and expense ratio, Republic Indemnity
has been able to pay policyholder dividends which are higher than
those paid by most of its competitors.
Management believes that Republic Indemnity's favorable loss
and expense ratio record has been attributable to strict under-
writing standards, loss control services, a disciplined claims
philosophy and expense containment. Management believes that
these factors, as well as Republic Indemnity's favorable reputa-
tion with insureds for paying policyholder dividends, have
contributed to a high policy renewal rate. From 1991 through
1993, the percentage of Republic Indemnity's policies renewed
increased from 72.8% to 83.9% and the percentage of premiums
represented by policy renewals increased from 77.2% to 89.2% of
the premiums eligible for renewal.
In recent years, the California market has been adversely
affected by recessionary economic conditions, resulting in lower
payrolls of California employers that form the basis of premium
assessments. Nevertheless, Republic Indemnity experienced a
17.3% growth in net written premiums in 1993 over 1992. A con-
tributing factor to Republic Indemnity's 1993 premium growth was
the withdrawal from the Southern California market by several
large workers' compensation carriers due to continuing underwrit-
ing losses.
Marketing. Republic Indemnity writes insurance through
approximately 550 independent property and casualty insurance
brokers. In 1993, none of these produced more than 4.6% of total
premiums. The largest three of these produced approximately 10%
of total premiums. Republic Indemnity has in excess of 11,300
policies in force, the largest of which represents less than
1% of net premiums written.
Reinsurance. In its normal course of business and in
accordance with industry practice, Republic Indemnity reinsures a
portion of its exposure with other insurance companies so as to
limit its maximum loss arising out of any one occurrence. Rein-
surance does not legally discharge the original insurer from
primary liability. Republic Indemnity retains the first $1.5
million of each loss, the next $1.5 million of each loss is
reinsured with a major reinsurance company, the next $2 million
of each loss is shared equally by Republic Indemnity and the
reinsurance company and the remaining $120 million of each loss
is covered by reinsurance provided by a group of more than 50
reinsurance companies. Premiums for reinsurance ceded by
Republic
Indemnity in 1993 were 1.0% of net written premiums for the
period.
Republic Indemnity does not assume reinsurance, except as an
accommodation to policyholders who have a small percentage of
their
employees outside the state of California. See Notes 3 and 17
of the Notes to Financial Statements for further information on
reinsurance.
Competition. Republic Indemnity competes with both the
California State Compensation Insurance Fund (the "State Fund")
and over 300 other companies writing workers' compensation
insurance in California. In 1992, the State Fund wrote approxi-
mately $1.8 billion in direct written premiums, which was approx-
imately 20.6% of the insured workers' compensation market in
California. In addition, many employers are self-insured.
According to published sources, no other company wrote in excess
of $470 million in direct written premiums in 1992. Republic
Indemnity wrote $401 million in statutory direct written premiums
in 1992. With a market share of approximately 4.7% in 1992, not
including risks self-insured by employers, Republic Indemnity
believes that it is currently the third largest writer of
workers' compensation insurance in California, including the
State Fund.
Approximately 95% of net premiums written by Republic
Indemnity in 1993 were from the sale of policies that provide for
the discretionary payment of dividends to policyholders as a
refund of premiums paid when Republic Indemnity's experience with
such policyholders has been more favorable than certain specified
levels and Republic Indemnity has had favorable financial
results.
Because companies may not set workers' compensation premiums
at rates lower than those approved by the Insurance Commissioner,
competition is based primarily on an insurer's reputation for
8
paying dividends to policyholders. Management believes that
Republic Indemnity's record and reputation for paying relatively
high policyholder dividends have enhanced its competitive posi-
tion. Moreover, the Company believes that its position was
favorably impacted by the State Fund's reduction of its policy-
holder dividends during 1992 which made the State Fund program
less attractive to the market. Other competitive factors include
loss control services, claims service, service to brokers and
commission schedules. While many companies, including certain of
the largest writers, specialize in the writing of California
workers' compensation insurance, Republic Indemnity believes it
has a competitive advantage over certain other companies offering
all lines of insurance in that its specialization in the workers'
compensation field enables it to concentrate on that business
with a favorable effect upon operations. Republic Indemnity may
be at a competitive disadvantage when businesses that purchase
general property and casualty insurance are encouraged by other
insurers to place their workers' compensation insurance as part
of an overall insurance package. Although Republic Indemnity is
one of the largest writers of workers' compensation insurance in
California, certain of its competitors are larger and/or have
greater resources than Republic Indemnity.
Regulation. Republic Indemnity's insurance activities are
regulated by the California Department of Insurance for the
benefit of policyholders. The Department of Insurance has broad
regulatory, supervisory and administrative powers along the lines
of those promulgated by most states relating to the activities of
their domestically incorporated insurers and the conduct of all
insurance business within their respective jurisdictions, as
described more fully under "Non-Standard Automobile Insurance"
above. As indicated above, minimum premium rates for workers'
compensation insurance are determined by the Insurance Commis-
sioner based in part upon recommendations of the Bureau.
On July 16, 1993, California enacted legislation effecting
an overall 7% reduction in workers' compensation insurance
premium rates with immediate effect, increasing statutory wor-
kers' compensation benefits for temporary and permanent disabili-
ty commencing initially July 1, 1994 and increasing again in
1995 and 1996, expanding the rights of employers under workers'
compensation insurance policies to obtain access to insurance
company files and introducing several reforms intended to reduce
workers' compensation costs. The reforms include a tightening of
the standards for job-related stress and post-termination claims,
introducing measures designed to curb medical costs, limiting the
frequency of medical-legal evaluations, capping the amount of
compensable vocational rehabilitation expenses and strengthening
penalties for fraudulent claims. The legislation authorizes the
Insurance Commissioner to approve further reductions in premium
rates so long as the further reduced rates are "adequate". It
also prohibits the Insurance Commissioner, prior to January 1,
1995, from approving any premium rate that is greater than the
reduced rates effected by the legislation. On July 28, 1993,
California enacted further legislation that will replace the
workers' compensation insurance minimum rate law, effective
January 1, 1995, with a procedure permitting insurers to use
any rate within 30 days after filing it with the Insurance
Commissioner unless the rate is disapproved by the Insurance
Commissioner. On December 1, 1993, the Insurance Commissioner
ordered an additional 12.7% minimum premium rate decrease effec-
tive January 1, 1994 for new and renewal policies entered into
on and after January 1, 1994. The legislation also provides for
the licensing of "managed" health care organizations to provide
care for injuries covered by workers' compensation and generally
permits employers to require employees to obtain medical services
for their work-related injuries for a certain period of time from
a health care organization selected by the employer, unless the
employee chooses to be treated by a physician designated by the
employee prior to the injury.
If the workers' compensation cost savings resulting from the
new legislation are inadequate to offset the impact of premium
rate reductions, increased benefits and expanded employers'
rights, the profitability of Republic Indemnity's workers'
compensation insurance operations could be adversely affected.
Management believes that this effect may be mitigated by Republic
Indemnity's ability to reduce its relatively high policyholder
dividends, although a reduction in dividends could affect premium
volume. Greater price competition is expected to result when the
repeal of the minimum premium rates that now govern all workers'
compensation insurers becomes effective, and Republic Indemnity's
operations could be affected adversely. The Company believes
that the legislation's provisions relating to "managed" health
care organizations will probably result in certain workers'
compensation insurers seeking affiliation, contractual or other-
wise, with one or more health care organizations. The Company
9
continues to evaluate the implications of these provisions but is
unable to predict whether their ultimate impact on its workers'
compensation insurance operations will be positive or adverse.
While Republic Indemnity has continued to operate on a profitable
basis, no assurance can be given that it could continue to do so
in the face of adverse regulatory developments.
Shareholder dividends paid within any twelve-month period
from a California property and casualty insurance company to its
parent without regulatory approval cannot exceed the greater of
10% of the insurer's statutory policyholders' surplus as of the
preceding December 31, or 100% of its net income for the preced-
ing calendar year, a limitation during 1994 of $61.6 million in
the aggregate for Republic Indemnity.
Due to the existence of the State Fund, California does not
require licensed insurers to participate in any involuntary pools
or assigned risk plans for workers' compensation insurance.
California has guarantee regulations to protect policyholders of
insolvent insurance companies. In California, an insurer cannot
be assessed an amount greater than 1% of its premiums written in
the preceding year, and the full amount is required to be recov-
ered through a mandated surcharge to policyholders. Premiums
written under workers' compensation policies are subject to
assessment only with respect to covered losses incurred by the
insolvent insurer under workers' compensation policies. There
were no such assessments for policy year 1993.
Proposition 103, which is described more fully under "Non-
Standard Automobile Insurance" above, does not affect workers'
compensation insurance as directly as other lines of business
principally because its rate rollback feature does not apply to
workers' compensation insurance.
Reinsurance Subsidiary
----------------------
Penn Central Reinsurance Company, a subsidiary of the
Company, commenced the writing of reinsurance in 1990. Earned
premiums in 1993 and 1992 were approximately $10.7 million and
$9.8 million, respectively.
Liability for Property-Casualty Losses and Loss Adjustment
Expenses
-----------------------------------------------------------------
--
The consolidated financial statements of the Company and its
subsidiaries that are incorporated herein by reference include
the estimated liability for unpaid losses and LAE of the Com-
pany's insurance subsidiaries. The liabilities for losses and
LAE are determined using actuarial and statistical procedures and
represent undiscounted estimates of the ultimate net cost of all
unpaid losses and LAE incurred through December 31 of each year.
These estimates do not represent an exact calculation of liabili-
ties but rather involve actuarial projections at a given time of
what the Company expects the ultimate settlement and administra-
tion of claims will cost based on facts and circumstances then
known, estimates of incurred but not reported losses, predictions
of future events, estimates of future trends in claims' severity
and judicial theories of liability as well as other factors such
as inflation and are subject to the effect of future trends on
claim settlement. These estimates are continually reviewed and
adjusted as experience develops and new information becomes
known. In light of present facts and current legal interpreta-
tions, management believes that adequate provision has been made
for loss and LAE reserves. However, establishment of appropriate
reserves is an inherently uncertain process, and there can be no
certainty that currently established reserves will prove adequate
in light of subsequent actual experience. Future loss develop-
ment could require reserves for prior periods to be increased,
which would adversely impact earnings in future periods.
Increases in claim payments are caused by a number of
factors that vary with the individual types of policies written.
Future costs of claims are projected based on historical trends
adjusted for changes in underwriting standards, policy provi-
sions, 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 following table provides an analysis of changes in the
estimated liability for losses and LAE over the past three years,
net of all reinsurance activity, in accordance with GAAP:
10
1993 1992
1991
---- ----
----
(Dollars in
millions)
Balance at beginning of year.............. $763.5 $663.9
$601.7
------ ------
------
Provision for losses and LAE
occurring in the current year........... 914.7 706.8
601.0
Net increase (decrease) in provision
for claims occurring in prior years..... (57.8) (20.2)
(21.7)
------- -------
-------
856.9 686.6
579.3
------- -------
-------
Payments for losses and LAE occurring during:
Current year............................ 413.0 294.7
257.7
Prior years ............................ 345.1 292.3
259.4
------ ------
------
758.1 587.0
517.1
------ ------
------
Loss and LAE reserves of subsidiaries
purchased .............................. 54.0 --
--
------ ------
------
Balance at end of year.................... 916.3 763.5
663.9
Reinsurance receivable on unpaid
losses and LAE at end of year (1)....... 45.1 --
--
------ ------
------
Balance at end of period, gross of
reinsurance receivable (1) ............. $961.4 $763.5
$663.9
------ ------
------
------ ------
------
---------------------
(1) New accounting rules effective in 1993 require that
insurance
liabilities be reported without deducting reinsurance
amounts.
See Note 1 of Notes to Financial Statements.
The decreases in the provision for claims occurring in prior
years results from reductions in the estimated ultimate losses
and LAE related to such claims.
The difference between the liability for losses and LAE
reported in the annual statements filed with the state insurance
departments in accordance with statutory accounting principles
and
that reported in the consolidated financial statements that are
incorporated herein by reference in accordance with GAAP is $45.1
million at December 31, 1993, which is equal to the reinsurance
receivable on unpaid losses and LAE at December 31, 1993.
The following table presents the development of the liabil-
ity for losses and LAE net of reinsurance for 1989 (the year the
Company acquired its first insurance subsidiary) through 1993.
The
top line of the table shows the estimated liability for unpaid
losses and LAE recorded at the end of the indicated years. The
remainder of the table presents development as percentages of the
estimated liability. The development results from additional
information and experience in subsequent years. The middle line
shows a cumulative redundancy which represents the aggregate
percentage 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 liability.
1989 1990 1991 1992
1993
---- ---- ---- ----
----
(Dollars in millions)
Liability for unpaid
losses and LAE ...... $369.1 $601.7 $663.9 $763.5
$916.3
Liability re-estimated as of:
One year later ......... 97.0% 96.5% 97.0% 92.4%
Two years later ........ 89.7% 93.0% 93.4%
Three years later ...... 85.7% 91.0%
Four years later ....... 85.5%
Cumulative Redundancy..... 14.5% 9.0% 6.6% 7.6%
N/A
------ ------ ------ ------
-----
------ ------ ------ ------
-----
Cumulative paid as of:
One year later ......... 19.5% 43.0% 44.1% 40.6%
Two years later ........ 49.1% 64.4% 64.5%
Three years later ...... 64.6% 75.2%
Four years later ....... 71.4%
11
The preceding table does not present accident or policy year
development data. As indicated in the preceding table, the
Company has developed redundancies for all periods presented.
These redundancies were offset, in part, by deficiencies related
to workers' compensation in the 1990 and 1991 accident years.
Furthermore, in evaluating the re-estimated liability and cumula-
tive redundancy, it should be noted that each percentage includes
the effects of changes in amounts for prior periods. For exam-
ple, a redundancy related to losses settled in 1993, but incurred
in 1989, would be included in the re-estimated liability and
cumulative redundancy percentage for each of the years 1989
through 1992. Conditions and trends that have affected develop-
ment of the liability in the past may not necessarily exist in
the future. Accordingly, it is not appropriate to extrapolate
future redundancies based on this table.
NON-INSURANCE OPERATIONS
Businesses Divested and to be Divested
--------------------------------------
On December 10, 1992, the Company announced its intention to
pursue the divestiture of all of its wholly owned non-insurance
subsidiaries, consisting of its defense services operations and
five smaller diversified industrial businesses.
On August 25, 1993, the Company sold its defense services
operations, which provide diverse technology and engineering
support to government agencies worldwide and manufacture various
technical products, to Tracor, Inc. for approximately $94 million
in cash, subject to post-closing working capital adjustments. On
July 13, 1993, the Company sold its Engineering and Technical
Services unit, which principally designs, engineers and installs
satellite and microwave communications networks, for cash and
notes approximating its $7 million book value. On September 22,
1993, the Company sold its NES unit, which provides consulting,
engineering, systems design and other services to the nuclear
energy and hazardous waste industries, for cash and notes appro-
ximating its $1 million book value. On March 11, 1994, the
Company sold its Sperry Rail unit, which provides track testing
services for the railroad industry, for approximately $9.8
million in cash.
The Company also is pursuing the sale of the following two
businesses:
The Company's Apparatus unit manufactures aerial lift
trucks and utility bodies (mobile tools) under the Telsta
and Holan product names for the telecommunications, electric
utility and cable television industries which are used for
installing and maintaining aerial cable. This unit also
manufactures telecommunications cable pressurization and
safety equipment under the Puregas and Mopeco product names
for the telecommunications and power utility industries.
The Company's Marathon Power Technologies Company unit
manufactures vented-cell nickel-cadmium batteries which are
used primarily for private, commercial and military aircraft
and other heavy-duty starting applications and also as a
standby power source. This unit also manufactures sealed-
cell nickel-cadmium batteries, as well as static inverters
for aircraft electrical systems.
The Company has reached agreements in principle for the sale of
these two businesses for an aggregate of approximately $36
million.
See Note 2 of Notes to Financial Statements for information
with respect to the revenues, operating income and carrying value
of the businesses sold and to be sold.
Other
-----
Contract Drilling. The Company owns approximately 53.9% of
the common stock of DI Industries, Inc. ("DI"), which is engaged
primarily in the business of providing onshore contract drilling
and well workover services to firms in the oil and gas industry.
DI owns or operates 97 drilling and workover rigs located in 12
states, four rigs in Argentina and one rig in Guatemala. Drill-
ing operations are conducted primarily in Texas, Louisiana,
Oklahoma, Arkansas, Ohio, western Pennsylvania, New York, Michi-
gan, Argentina and Guatemala. Well workover services are provid-
ed in Montana, Utah, North Dakota and Colorado. Customers
include large and small independent producers and major oil
companies. DI also engages in commercial drilling activities,
generally consisting of drilling shafts for underground tunneling
projects and caissons for highway and bridge projects, and heavy
equipment sales and repair. DI also engages in oil and gas
exploration, production and development, primarily in Oklahoma,
Texas and Louisiana.
12
Oil and Gas Properties. The Company owns certain oil and
gas properties, located primarily in Oklahoma and Texas.
Coal Properties. The Company and a subsidiary own fee
interests in coal properties in Illinois, Ohio and Pennsylvania.
Most of these properties are leased at various royalty rates to
coal mining companies under long-term arrangements, including
fixed-term leases with renewal options and exhaustion leases.
The Company does not produce, prepare or sell coal or conduct
mining operations.
Eight mines operated by lessees of the leased coal proper-
ties, and carried at approximately $3.4 million, supply steam
coal for electrical utilities or industrial customers. The
future level of royalties above certain minimum and advance
royalties from the reserves presently under lease will depend
upon the rate of mining, the change in certain price indices and,
in some instances, the sales price of the coal. During 1993, the
leased coal properties produced royalties of $6.7 million.
GCT and Related Development Rights. Subsidiaries of the
Company own GCT in New York City and rights (the "Development
Rights") to develop or transfer approximately 1.7 million square
feet of floor space in the GCT area. The Development Rights are
derived from such subsidiaries' ownership of the land upon which
GCT is constructed. Utilization or transfer of such rights
requires the approval of certain New York City agencies. If
required governmental approvals are obtained, the floor space may
be developed on the GCT site, contiguous sites or certain parcels
of land in the vicinity, in each case subject to the requirements
of applicable law. In 1972, the Company leased GCT (but not the
Development Rights) and its related Harlem and Hudson rail lines
to
the MTA for an initial term expiring in 2032, which is subject to
renewal options.
In December 1993, the Company reached an agreement in
principle with the MTA that provides for an extension of the end
of the Company's lease to the MTA of GCT and the Harlem and
Hudson commuter rail lines from the year 2032 to 2274. It also
provides for the grant of an option to the MTA to purchase the
leased property in 25 years. In return, the Company would
receive consideration having an estimated present value of $55
million, consisting principally of a $5 million cash payment and
an increase in future lease rental payments to the Company of
approximately $2 million per year. The agreement in principle
also calls for the Company to relinquish its right to construct
an office building over GCT. However, the Company will retain
its rights to transfer the Development Rights from GCT to other
sites in the surrounding area.
In November 1983, the Company and two of its subsidiaries
entered into an agreement (the "Agreement") with a partnership
controlled by The First Boston Corporation (the "Partnership")
for the sale by the two subsidiaries to the Partnership of 1.5
million square feet of Development Rights for use on one or more
sites neighboring GCT. If a closing were to occur under the
Agreement, the purchase price to be received by the two subsid-
iaries and the consideration to be received by the Company for
release of its leasehold interest in the Development Rights
could, under the applicable contractual formula, exceed $95
million. Consummation of the transaction is conditioned on
receipt by the Partnership of a special permit from the New York
City Planning Commission (the "CPC") to transfer at least a
majority of the Development Rights under contract to a site owned
by the Partnership in the vicinity of GCT. In August 1989, the
CPC denied the Partnership's application for such a permit,
whereupon the Partnership brought a lawsuit in New York State
Supreme Court challenging the denial. In August 1991, the Court
dismissed the lawsuit on a summary judgment motion. In May 1993,
the Appellate Division of the New York State Supreme Court af-
firmed the dismissal. The New York State Court of Appeals
refused to grant leave for further appeal. In February 1994, the
Partnership petitioned the U.S. Supreme Court for a writ of
certiorari to review the case. It is not possible at this time to
predict whether the Partnership's lawsuit will be successful.
The Agreement terminates by its terms one year after final
resolution of the lawsuit if a special permit for the transfer of
Development Rights to the Partnership's site has not theretofore
been issued by the CPC.
Real Estate Operations. Subsidiaries of the Company own
certain land and rights associated with the potential development
of areas adjacent to, and above, certain rail lines in the New
York City and Westchester County, New York areas. Scarsdale, New
York has designated a subsidiary of the Company as preferred
developer for the construction of a residential and retail use
project adjacent to the Scarsdale commuter railroad station. The
agreement in principle with the MTA discussed above under "GCT
and Related Development Rights" would transfer all such develop-
ment rights to the MTA, except those related to the proposed
Scarsdale project.
13
The Company also has a program for the sale of real estate
assets that relate to its former rail operations and other
surplus land and manufacturing facilities.
Management Company. Buckeye Management Company, a subsid-
iary of the Company, manages as the sole general partner of, and
owns a 1% interest in, Buckeye Partners, L.P., which owns and
operates refined petroleum products and crude oil pipelines in
the northeast and midwestern United States.
GENERAL
Compliance with federal, state and local environmental
protection laws during 1993 had no material effect upon the
Company's capital expenditures, earnings or competitive position,
and management anticipates no such material effects resulting
from compliance during 1994. However, certain claims are pending
against the Company and certain of its subsidiaries relating to
the generation, disposal or release into the environment of
allegedly hazardous substances, as described below under Item
3--"Legal Proceedings".
EMPLOYEES
As of December 31, 1993, the approximate number of employees
of the Company and its consolidated subsidiaries was:
Insurance ....................................... 3,000
Non-Insurance Operations ........................ 2,300
Corporate........................................ 100
-----
Total ........................................... 5,400
-----
-----
Approximately 550 of these employees, all in the Non-Insur-
ance Operations, are covered by collective bargaining agreements.
ITEM 2. PROPERTIES
The Company's operations are conducted principally within
the United States, and the Company believes that its principal
facilities, all of which are owned unless otherwise noted, are
maintained in good operating condition and are adequate for the
present needs of its operations.
The principal facilities by reportable industry segment and
other operations are as follows:
INSURANCE
Non-Standard Automobile
-----------------------
The NSA Group's principal offices are leased facilities
located in Birmingham, Alabama (57,000 square feet), Atlanta
(78,000 square feet) and Norcross (58,000 square feet), Georgia
and Independence, Ohio (29,000 square feet). These leases expire
in January 1995, May 1998, August 2000 and March 1998, respec-
tively.
Workers' Compensation
---------------------
Republic Indemnity leases office space in Encino (72,000
square feet), San Francisco (43,000 square feet), San Diego
(11,000 square feet) and Sacramento (9,000 square feet), Califor-
nia, and Phoenix, Arizona (2,000 square feet) under agreements
expiring in May 1996, March 2001, December 1998, July 1996 and
September 1994, respectively.
NON-INSURANCE OPERATIONS
Businesses to be Divested
-------------------------
The Company's Apparatus unit operates four plants in four
states, which have an aggregate floor space of approximately
301,000 square feet. Two of these four plants (aggregating
41,000 square feet) are leased under leases expiring in July 1996
and January 1997, respectively, and both have renewal options.
14
Power Tech owns 50 acres in Waco, Texas on which it has a 200,000
square-foot battery manufacturing facility and a 15,000
square-foot office facility.
Contract Drilling
-----------------
At March 15, 1994, DI's contract oil and gas well drilling
fleet consisted of 60 rigs (21 active) based in Texas, Louisiana,
Oklahoma, Arkansas, Ohio, western Pennsylvania, New York, Michi-
gan, Argentina and Guatemala. At March 15, 1994, the well
workover service rig fleet totaled 24 rigs (18 active) based in
Montana, Utah, North Dakota and Colorado. In addition, at March
15, 1994, DI owned 3 and operated 13 commercial drilling rigs
under a cash flow sharing agreement, 6 of which were active.
Also, at March 15, 1994, 2 rigs were held for resale.
Oil and Gas Properties
----------------------
All of the Company's oil and gas properties are located in
the United States. As of December 31, 1993, the Company had
interests in 73 gross (36 net) producing oil wells and 4 gross (1
net) producing gas wells and 6,160 gross (2,965 net) developed
and 23,246 gross (5,601 net) undeveloped acres. As of March 31,
1993, DI had interests in 238 gross (9 net) producing oil
wells and 574 gross (14.7 net) producing gas wells and 179,539
gross (5,648 net) developed and 335 net undeveloped acres.
Coal Properties
---------------
The Company and a subsidiary own fee interests in approxi-
mately 161,000 acres of coal properties in Illinois, Ohio and
Pennsylvania. Approximately 105,000 acres of these properties
remain leased at various royalty rates to coal mining companies
under long-term arrangements, including fixed-term leases with
renewal options and exhaustion leases.
GCT and Related Development Rights
----------------------------------
Subsidiaries of the Company own GCT and rights to develop
floor space in the Grand Central Terminal area of New York City,
as discussed under Item 1--"Description of Businesses--Non-
Insurance Operations--GCT and Related Development Rights".
Real Estate Operations
----------------------
The Company's real estate inventory at December 31,1993
included approximately 20,000 acres of real estate (including
approximately 80 acres with surplus manufacturing facilities)
spread throughout 13 states.
ITEM 3. LEGAL PROCEEDINGS
The U.S. Government and other parties have asserted claims
against the Company as a potentially responsible party for
clean-up costs ("Clean-up Costs") under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA")
at a Superfund site at the Paoli, Pennsylvania railyard ("Paoli
Yard"), formerly owned and operated by the Company's prede-
cessor, Penn Central Transportation Company ("PCTC"). A Record
of Decision was issued by the U.S. Environmental Protection
Agency on July 21, 1992 presenting a final selected remedial
action for the Paoli Yard in accordance with CERCLA having an
estimated cost of approximately $28.3 million. This figure is an
estimate of the cost to remediate the entire yard and off-site
property to a level acceptable to the U.S. EPA. In March 1992,
the Company filed a lawsuit in the Special Court created by the
Regional Rail Reorganization Act (the "Rail Act") seeking to
enjoin the U.S. Government, Consolidated Rail Corporation ("Con-
rail") and other parties from prosecuting claims against the
Company for the Clean-up Costs on the grounds that the Paoli Yard
environmental claims are barred by: (1) the terms by which the
Paoli Yard was transferred by PCTC to Conrail "as is" in 1976
pursuant to the Rail Act; (2) the 1980 settlement of the Valua-
tion Case proceedings to determine compensation to be paid by the
U.S. Government for the railroad properties transferred by PCTC
pursuant to the Rail Act; and (3) the U.S. Constitution. On
February 9, 1993, the Special Court denied the U.S. Government's
motion to dismiss the Company's complaint for lack of subject
matter jurisdiction, holding that it had exclusive jurisdiction
to decide these issues. On April 30, 1993, the U.S. Government's
separate action in U.S. District Court to recover Clean-up Costs
from the Company was stayed pending final judgment by the Special
Court in the lawsuit filed by the Company. The parties have
filed cross motions for summary judgment, which were argued to
15
the Special Court on February 23, 1994 and are now under submis-
sion. In addition to the Special Court litigation, the Company
believes that it has other substantial defenses to claims for
Clean-up Costs at the Paoli Yard, including its position that
other parties are responsible for substantial percentages of such
Clean-up Costs by virtue of their operation of electrified rail-
road cars at the Paoli Yard that discharged PCB's at higher
levels than discharged by cars operated by PCTC. The Company
also intends to make claims against certain insurance carriers
for reimbursement of any Clean-up Costs that the Company may
incur. The Company has not established any accrual for potential
liability for Clean-up Costs at the Paoli Yard.
There are certain other claims involving the Company and
certain of its subsidiaries, including claims relating to the
generation, disposal or release into the environment of allegedly
hazardous substances and pre-reorganization personal injury
claims, that allege or involve amounts that are potentially
substantial in the aggregate.
The Paoli Yard litigation and the preponderance of the other
claims arose out of railroad operations disposed of by PCTC prior
to its 1978 reorganization and, accordingly, any ultimate liabil-
ity resulting therefrom in excess of previously established loss
accruals would be attributable to such pre-reorganization events
and circumstances. In accordance with the Company's reorganiza-
tion accounting policy, any such ultimate liability will reduce
the Company's capital surplus and shareholders' equity, but will
not be charged to income.
The Company believes that its maximum aggregate potential
exposure at December 31, 1993 with respect to the foregoing
environmental claims (other than Paoli Yard), net of related loss
accruals, was approximately $15 million for claims arising out of
pre-reorganization operations and in the range of $1 million to
$4 million for claims arising out of post-reorganization opera-
tions (which range depends upon the method of remediation, if
any, required). The Company believes that it has meritorious
defenses in such matters, including its position that other
parties are responsible for substantial percentages of such
amounts claimed and, in the case of the post-reorganization
matter referred to above, its belief that the relevant regulatory
authority will permit remediation to be deferred until there is a
change in the use of the facility which the Company believes is
unlikely.
In management's opinion, the outcome of the foregoing claims
will not, individually or in the aggregate, have a material
adverse effect on the financial condition or results of opera-
tions of the Company. In making this assessment, management has
taken into account previously established loss accruals in its
financial statements and probable recoveries from insurance
carriers and other third parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The persons named below are executive officers of the
Company who have been elected to serve in the capacities indicat-
ed at the pleasure of the Company's Board of Directors.
NAME, AGE AND PRINCIPAL BUSINESS AFFILIATIONS
POSITIONS WITH THE COMPANY DURING PAST FIVE YEARS
-------------------------- -------------------------------
Carl H. Lindner, 74 Mr. Lindner has been Chairman
Chairman of the Board and of the Board and Chief Execu-
Chief Executive Officer tive Officer of the Company for
more than five years. During
the
past five years, Mr. Lindner
has been Chairman of the Board
and Chief Executive Officer of
American Financial Corporation,
a diversified financial ser-
vices company. He is also a
director of American Annuity
Group, Inc., American Financial
Enterprises, Inc., Chiquita
Brands International, Inc.,
General Cable Corporation and
Great American Communications
Company. Mr. Lindner is Carl
H. Lindner III's father.
16
NAME, AGE AND PRINCIPAL BUSINESS AFFILIATIONS
POSITIONS WITH THE COMPANY DURING PAST FIVE YEARS
-------------------------- -------------------------------
Carl H. Lindner III, 40 Mr. Lindner was elected Presi-
President and Chief Operating dent and Chief Operating
Officer and a Director Officer of the Company in
February 1992. Prior thereto,
he had served as Vice Chairman
of the Board of the Company
since October 1991. During the
past five years, Mr. Lindner
has been President of Great
American Insurance Company, a
property and casualty insurance
company owned by American
Financial Corporation.
Richard M. Haverland, 53 Mr. Haverland was elected
Executive Vice President-- Executive Vice President--
Insurance Group and a Insurance Group of the Company
Director in February 1991. Prior
thereto, Mr. Haverland was
Executive Vice President of
Great American Holding Corpora-
tion, a holding company subsid-
iary of American Financial
Corporation, a diversified
financial services company
(April 1984 to February 1991).
Neil M. Hahl, 45 Mr. Hahl has been Senior Vice
Senior Vice President President of the Company for
and a Director more than five years. Mr. Hahl
is a director of Buckeye
Management Company.
Robert W. Olson, 48 Mr. Olson has been Senior Vice
Senior Vice President, President, General Counsel and
General Counsel and Secretary of the Company for
Secretary and a Director more than five years. Mr.
Olson is a director of DI
Industries, Inc.
Robert F. Amory, 48 Mr. Amory was elected Vice
Vice President and Controller President of the Company in
December 1989 and Controller
in September 1986.
R. Bruce Brumbaugh, 41 Mr. Brumbaugh was elected Vice
Vice President -- Risk President -- Risk Management of
Management the Company in February 1990.
Prior thereto, Mr. Brumbaugh
was
Staff Vice President--Risk
Management (June 1987 to
February 1990).
Richard A. Carlson, 42 Mr. Carlson was elected Vice
Vice President and President in February 1994 and,
Assistant General Counsel prior thereto, had been Staff
Vice
President since January 1990
and Assistant General Counsel
since April 1988.
Michael L. Cioffi, 41 Mr. Cioffi was elected Vice
Vice President and President in February 1993 and,
Assistant General Counsel prior thereto, had been Staff
Vice
President since January 1990
and Assistant General Counsel
since February 1988.
Robert E. Gill, 47 Mr. Gill was elected Vice
Vice President--Taxes President--Taxes of the Company
in February 1990. Prior
thereto, Mr. Gill was Staff
Vice President--Taxes (July
1986 to February 1990).
Philip A. Hagel, 49 Mr. Hagel was elected Vice
Vice President and Treasurer President of the Company in
February 1990 and Treasurer in
January 1988. Mr. Hagel is a
director of DI Industries, Inc.
Michael D. Mauer, 41 Mr. Mauer was elected Vice
Vice President President of the Company in
February 1990. Prior thereto,
he was Staff Vice President--
General Auditor and Adminis-
trative Services (January 1987
to February 1990).
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
"Dividend Policy and Stock Market Prices" on page 47 of
the Company's 1993 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Consolidated Financial Data" on page 25 of
the Company's 1993 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 15
through 24 of the Company's 1993 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company
and its subsidiaries, included on pages 26 through 44
of the Company's 1993 Annual Report to Shareholders,
and "Quarterly Financial Data", included on page 46 of
such Annual Report, are incorporated herein by refer-
ence.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except to the extent included in Part I under the
caption "Executive Officers of the Registrant", the
information called for by Item 10 is incorporated by
reference to the definitive proxy statement involving
the election of directors which the Company intends to
file with the Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934 not later
than 120 days after December 31, 1993.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated
by reference to the definitive proxy statement involv-
ing the election of directors which the Company intends
to file with the Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934 not later
than 120 days after December 31, 1993.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for by Item 12 is incorporated
by reference to the definitive proxy statement involv-
ing the election of directors which the Company intends
to file with the Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934 not later
than 120 days after December 31, 1993.
American Financial Corporation ("AFC") beneficially
owns approximately 41% of the outstanding Common Stock
of the Company and has substantial influence over the
management and operations of the Company. Carl H.
Lindner, Chairman of the Board and Chief Executive
Officer of the Company, is Chairman of the Board and
Chief Executive Officer of AFC. All of AFC's out-
standing Common Stock is owned by Mr. Lindner, members
of his family and trusts for their benefit. AFC and
Mr. Lindner may be deemed to be controlling persons of
the Company. See "Executive Officers of the Regis-
trant" in Part I.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated
by reference to the definitive proxy statement involv-
ing the election of directors which the Company intends
to file with the Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934 not later
than 120 days after December 31, 1993.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) The following documents are filed as a part of this
report:
(1) and (2) Financial Statements and Financial State-
ment Schedules--see Index to Financial Statements
and Financial Statement Schedules appearing on Page
F-1.
(3) Exhibits:
EXHIBIT NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K)
---------------
(3) (i) ---Amended and Restated Articles of Incor-
poration of the Company, as amended effec-
tive March 25, 1994.
(ii) ---By-Laws of the Company, as amended *
July 30, 1992, incorporated by reference
to Exhibit (3)(iii) to the Company's
Annual Report on Form 10-K for 1992.
(4)(i) ---Order No. 3708 of the United States *
District Court for the Eastern District
of Pennsylvania in In the Matter of Penn
Central Transportation Company, Debtor,
Bankruptcy No. 70-347 dated August 17,
1978 directing the consummation of
the Plan of Reorganization for Penn Central
Transportation Company, incorporated by
reference to Exhibit 4 to Form 8-K Current
Report of Penn Central Transportation
Company for August 1978.
(4)(ii) (a) ---Certain instruments with respect to
long-term debt of subsidiaries of the
Company which do not relate to debt
exceeding 10% of the total assets of
the Company and its consolidated sub-
sidiaries are omitted pursuant to
Item 601(b)(4)(iii)(A) of Regulation S-K,
17 C.F.R. Section 229.601. The Company
hereby agrees to furnish supplementally to
the Securities and Exchange Commission a
copy of each such instrument upon request.
(b) ---(i) Indenture dated as of August 1, *
1989 between the Company and Morgan
Guaranty Trust Company of New York, as
Trustee, regarding the Company's Sub-
ordinated Debt Securities (the "Indenture"),
incorporated by reference to Exhibit 4.1
to the Company's Form 8-K Current Report
dated August 10, 1989.
---(ii) Instrument of Resignation of Trustee *
and Appointment and Acceptance of Successor
Trustee and Appointment of Agent dated as
of November 15, 1991 among the Company,
Morgan Guaranty Trust Company of New York
as Resigning Trustee and Star Bank, N.A. as
Successor Trustee, incorporated by
reference to Exhibit (4)(ii)(d)(ii) to
the Company's Annual Report on Form 10-K
for 1991.
---(iii) Officer's Certificate Pursuant to *
Sections 102 and 301 of the Indenture
relating to authentication and designation
of the Company's 9-3/4% Subordinated Notes
due August 1, 1999, to which is attached
the Form of Note, incorporated by reference
to Exhibit 4.2 to the Company's Form 8-K
Current Report dated August 10, 1989.
---------------
* Asterisk indicates an exhibit previously filed with the
Securities
and Exchange Commission incorporated herein by reference.
19
EXHIBIT NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K)
---------------
---(iv) Officer's Certificate Pursuant to *
Sections 102 and 301 of the Indenture
relating to authentication and designation
of the Company's 10-5/8% Subordinated Notes
due April 15, 2000, to which is attached
the Form of Note, incorporated by reference
to Exhibit 4.1 to the Company's Form 8-K
Current Report dated April 19, 1990.
---(v) Officer's Certificate Pursuant to *
Sections 102 and 301 of the Indenture
relating to authentication and designation
of the Company's 10-7/8% Subordinated Notes
due May 1, 2011, to which is attached the
Form of Note, incorporated by reference
to Exhibit 4.1 to the Company's Form 8
amendment dated May 8, 1991 to the Com-
pany's Form 8-K Current Report dated May 7,
1991.
(10)(i) (a) ---(i) Intercompany Agreement, dated June 9, *
1992, by and between the Company and
General Cable Corporation, incorporated by
reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated June 9,
1992.
---(ii) Subordinated Promissory Note of *
General Cable Corporation due 2007 in the
principal amount of $255,000,000 payable
to the Company, incorporated by reference
to Exhibit 10.1 to the Company's Current
Report on Form 8-K dated June 30, 1992.
(b) ---Stock Purchase Agreement, dated as of *
June 10, 1993, among the Company, PCC
Technical Industries, Inc. and Tracor,
Inc., incorporated by reference to
Exhibit (99) to the Company's Current
Report on Form 8-K dated May 26, 1993.
The following Exhibits (10)(iii)(a) through (10)(iii)(g) are
compensatory plans and arrangements in which directors or execu-
tive officers participate:
(iii) (a) ---(i) The Company's Stock Option Plan, as *
amended March 25, 1992, incorporated by
reference to Exhibit (10)(iii)(a)(i) to
the Company's Annual Report on Form 10-K
for 1992.
---(ii) Amendment to the Company's Stock *
Option Plan adopted by the Company's
Board of Directors on March 24, 1993,
incorporated by reference to Exhibit
(10)(iii)(a)(ii) to the Company's Annual
Report on Form 10-K for 1992.
---(iii) Forms of stock option agreements *
used to evidence options granted under
the Company's Stock Option Plan to officers
and directors of the Company, incorporated
by reference to Exhibit (10)(iii)(a)(iii)
to the Company's Annual Report on Form 10-K
for 1992.
---(iv) The Company's Stock Option Loan *
Program, as amended February 8, 1991,
incorporated by reference to Exhibit
(10)(iii)(a)(v) to the Company's Annual
Report on Form 10-K for 1990.
---(v) The Company's 1992 Spin-Off Stock *
Option Plan adopted by the Company's
Board of Directors on March 25, 1992,
incorporated by reference to Exhibit
(10)(iii)(a)(vi) to the Company's Annual
Report on Form 10-K for 1991.
---------------
* Asterisk indicates an exhibit previously filed with the
Securities
and Exchange Commission and incorporated herein by reference.
20
EXHIBIT NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K)
---------------
(b) ---The Company's Annual Incentive Compen- *
sation Plan, as amended February 12, 1992,
incorporated by reference to Exhibit
(10)(iii)(b) to the Company's Annual
Report on Form 10-K for 1991.
(c) ---Description of the Company's retirement *
program for outside directors, as adopted
by the Company's Board of Directors on
March 23, 1983, incorporated by reference
to Exhibit (10)(iii)(i) to the Company's
Annual Report on Form 10-K for 1982.
(d) ---The Company's Employee Stock Redemption *
Program, as adopted by the Company's
Board of Directors on March 28, 1985,
incorporated by reference to Exhibit
(10)(iii)(j) to the Company's Annual
Report on Form 10-K for 1984.
(e) ---(i) Severance Agreement dated March 29, *
1987 between the Company and Alfred W.
Martinelli, a director of the Company,
incorporated by reference to Exhibit
(10)(iii)(a)(i) to the Company's Form
10-Q Quarterly Report for the Quarter
Ended March 31, 1987.
---(ii) Consulting Agreement dated as of *
March 29, 1987 between the Company and
Alfred W. Martinelli, incorporated by
reference to Exhibit (10)(iii)(a)(ii)
to the Company's Form 10-Q Quarterly
Report for the Quarter Ended March 31,
1987.
---(iii) Letter agreement amending the fore- *
going Consulting and Severance Agreements
dated December 9, 1991 between the Company
and Alfred W. Martinelli, incorporated by
reference to Exhibit (10)(iii)(e)(iii)
to the Company's Annual Report on Form 10-K
for 1991.
(f) ---Letters dated April 9, 1987 from the *
Company to each of Neil M. Hahl and
Robert W. Olson, officers of the Company,
with respect to severance arrangements, as
supplemented by letters dated June 26, 1987
to each such officer, incorporated by
reference to Exhibit (10)(iii)(a) to the
Company's Form 10-Q Quarterly Report for
the Quarter Ended June 30, 1987.
(g) ---(i) Excess of Loss Agreement, effective *
March 31, 1988, between Republic Indemnity
Company of America and Great American
Insurance Company, incorporated by refer-
ence to Exhibit (g)(1) to Amendment No. 1
to Schedule 13E-3, dated January 17, 1989,
relating to Republic American Corporation
filed by Republic American Corporation,
the Company, RAWC Acquisition Corp.,
American Financial Corporation and Carl H.
Lindner (the "Schedule 13E-3 Amendment").
---(ii) First Amendment to Excess of Loss *
Agreement, effective March 31, 1988,
between Republic Indemnity Company of
America and Great American Insurance
Company, incorporated by reference to
Exhibit (g)(2) to the Schedule 13E-3
Amendment.
(h) ---(i) Business Assumption Agreement, *
effective as of December 31, 1990,
between Stonewall Insurance Company and
Dixie Insurance Company, incorporated
by reference to Exhibit (10)(iii)(o)(i)
to the Company's Annual Report on Form
10-K for 1990.
---------------
* Asterisk indicates an exhibit previously filed with the
Securities
and Exchange Commission and incorporated herein by reference.
21
EXHIBIT NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K)
---------------
---(ii) Quota Share Agreements, effective *
December 31, 1990, between Stonewall
Insurance Company and Dixie Insurance
Company, incorporated by reference to
Exhibit (10)(iii)(o)(ii) to the Company's
Annual Report on Form 10-K for 1990.
---(iii) Management Agreement, effective as *
of January 1, 1991, by and between Dixie
Insurance Company and Stonewall Insurance
Company, incorporated by reference to
Exhibit (10)(iii)(o)(iii) to the Company's
Annual Report on Form 10-K for 1990.
(i) ---Excess of Loss Agreements, effective *
December 31, 1990, between Great American
Insurance Company and each of Atlanta
Casualty Company, Dixie Insurance Company
and Windsor Insurance Company, incorporated
by reference to Exhibit (10)(iii)(p) to the
Company's Annual Report on Form 10-K for
1990.
(j) ---Premium Payment Agreement, effective as *
of January 1, 1991, by and between Great
American Insurance Company and the Company,
incorporated by reference to Exhibit
(10)(iii)(q) to the Company's Annual Report
on Form 10-K for 1990.
(11) ---Supplemental information regarding computa-
tions of net income per share amounts.
(12) ---Calculation of ratio of earnings to fixed
charges.
(13) ---Portions of the Company's 1993 Annual Report
to Shareholders.
(21) ---List of subsidiaries of the Company.
(23) ---Consent of Deloitte & Touche.
(28) ---Information from reports provided to state
regulatory authorities.
(b) Reports on Form 8-K filed during the quarter ended
December 31, 1993:
None
---------------
* Asterisk indicates an exhibit previously filed with the
Securities
and Exchange Commission and incorporated herein by reference.
22
For the purposes of complying with the amendments to the
rules governing Form S-8 (effective July 13, 1990) under the
Securities Act of 1933, the undersigned registrant hereby under-
takes as follows, which undertaking shall be incorporated by
reference into registrant's Registration Statement on Form
S-8 No. 2-81422 (filed January 20, 1983), registrant's Post-
Effective Amendment No. 1 to Registration Statement on Form S-8
No. 2-72453 (filed December 23, 1983), registrant's Registration
Statement on Form S-8 No. 33-34871 (filed May 11, 1990) and
registrant's Registration Statement on Form S-8 No. 33-48700
(filed June 17, 1992):
Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to direc-
tors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or contro-
lling person in connection with the securities being regis-
tered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling prece-
dent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against
public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
23
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED
THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THERE-
UNTO DULY AUTHORIZED.
AMERICAN PREMIER UNDERWRITERS, INC.
(Registrant)
By Carl H. Lindner
---------------------------------
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Date: March 29, 1994
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.
Date: March 29, 1994 By Hugh F. Culverhouse
--------------------------------
Hugh F. Culverhouse
Director
Date: March 29, 1994 By Theodore H. Emmerich
------------------------------
Theodore H. Emmerich
Director
Date: March 29, 1994 By James E. Evans
--------------------------------
James E. Evans
Director
Date: March 29, 1994 By Neil M. Hahl
--------------------------------
Neil M. Hahl
Senior Vice President and a Director
(Principal Financial Officer)
Date: March 29, 1994 By Richard M. Haverland
--------------------------------
Richard M. Haverland
Director
Date: March 29, 1994 By Thomas M. Hunt
--------------------------------
Thomas M. Hunt
Director
24
Date: March 29, 1994 By Carl H. Lindner
--------------------------------
Carl H. Lindner
Chairman of the Board and Chief
Executive Officer and a Director
Date: March 29, 1994 By Carl H. Lindner III
--------------------------------
Carl H. Lindner III
Director
Date: March 29, 1994 By S. Craig Lindner
--------------------------------
S. Craig Lindner
Director
Date: March 29, 1994 By Alfred W. Martinelli
--------------------------------
Alfred W. Martinelli
Director
Date: March 29, 1994 By Robert W. Olson
--------------------------------
Robert W. Olson
Director
Date: March 29, 1994 By Robert F. Amory
--------------------------------
Robert F. Amory
Vice President and Controller
(Principal Accounting Officer)
25
AMERICAN PREMIER UNDERWRITERS, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE
NUMBER
-----------
Independent Auditors' Report...............................
F-2
American Premier Underwriters, Inc. and Consolidated
Subsidiaries:
Statement of Income--For the years ended December
31, 1993, 1992 and 1991............................
*
Balance Sheet--December 31, 1993 and 1992............
*
Statement of Cash Flows--For the years ended
December 31, 1993, 1992 and 1991...................
*
Notes to Financial Statements........................
*
Schedule II--Amounts Receivable from Related
Parties and Underwriters, Promoters and Employees
Other than Related Parties.........................
S-1
Schedule III--Condensed Financial Information of
Registrant.........................................
S-3
Schedule VII--Guarantees of Securities and Other
Obligations of Other Issuers.......................
S-5
Schedule VIII--Valuation and Qualifying
Accounts...........................................
S-5
Schedule X--Supplemental Information Concerning
Property-Casualty Insurance Operations.............
S-6
Schedules other than those listed above are omitted because
they are either not applicable or not required or the information
required is included in the consolidated financial statements or
notes thereto.
-------------------
* Incorporated by reference to the Company's 1993 Annual
Report to Shareholders.
F-1
INDEPENDENT AUDITORS' REPORT
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 accompanying Index to
Financial Statements and Financial Statement Schedules. These
financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and finan-
cial statement schedules based on our audits.
We conducted our audits in accordance with generally accept-
ed auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of American Premier
Underwriters, Inc. and Consolidated Subsidiaries at December 31,
1993 and 1992 and the results of its operations and its cash
flows for each of the three years in the period ended December
31, 1993 in conformity with generally accepted accounting princi-
ples. Also, in our opinion, such financial statement schedules,
when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the
information shown therein.
As discussed in Note 1 to the financial statements, in 1992
the Company changed its method of accounting for income taxes to
conform with Statement of Financial Accounting Standards No. 109.
Deloitte & Touche
Cincinnati, Ohio
February 16, 1994
(March 25, 1994 with respect
to the change of the Company's
name as discussed in Note 1
to the financial statements)
F-2
SCHEDULE II
AMERICAN PREMIER UNDERWRITERS, INC. AND
CONSOLIDATED SUBSIDIARIES
Amounts Receivable from Related Parties and
Underwriters,
Promoters and Employees Other than Related
Parties
For the Years Ended December 31, 1993, 1992
and 1991
(Dollars in Thousands)
Balance at
Beginning of
Deductions
End of Period
Period
Amounts Amounts
Name of Debtor Current
Noncurrent Additions Collected Written-Off Other
Current Noncurrent
Year ended December 31, 1993:
Officers and employees of the
Company or its Subsidiaries
and related parties:
American Annuity Group, Inc. (a) $ 1,835
$ 724 $ 1,000
$ 1,559
General Cable Corporation (b)... $255,000
$255,000
General Cable Corporation (c)... 36,900
36,900
0
General Cable Corporation (d)... 31,812
31,812
R.E. Gill (e)................... 117
117
N.M. Hahl (e)................... 123
161
284
J.M. Kampf (f).................. 332
332
0
A.W. Martinelli (g)............. 8,906
8,906
R.W. Olson (e).................. 260
215 32
443
S.Stavenhagen (h)............... 100
100
0
Year ended December 31, 1992:
Officers and employees of the
Company or its Subsidiaries
and related parties:
American Annuity Group, Inc. (a) $ 1,231
$ 1,104 $ 500
$ 1,835
M.A. Cramer, Jr. (i)............ 489
489
$ 0
General Cable Corporation (b)...
255,000
255,000
General Cable Corporation (c)...
36,900
36,900
R.E. Gill (e)...................
117
117
N.M. Hahl (e)...................
123
123
J.M. Kampf (j).................. 403
734 805
332
A.W. Martinelli (e,g,k)......... 9,697
1,842 2,633
8,906
R.W. Olson (e).................. 170
118 28
260
S.Stavenhagen (h)............... 101
1
100
S-1
Year ended December 31, 1991:
Officers and employees of the
Company or its Subsidiaries
and related parties:
R.F. Amory (h,l)................ $ 293
$ 2 $ 291
$ 0
J.A. Anderson (h,l)............. 358
2 356
0
R.B. Brumbaugh (h,l)............ 181
2 179
0
R.W. Bubak (h,l)................ 168
168
0
M.A. Cramer, Jr. (i)............
$ 489
489
R.E. Gill (h,l)................. 415
3 412
0
P.A. Hagel (h,l)................ 247
2 245
0
N.M. Hahl (h,l)................. 558
4 554
0
F.R. Holt (h,l)................. 334
2 332
0
J.M. Kampf (i)..................
403
403
G.B. Kenny (h,l)................ 473
2 471
0
A.W. Martinelli (e,g)........... 9,649
48
9,697
M.D. Mauer (h,l)................ 147
147
0
P.S. Meyers (h)................. 174
174
0
R.W. Olson (e,h,l).............. 402
14 51 195
170
R.J. Siverd (h,l)............... 346
2 344
0
W.J. Smith (h,l)................ 103
1 102
0
S.Stavenhagen (h)............... 102
1
101
D.H. Street (h,l)............... 593
4 589
0
N.G. Tsacalis (h,l)............. 154
1 153
0
A.N. Watson (h,l)............... 123
1 122
0
__________
(a) Non-interest bearing amounts due to the Company,
representing
payments made by the Company on behalf of the successor
of a
previously spun-off subsidiary of the Company.
(b) Subordinated note of previously spun-off company, bearing
interest at 9.98 percent per annum, due September 30,
2007
(see Note 2 of Notes to Financial Statements).
(c) Short-term note of previously spun-off company.
(d) Interest notes received in lieu of cash interest payments
on
the subordinated note referred to in (b) above, paid in
full
on February 14, 1994.
(e) Promissory notes of participants in the Company's Stock
Option
Loan Program delivered in payment of up to 95 percent of
the
purchase price for the Company's Common Stock purchased
upon
the exercise of stock options, secured by the stock
purchased,
bearing interest at rates ranging from 3.65 to 7.06
percent
per annum.
(f) Individual ceased to be an employee or a related party
during
the year.
(g) Includes recourse promissory notes of participants in the
Company's Career Share Purchase Plan delivered in payment
of
up to 95 percent of the purchase price for Career Shares
(see
Note 9 of Notes to Financial Statements), secured by the
Career Shares purchased, bearing interest at 9 percent
per
annum and payable not later than ten years after the
purchase
date.
(h) Mortgage notes receivable, incidental to employees'
relocations, secured by homesites. Principal and
interest are
payable monthly based on amortization schedules which
range
from 15 to 30 years and carry annual interest rates
ranging
from 9 1/2 to 9 3/4 percent.
(i) Non-interest bearing temporary home loans, incidental to
employees' relocations, payable within one year of the
date of
the loans.
(j) Note receivable, incidental to employee relocation,
bearing
interest at 6.49 percent per annum. Principal and
interest
are payable on or before June 30, 2000.
(k) Promissory notes referred to in (e) above were collected
during 1992.
(l) Mortgage note referred to in (h) above was sold during
1991 in
the secondary market.
S-2
SCHEDULE III
AMERICAN PREMIER UNDERWRITERS, INC.
Condensed Financial Information of Registrant (Note
1)
(In Millions)
COMBINED CONDENSED INCOME STATEMENT
For the Years
Ended December 31,
REVENUES 1993
1992 1991
Equity in earnings of subsidiaries $178.1
$146.2 $159.2
Interest and dividend income 52.4
45.0 34.2
Net sales 16.8
17.3 15.2
Net realized gains (losses) 92.9
(3.3) (9.7)
340.2
205.2 198.9
EXPENSES
Corporate and administrative expenses 20.2
20.2 25.8
Interest and debt expense 62.6
69.0 63.0
Provision for loss on sale of
subsidiaries and asset
impairment 37.9
- -
Other (income) expense, net 30.3
32.3 30.5
151.0
121.5 119.3
Income from continuing operations before
income taxes 189.2
83.7 79.6
Income tax (expense) benefit 53.5
(32.8) (29.4)
Income from continuing operations 242.7
50.9 50.2
DISCONTINUED OPERATIONS
Equity in earnings (losses) of
subsidiaries 2.8
1.7 (47.6)
Loss from disposal of businesses (13.5)
- -
Cumulative effect of accounting change -
252.8 -
NET INCOME $232.0
$305.4 $ 2.6
COMBINED CONDENSED BALANCE SHEET
As of
December 31,
1993
1992
ASSETS
Investments $ 927.4 $
782.2
Receivables from subsidiaries 293.5
332.7
Investments in subsidiaries 1,231.7
972.3
Net assets of discontinued operations 9.8
111.5
Deferred tax asset 295.8
245.4
Other assets 120.8
116.1
$2,879.0
$2,560.2
LIABILITIES AND CAPITAL
Accounts payable, accrued expenses and
other liabilities $ 196.2 $
128.5
Payables to subsidiaries 440.9
276.1
Long-term debt 519.6
652.8
Other capital 1,722.3
1,502.8
$2,879.0
$2,560.2
S-3
SCHEDULE III
(continued)
AMERICAN PREMIER UNDERWRITERS, INC.
Condensed Financial Information of Registrant (Note
1)
(In Millions)
COMBINED CONDENSED STATEMENT OF CASH FLOWS
For the
Years Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1993
1992 1991
Income from continuing operations $ 242.7
$ 50.9 $ 50.2
Adjustments
Equity in earnings of subsidiaries (178.1)
(146.2) (159.2)
Deduction in lieu of current Federal
income tax -
- 24.3
Deferred Federal income tax (57.9)
28.9 -
Net (gain) loss on disposal of
businesses, investments and PP&E (54.5)
4.1 11.4
Cash received from subsidiaries 231.2
122.2 89.6
Litigation settlement 15.6
- -
Other, net (35.7)
(24.0) (15.0)
Cash flows from operating
activities 163.3
35.9 1.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in temporary
investments (179.3)
214.8 (114.1)
Purchases of investments (158.3)
(290.5) (23.1)
Sales and maturities of investments 372.1
142.8 62.4
Acquisitions of businesses, net of cash
acquired (57.3)
- -
Other, net (.7)
(2.4) 20.5
Cash flows from investing
activities (23.5)
64.7 (54.3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of Company Common Stock (1.9)
(36.8) (142.7)
Issuance of debt -
- 148.7
Repayment of debt (133.7)
- -
Common Stock dividends (38.2)
(36.8) (32.3)
Other, net 23.3
13.2 11.3
Cash flows from financing
activities (150.5)
(60.4) (15.0)
Net cash flows from continuing operations (10.7)
40.2 (68.0)
Net cash (to) from discontinued operations 8.3
(36.6) 68.1
Increase (decrease) in cash (2.4)
3.6 .1
Cash - beginning of year 6.2
2.6 2.5
Cash - end of year $ 3.8
$ 6.2 $ 2.6
Cash dividends received from equity method
accounting investees $ 2.5
$ 3.9 $ 3.8
Cash dividends received from consolidated
subsidiaries $ 36.2
$ 53.1 $ 37.2
Note 1: For purposes of preparing the combined condensed
financial
statements included in this Schedule III, the
accounts of
the Company ("Registrant") have been combined with
the
accounts of Pennsylvania Company ("Pennco").
Pennco is a
wholly owned direct subsidiary of the Registrant,
and is
itself a holding company. At December 31, 1993,
approximately 61% of Investments and substantially
all
Investments in Subsidiaries as reported on the
Combined
Condensed Balance Sheet were owned by Pennco.
Pennco has
no debt obligations and there are no restrictions
affecting transfers of funds between Pennco and the
Registrant. Accordingly, management believes that
the
financial resources held at Pennco as well as
Pennco's
cash flow are available, if necessary, to service
the
obligations of the Registrant.
S-4
SCHEDULE VII
AMERICAN PREMIER UNDERWRITERS, INC. AND
CONSOLIDATED SUBSIDIARIES
Guarantees of Securities and Other
Obligations of Other Issuers
December 31, 1993
(Dollars In Millions)
Total Amount
Name of Issuer of Title of Issue
Guaranteed
Securities Guaranteed of Each Class
and Nature of
by Registrant Guaranteed
Outstanding Guarantee
Gulf Energy Development Industrial Revenue Bond,
$2.2 Principal
Corporation 6%, dated December 1984
and Interest
Republic Indemnity Company Employee Stock Ownership
$1.3 Principal
of America Plan Debt
and Interest
SCHEDULE VIII
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED
SUBSIDIARIES
Valuation and Qualifying Accounts
For the Years Ended December 31, 1993, 1992 and
1991
(Dollars In Millions)
Additions
Balance at
Charged Charged Balance
beginning
to costs to other at end of
Description of period and
expenses accounts Deductions period
Year ended December 31, 1993:
Allowance for uncollectible
accounts - trade and other
receivables $ 9.9 $
6.4 $ .6(a) $ .5(b)(c) $16.4
Allowance for uncollectible
notes receivable 12.9
- - 12.9(d) -
Miscellaneous reserves for losses -
other asset categories 6.3
15.4 (9.3)(e) 5.7(c) 6.7
Year ended December 31, 1992:
Allowance for uncollectible
accounts - trade and other
receivables 6.9
2.0 1.8(f) .8(b)(c) 9.9
Allowance for uncollectible
notes receivable 15.2
- - 2.3(d) 12.9
Miscellaneous reserves for losses -
other asset categories 36.9
3.5 (17.0)(e) 17.1(b)(f) 6.3
Year ended December 31, 1991:
Allowance for uncollectible
accounts - trade and other
receivables 7.3
.4 - .8(c) 6.9
Allowance for uncollectible
notes receivable 30.3
- - 15.1(d) 15.2
Miscellaneous reserves for losses -
other asset categories 39.4
14.9 - 17.4(c)(e) 36.9
(a) Includes additions for businesses acquired.
(b) Includes reductions for divested businesses.
(c) Includes reductions of valuation accounts for actual
charges
incurred.
(d) Includes a reduction in reserves for uncollectibility of
notes
which resulted from the prior sale of certain offshore
drilling
rigs, to reflect the receipt of significant principal and
interest payments.
(e) Includes changes in unrealized gains and/or losses on
securities.
(f) Includes transfers to/from other reserve accounts.
S-5
SCHEDULE X
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED
SUBSIDIARIES
Supplemental Information Concerning Property - Casualty
Insurance
Operations
For The Years Ended December 31, 1993, 1992 and
1991
(Dollars in Millions)
Column A Column B Column C Column D
Column E Column F
Reserves for
Deferred Unpaid Claims
Affiliation Policy and Claim Discount
with Acquisition Adjustment Deducted
in Unearned Earned
Registrant Costs Expenses Column C
Premiums Premiums
CONSOLIDATED PROPERTY AND CASUALTY ENTITIES
1993 $77.4 $961.4(1) $0
$352.3 $1,273.6
1992 $50.4 $763.5 $0
$224.3 $ 998.7
1991 $34.6 $663.9 $0
$156.1 $ 845.6
SCHEDULE X
(continued)
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED
SUBSIDIARIES
Supplemental Information Concerning Property - Casualty Insurance
Operations
For The Years Ended December 31, 1993, 1992 and
1991
(Dollars in Millions)
Column G Column H Column I
Column J Column K
Claims and Claim Amortization
Paid
Adjustment Expenses of Deferred
Claims
Net Incurred Related to Policy
and Claim
Investment Current Prior Acquisition
Adjustment Premiums
Income Year Years Costs
Expenses Written
CONSOLIDATED PROPERTY AND CASUALTY ENTITIES
$114.7 $914.7 $(57.8) $243.8
$758.1 $1,378.9
$105.0 $706.8 $(20.2) $195.9
$587.0 $1,067.3
$ 97.9 $601.0 $(21.6) $121.7
$517.1 $ 864.6
(1) Gross of ceded reinsurance receivable of $45.1 million.
S-6
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis discusses the Company's
financial condition and results of operations for each of the
three
years in the period ended December 31, 1993. The following is a
description of the Company's Insurance segment and other
operations.
Amounts presented in the discussion and analysis relate only to
continuing operations unless otherwise indicated.
INSURANCE
The Insurance segment consists primarily of a group of
non-standard
private passenger automobile insurance companies (the "NSA
Group")
and a business which sells workers' compensation insurance in
California ("Republic Indemnity"). On May 20, 1993, the Company
purchased Leader National Insurance Company ("Leader National"),
a
writer of non-standard automobile insurance, for $38.0 million.
The
non-standard automobile insurance companies insure risks not
typically accepted for standard automobile insurance coverage
because of the applicant's driving record, type of vehicle, age
or
other criteria. Also, a subsidiary of the Company is engaged in
the
writing of reinsurance.
NON-INSURANCE OPERATIONS
These operations include the manufacture of a variety of
industrial
products and the providing of other industrial services as well
as
energy and real estate operations. In connection with the
Company's
previously announced divestiture effort, two industrial
businesses
were sold during 1993 and one unit was sold in March of 1994.
The
sales of the other two companies are pending. These businesses
do
not comprise reportable industry segments of the Company and,
accordingly, are not reportable as discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's management believes the following information may
be
useful in understanding the liquidity and capital resources of
the
Company.
(Dollars in Millions, Except Per Share Amounts)
As of and for the years ended December 31, 1993 1992
1991
Cash, Parent Company short-term investments
and Parent Company fixed maturity
securities $669.2 $498.8
$562.7
Deduct items not readily available for
corporate purposes:
Cash held by the insurance operations (23.2) (26.8)
(8.4)
Securities held in bank escrow accounts (20.2) (65.5)
(15.6)
Private placement notes (14.6) (11.4)
(1.4)
Cash, temporary investments and marketable
securities $611.2 $395.1
$537.3
Total debt as a percentage of total capital 23% 30%
31%
Book value per share of Common Stock $36.30 $32.40
$31.23
Net cash provided by continuing operating
activities $304.1 $217.9
$130.6
The Company's Federal income tax loss carryforward is
available
to offset taxable income and, as a result, the Company's
requirement
to currently pay Federal income tax is substantially eliminated.
It
is expected that the 1993 consolidated Federal income tax return
will report a remaining net operating loss carryforward currently
estimated at approximately $610 million, which will expire at the
end of 1996 unless previously utilized.
The $216.1 million increase during 1993 in the cash,
temporary
investments and marketable securities included in the preceding
table was principally attributable to the Company's sale of its
shares of the common stock of Tejas Gas Corporation ("Tejas") for
net proceeds of $106.6 million, the sale of the Company's defense
services operations for $94.0 million in cash, subject to a post-
closing working capital adjustment, and the Company's sale of its
limited
15
partnership units of Buckeye Partners L. P. ("Buckeye Units")
previously held in the Parent Company investment portfolio (but
not
included in the aggregate of cash, temporary investments and
marketable securities) for approximately $60.9 million. The
Company
also received $39.2 million in cash, including accrued interest,
from the payment by General Cable Corporation ("General Cable")
of
its $36.9 million short-term note issued in connection with the
Company's 1992 spin-off to its shareholders of substantially all
of
the Company's General Cable stock (the "Spin-off") and $26.0
million
from payment of a note plus accrued interest relating to the
prior
sale of an offshore drilling rig. These increases in cash,
temporary investments and marketable securities were partially
offset by the Company's redemption of all of its outstanding 11
percent subordinated debentures due December 15, 1997 for $133.3
million plus accrued interest.
Net Cash Provided by Continuing Operating Activities
During each of the three years in the period ended December 31,
1993, the Company's continuing operations provided significant
financial resources and sufficient cash flow to meet its
operating
requirements. Management expects that the Company's operating
cash
flow and financial resources will continue to be adequate to meet
its operating needs in the short-term and long-term (i.e., more
than
twelve months) future. Cash flows of the Company may be
influenced
by a variety of factors, including changes in the property and
casualty insurance industry, the insurance regulatory environment
and general economic conditions.
Operating cash flow of the insurance operations is dependent
primarily on the growth of written premiums, the requirements for
claim payments and the rate of return achieved on the insurance
investment portfolio. Operating cash flow from the Company's
other
operations is primarily dependent on pre-tax income, adjusted for
non-cash charges such as depreciation and amortization, and the
operating working capital requirements of the businesses.
Net Cash Provided by Continuing Operating Activities (continued)
Cash provided by continuing operating activities in 1993 was
$86.2 million higher than in 1992. This increase resulted
primarily
from an increase in the insurance operations' operating cash flow
at
Republic Indemnity and, to a lesser extent, at the NSA Group.
While
the NSA Group and Republic Indemnity experienced strong written
premium growth during 1993, the favorable impact of such growth
on
the operating cash flow of the NSA Group has been partially
offset
by an increase in claims payments resulting from business
expansion
in previous periods. The payment of a note relating to the prior
sale of an offshore drilling rig, the net proceeds resulting from
the settlement of certain litigation relating to a previously
owned
subsidiary which was included in the General Cable Spin-off and
lower interest payments due to the redemption of the Company's 11
percent subordinated debentures in July 1993 also contributed to
the
improved operating cash flow. These favorable variances were
partially offset by a settlement payment resulting from the
termination of a reinsurance contract, lower operating cash flow
from the Company's industrial operations and lower interest
receipts
on the Parent Company investment portfolio.
During 1993, the insurance operations generated $327.8
million
of operating cash flow, approximately 66 percent of which was
retained by the insurance companies and primarily used to
purchase
investments, principally marketable debt securities, and for the
acquisition of Leader National. The remainder of the cash
provided
by the insurance operations was paid to the Parent Company
principally through intercorporate tax allocation payments. The
Company's insurance subsidiaries are restricted as to the amount
of
stockholder dividends they can pay to the Company without prior
regulatory approval. Under these restrictions, the maximum amount
of
dividends which can be paid to the Company during 1994 by these
subsidiaries is $96.5 million.
Cash provided by continuing operating activities in 1992 was
$87.3 million higher than in 1991. This increase resulted
primarily
from strong growth in written premiums at the NSA Group and, to a
lesser extent, at Republic Indemnity. Cash provided by
continuing
operating activities was also favorably affected by increased
operating results at operations which installed satellite ground
station electronic equipment and by lower administrative costs.
These favorable variances were partially offset by lower
operating
results at operations that manufacture aerial lift trucks and
mobile
tools, higher interest payments resulting from a full year of
interest on the 10 7/8 percent subordinated notes issued in May
1991, and lower interest receipts on the Parent Company
investment
portfolio in the 1992 period versus 1991.
16
Investing and Financing Activity
During 1993, sales of the Parent Company's Tejas shares and
Buckeye
Units, sales of the Company's defense services operations and two
of
the Company's industrial businesses and payment by General Cable
of
its short-term note provided approximately $294 million in the
aggregate. In addition, the Company received $24.0 million from
the
sale of shares of Company Common Stock pursuant to the exercise
of
stock options. During this same period, the Company used $133.3
million to redeem all of its outstanding 11 percent subordinated
debentures, $52.8 million for the payment of the purchase price
contingency relating to the acquisition of the NSA Group,
including
$12.8 million of interest and $40 million of securities deposited
by
the Company at the end of 1992 in a bank escrow account, and
$38.0
million in cash to acquire Leader National. The Company also
used
$38.2 million for the payment of Common Stock dividends, $17.5
million for capital expenditures and $4.5 million for the
purchase
of an investment in an insurance company located in the United
Kingdom. The Company's insurance operations made net purchases
of
investments of $179.9 million during 1993 and the Company used
approximately $165.5 million for net purchases of investments for
the Parent Company investment portfolio.
On February 10, 1994, the Company announced that it is
considering a proposal from American Financial Corporation
("AFC")
for the purchase by the Company of the personal lines insurance
businesses owned by Great American Insurance Company ("GAIC") for
a
proposed purchase price of approximately $380 million in cash.
GAIC's personal lines insurance businesses principally provide
standard private passenger automobile insurance and multiperil
homeowners' insurance. GAIC is a wholly-owned subsidiary of AFC.
Completion of a transaction would be subject to certain
conditions,
including approval by a special committee of the Company's
directors
which has been empowered to negotiate all aspects of the proposed
acquisition, including the proposed purchase price, receipt by
the
Company of an appropriate fairness opinion from an independent
investment banking firm and any required regulatory approvals.
AFC
beneficially owned 40.5 percent of the Company's outstanding
common
shares at December 31, 1993 and AFC's Chairman, Chief Executive
Officer and principal shareholder is Chairman and Chief Executive
Officer of the Company. AFC's proposal would include the
transfer
by GAIC of an investment portfolio consisting principally of
investment grade bonds with a market value of approximately $450
million. GAIC's personal lines businesses reported net earned
premiums of $342 million and $322 million for 1993 and 1992,
respectively. GAIC estimates that on a stand-alone basis the
personal lines businesses had pro forma accident year statutory
combined ratios of 99.0 percent and 99.1 percent for 1993 and
1992,
respectively. GAIC also estimates that the net book value of the
businesses that would be transferred at closing would be
approximately $200 million.
As part of the General Cable Spin-off, the Company retained
a
$255.0 million 9.98% subordinated note due 2007 issued by General
Cable (the "General Cable Note"). Interest due prior to 1998 on
the
General Cable Note may be paid with additional 9.98% subordinated
notes ("Interest Notes") in lieu of cash if certain earnings
levels
are not achieved by General Cable. During 1993, General Cable
paid
100 percent, or $31.8 million, of the interest due on the General
Cable Note with Interest Notes in lieu of cash.
On February 14, 1994, General Cable delivered to the Company
cash and promissory notes issued by a subsidiary of Rowan
Companies,
Inc. ("Rowan") totalling $52.1 million as a partial payment of
the
General Cable notes. The cash portion of the payment was $10.4
million. The Rowan notes, which are guaranteed by Rowan, have a
face value of $41.7 million, an interest rate of 7 percent and
are
due in 1999. Quarterly interest payments are payable in cash
beginning March 31, 1994. The cash and Rowan notes resulted from
the sale by General Cable of its Marathon LeTourneau unit to
Rowan.
As a result of these receipts, the Company credited General Cable
with $48.1 million of principal and interest payments on the
General
Cable notes which resulted in the payment in full of the $31.8
million of Interest Notes and reduced the principal amount of the
General Cable Note to $241.4 million from $255.0 million at
December
31, 1993.
Under the terms of General Cable's revolving credit and
letter
of credit facility with certain commercial banks, General Cable
is
required to exercise its option, if available, to pay interest on
the General Cable Note with Interest Notes in lieu of cash. In
view
of General Cable's consolidated net losses of $57.6 million for
the
twelve months ended December 31, 1993, the Company expects
17
that General Cable will pay approximately $12.0 million of
interest
due on March 31, 1994 with an Interest Note. See Note 2 of Notes
to
Financial Statements for a discussion of the recoverability of
the
General Cable Note and Interest Notes.
On February 16, 1994, the Company called for redemption on
March 25, 1994 all of the outstanding $16.2 million principal
amount
of its 9 1/2 percent subordinated debentures due August 1, 2002
at
the redemption price of 100 percent of the principal amount plus
accrued and unpaid interest through the redemption date. The
Company plans to fund the redemption with internal cash resources
and proceeds from the sale of a portion of the Parent Company's
short-term investments.
At December 31, 1993, the Parent Company investment
portfolio
held unrated or less than investment grade corporate debt
securities, excluding the General Cable notes, with carrying
values
of $19.9 million. At that date, the Company's insurance
operations
held $117.9 million of such unrated or less than investment grade
debt securities and preferred stocks. As a group, unrated or
less
than investment grade investments may be expected to generate
higher
average yields than investment grade securities. However, the
risk
of loss from default by the borrower may be greater with respect
to
such securities because these issuers usually have higher levels
of
indebtedness and may be more sensitive to adverse economic
conditions than are investment grade issuers. In addition, there
is
only a thinly traded secondary market for such securities and
market
quotations are available from a limited number of dealers. In
order
to manage its risk associated with these investments, the Company
limits its investment in unrated or less than investment grade
securities of any one issuer and regularly monitors the condition
of
the issuers and their industries. At December 31, 1993, the
largest
investment of the Company and its insurance operations in such
securities of any one issuer, excluding the General Cable notes,
totaled $13.3 million.
At December 31, 1993, management remained authorized by the
Board of Directors to effect purchases of up to an additional 4.5
million shares of the Company's Common Stock, at market prices,
through privately negotiated transactions or on the open market.
The Company's principal source of cash from investing and
financing activities during 1992 was maturities of the Parent
Company investment portfolio (net of purchases of investments)
which
provided $113.2 million. In addition to $25 million transferred
to
General Cable as part of the Spin-off, the Company used cash of
$36.8 million for Common Stock dividends, $36.8 million for
purchases of shares of Company Common Stock, $14.6 million for
capital expenditures and $13.1 million for the repayment of debt.
The Company's insurance operations made net purchases of
investments
totaling $164.3 million.
During 1991, the Company's principal source of cash from
investing and financing activities was $148.7 million from the
May
issuance of its 10 7/8 percent subordinated notes. Also, the
sale
of the Company's interests in certain oil and gas properties
generated approximately $26 million in cash. The principal uses
of
cash during 1991 were $142.7 million to acquire shares of the
Company's Common Stock and $72.4 million of net purchases of
investments for the Parent Company investment portfolio. In
addition, the Company's insurance operations made net purchases
of
investments totaling $94.7 million, excluding intercorporate
investment transactions.
During each of the three years in the period ended December
31,
1993, the Company's continuing operations did not have large
capital
spending requirements. The Company presently has no plans or
commitments for material capital expenditures.
Borrowing Facilities and Debt Obligations
Because of the Company's balances of cash and temporary
investments
and its positive cash flow from operating activities, the current
borrowing requirements for the Company's existing businesses are
not
significant. At December 31, 1993, the Company's total debt to
total capital ratio decreased to 23 percent from 30 percent at
year-end 1992. The decrease was primarily due to the 1993
redemption of the Company's 11 percent subordinated debentures.
Total capital as defined for this ratio consists of debt,
minority
interests in subsidiaries and common shareholders' equity. On
the
basis of this ratio and other relevant factors, management
believes
that the Company has additional borrowing capacity which may be
available to expand its current businesses or for acquisitions.
The
Company is in compliance with all of its debt covenants, none of
which are materially restrictive.
Adjustments of Estimated Pre-reorganization Liabilities
During 1993 and 1992, the Company increased its accruals for its
net
probable liability for claims and contingencies arising from
events
and circumstances preceding the Company's 1978
18
reorganization. In 1993, the Company accrued $14.0 million for
pre-
reorganization environmental claims and related expenses. In
1992,
the Company accrued $15.0 million for pre-reorganization personal
injury and environmental claims and related expenses. Consistent
with the Company's reorganization accounting policy, such amounts
were charged to capital surplus rather than income. See Notes 1,
11
and 12 of Notes to Financial Statements. In management's
opinion,
the outcome of these claims and contingencies will not,
individually
or in the aggregate, have a material adverse effect on the
Company's
financial condition or results of operations.
Net Cash (to) from Discontinued Operations
During 1993, discontinued operations, which consisted of the
Company's defense services operations, provided $8.3 million of
cash. During the period from January 1, 1992 until the July 1,
1992
date of the General Cable Spin-off, the General Cable businesses
required $36.9 million, principally to fund their working capital
requirements. Also included in cash provided to discontinued
operations for 1992 is $1.3 million to fund expenses related to
the
General Cable Spin-off and $1.6 million received from the defense
services operations. During 1991, cash from discontinued
operations
totaled $68.1 million.
RESULTS OF OPERATIONS
Analysis of Continuing Operations
Income from continuing operations was $242.7 million, or $5.03
per
share, for 1993 as compared with $50.9 million, or $1.08 per
share,
for 1992. Results for 1993 include tax benefits of $132 million,
or
$2.74 per share, attributable to increases in the Company's net
deferred tax asset. Exclusive of the deferred tax asset
adjustment,
income from continuing operations for 1993 was $110.7 million, or
$2.29 per share.
Income from continuing operations before income taxes for
1993
increased to $190.1 million from $84.1 million for the 1992
period.
The increase was principally due to pre-tax gains of
approximately
$80.0 million and $18.5 million, respectively, from the sale of
the
Company's Tejas shares and Buckeye Units, improved operating
results
in the Company's Insurance segment and higher interest and
dividend
income generated from the Parent Company investment portfolio,
partially offset by provisions for expected losses associated
with
the intended divestitures of the Company's non-insurance
operations.
In 1993 and 1992, the Company recognized approximately $25.4
million
and $12.7 million, respectively, of interest on the General Cable
Note, of which $31.8 million in Interest Notes was paid in full
by
General Cable on February 14, 1994. For further information, see
"Liquidity and Capital Resources - Investing and Financing
Activity". Such interest, which is a component of interest and
dividend income, was approximately 13 percent and 15 percent,
respectively, of the Company's 1993 and 1992 income from
continuing
operations before income taxes.
The 1992 income from continuing operations of $50.9 million
increased from $50.2 million reported in 1991, principally due to
higher interest and dividend income generated from the Parent
Company's investments and lower general and administrative
expenses,
partially offset by higher interest expense, a provision for an
environmental claim settlement and slightly lower operating
results.
An increase in income per share from continuing operations
occurred
during 1992, as compared with 1991, largely because fewer average
shares were outstanding during 1992, as compared with the prior
year. Income from continuing operations in 1991 included
restructuring provisions related to certain non-insurance
businesses
and write-downs in the carrying value of certain Parent Company
equity investments, totaling $12.6 million net of tax, or $.26
per
share.
INSURANCE
Revenues in the Insurance segment increased to $1,405.8 million
in
1993 as compared with $1,127.3 million for 1992. The increase
was
primarily due to an increase in earned premiums at both the NSA
Group and Republic Indemnity. Investment income before realized
gains and losses on sales of investments also increased due to
higher average investment balances primarily due to increased
premiums, partially offset by a decrease in the average yield on
the
insurance operations' investment portfolio. Operating income in
1993 increased to $167.4 million as compared with $143.5 million
in
1992, primarily due to improved underwriting results at Republic
Indemnity and higher investment income, partially offset by lower
net realized gains. Net realized gains from sales of investment
securities in the insurance operations' portfolio totaled $17.5
million for 1993 compared with $23.6 million for 1992. See Note
3
of Notes to Financial Statements for further information
regarding
gross realized and unrealized investment gains and losses.
19
Revenues in the Insurance segment increased during 1992, as
compared with 1991, primarily due to an increase in earned
premiums
at both the NSA Group and Republic Indemnity. Investment income
before realized gains and losses on sales of investments also
increased due to higher average investment balances. Operating
income decreased, as compared with 1991, principally due to lower
net gains on sales of investments and the inclusion in 1991
results
of certain one-time purchase accounting benefits. Net realized
gains from sales of investment securities in the insurance
operations' portfolio totaled $23.6 million for 1992 compared
with
$26.5 million in 1991.
Underwriting profitability of the insurance operations is
measured by the combined ratio which, according to generally
accepted accounting principles ("GAAP"), is calculated as the
quotient of (a) the sum of insurance losses and loss adjustment
expenses ("LAE"), policyholder dividends and commissions and
other
insurance expenses, excluding amortization of cost in excess of
net
assets acquired, divided by (b) premiums earned, as reflected in
the
accompanying financial statements. Underwriting results are
generally considered profitable when the combined ratio is under
100
percent. The GAAP combined ratio for the Insurance segment was
96.2
percent in 1993, 97.5 percent in 1992 and 97.0 percent in 1991,
excluding the unusual purchase accounting benefit.
In October 1993, the Clinton Administration introduced in
Congress proposed legislation called the Health Security Act (the
"HSA"), which would guarantee all Americans access to
comprehensive
health care services provided through health plans. If the HSA
were
enacted, health plans would provide medical treatment for
injuries
sustained in the workplace or in an automobile accident.
Workers'
compensation and automobile insurers would continue to be
responsible for the costs of treatment covered by their policies
and
would reimburse health plans for services provided. The HSA also
would create a Commission on Integration of Health Benefits,
which
would study the feasibility and appropriateness of transferring
to
health plans financial responsibility for all medical benefits
covered under workers' compensation and automobile insurance and
would submit a report to the President by July 1, 1995 that would
provide a detailed plan for integration if integration is
recommended. The Company is unable to predict whether or in what
form the HSA will be enacted or, if enacted, what effect it will
have on the Company's insurance operations. However, depending
on
its actual terms, the HSA, and any subsequent legislation
mandating
such integration, could potentially have a material adverse
effect
on the Company's future insurance operations.
NSA Group
In general, automobile coverage written by the NSA Group is sold
to
drivers who have not been accepted for coverage by a writer of
standard risks due to driving history, type of automobile, age of
insured or other factors. Because it can be viewed as a residual
market, the size of the non-standard private passenger automobile
insurance market changes with the insurance environment.
Management
of the Company believes the non-standard market has experienced
significant growth in recent years as standard insurers have
become
more restrictive in the types of risks they will write. During
the
past three years, the NSA Group continued to obtain new licenses
to
write business in additional jurisdictions. Total licenses held
by
the NSA Group have grown by approximately 56 percent during this
time period. Entering additional states, increased market
penetration in its existing states and the purchase of Leader
National have contributed to the significant premium growth
achieved
by the NSA Group during the last three years. Competitive
pressures
in the Company's non-standard automobile insurance markets may
increase in 1994 and there can be no assurance that the annual
increases in written and earned premiums achieved over the past
three years can be sustained in 1994 or beyond.
The NSA Group management believes it has achieved
underwriting
success over the past several years due, in part, to the
refinement
of various risk profiles, thereby dividing the consumer market
into
more defined segments which can either be excluded from coverage
or
surcharged adequately. Highly effective cost control measures,
both
in the underwriting and claims handling areas, further contribute
to
the underwriting profitability of the NSA Group. In addition,
the
NSA Group generally writes policies of short duration which allow
more frequent rating evaluations of individual risks, providing
management greater flexibility in the ongoing assessment of the
business.
The following table presents certain information with
respect
to the NSA Group's insurance operations. The 1991 data excludes
the
unusual purchase accounting benefit of $5.4 million.
20
(Dollars in
Millions)
Years Ended December 31, 1993 1992
1991
Net Written Premiums $901.9 $660.4
$509.8
Net Earned Premiums $804.4 $594.8
$492.3
Loss and LAE 575.8 414.8
343.9
Underwriting Expenses 204.4 156.7
124.5
Underwriting Profit $ 24.2 $ 23.3 $
23.9
GAAP Ratios:
Loss and LAE Ratio 71.6% 69.7%
69.9%
Underwriting Expense Ratio 25.4 26.4
25.2
Combined Ratio 97.0% 96.1%
95.1%
Statutory Ratios:
Loss and LAE Ratio 72.5% 69.7%
70.5%
Underwriting Expense Ratio 24.4 26.1
26.5
Combined Ratio 96.9% 95.8%
97.0%
Total Private Passenger Automobile
Insurance Industry Statutory
Combined Ratio(1) 102.0%(Est.)102.0%
104.7%
(1) Industry information was derived from Best's Insurance
Management Reports Property/Casualty Supplement (January 3,
1994 edition). The comparison shown is to the private
passenger automobile insurance industry. Although the
Company
believes that there is no reliable regularly published
combined ratio data for the non-standard automobile
insurance
industry, the Company believes that such a combined ratio
would present a less favorable comparison in that it would
be
lower than the private passenger automobile industry average
shown above.
The NSA Group reported earned premiums of $804.4
million and
underwriting profit of $24.2 million for 1993 as compared with
1992
amounts of $594.8 million and $23.3 million, respectively. The
growth in both earned premiums and net written premiums of over
35
percent during 1993 was principally due to the pursuit of
business
in new markets and the trend over recent years whereby the
standard
insurers have become more restrictive in the types of risks they
are
willing to write. The acquisition of Leader National in the
second
quarter of 1993 also contributed to the premium growth. The
combined ratio for the NSA Group was 97.0 percent compared with
96.1
percent for 1992. The increase in the combined ratio for 1993
was
primarily caused by rate adjustments which more favorably
affected
1992 underwriting results and an increase in losses in the 1993
first quarter resulting from a more severe winter than in the
prior
period. Partially offsetting these factors was a decrease in the
underwriting expense ratio as growth in earned premiums outpaced
associated expenses.
The NSA Group reported earned premiums of $594.8
million and
underwriting profit of $23.3 million for 1992, as compared with
1991
amounts of $492.3 million and $29.3 million, respectively. The
1991
underwriting results for the NSA Group include the above
mentioned
one-time purchase accounting benefit of $5.4 million. The NSA
Group's 1992 combined ratio was 96.1 percent compared with 95.1
percent for 1991, excluding the unusual benefit. In addition,
1991
was favorably affected by differences between the actual 1991
profitability of the unearned premiums purchased as part of the
acquisition of the NSA Group and estimates thereof made in the
allocation of the purchase price. Excluding the effects of these
differences and the unusual purchase accounting benefit, the 1991
combined ratio of the NSA Group was approximately 97 percent.
Republic Indemnity
Republic Indemnity's workers' compensation insurance
operations are highly regulated by California state authorities.
In
addition, these insurance operations are affected by employment
trends in their markets, litigation activities, legal and medical
costs, use of vocational rehabilitation programs and the filing
of
traditionally non-occupational injuries, such as stress and
trauma
claims. While higher claims costs are ultimately reflected in
premium rates, there historically has been a time lag of varying
periods between the incurrence of higher claims costs and premium
rate adjustments, which may result in periods of unfavorable
underwriting results. Management believes that Republic
Indemnity's
stringent underwriting standards, disciplined claims philosophy,
expense containment and reputation with insureds have combined to
produce superior underwriting results as compared to the industry
in
general.
21
The following table presents certain information with
respect
to Republic Indemnity's insurance operations.
(Dollars in Millions)
Years Ended December 31, 1993 1992
1991
Net Written Premiums $465.8 $397.0
$353.1
Net Earned Premiums $458.5 $394.1
$351.6
Loss and LAE 270.2 261.8
233.7
Underwriting Expenses 70.6 63.3
57.6
Policyholder Dividends 93.2 67.5
58.9
Underwriting Profit $ 24.5 $ 1.5 $
1.4
GAAP Ratios:
Loss and LAE Ratio 59.0% 66.4%
66.4%
Underwriting Expense Ratio 15.4 16.1
16.4
Policyholder Dividend Ratio 20.3 17.1
16.7
Combined Ratio 94.7% 99.6%
99.5%
Statutory Ratios:
Loss and LAE Ratio 59.0% 69.1%
66.5%
Underwriting Expense Ratio 15.4 16.0
16.2
Total Loss and Expense Ratio 74.4 85.1
82.7
Policyholder Dividend Ratio 13.7 11.6
17.7
Combined Ratio 88.1% 96.7%
100.4%
Total Workers' Compensation Industry
Statutory Combined Ratio(1) 111.5%(Est.)121.5%
122.6%
(1) Industry information was derived from Best's Insurance
Management Reports Property/Casualty Supplement (January 3,
1994 edition).
Republic Indemnity reported earned premiums of $458.5
million for
1993 compared with $394.1 million in 1992. An underwriting
profit
of $24.5 million was reported for 1993 as compared with an
underwriting profit of $1.5 million for 1992. The increase in
both
earned premiums and net written premiums of approximately 17
percent
for 1993 was primarily due to improvement in the Company's
relative
competitive position in the industry resulting in part from the
withdrawal of several workers' compensation carriers from the Los
Angeles, California market. In addition, the California State
Fund,
the largest writer of workers' compensation insurance in
California,
reduced its policyholder dividends during 1992 making its program
less attractive to the market. During 1993, Republic Indemnity's
underwriting results benefited from a decrease in the frequency
and
severity of losses, in part due to a reduction in fraudulent
claims,
and a lower underwriting expense ratio as compared with the prior
year. Republic Indemnity had a combined ratio of 94.7 percent
and
99.6 percent for 1993 and 1992, respectively.
In July 1993, California enacted legislation (the
"Reform
Legislation") effecting significant changes in the workers'
compensation insurance system. The Reform Legislation effected
an
immediate overall 7 percent reduction in workers' compensation
insurance premium rates; authorized the Insurance Commissioner to
approve further reductions in premium rates so long as the
further
reduced rates are "adequate"; prohibited the Insurance
Commissioner,
prior to January 1, 1995, from approving any premium rate that is
greater than the reduced rates effected by the Reform
Legislation;
and replaced the workers' compensation insurance minimum rate
law,
effective January 1, 1995, with a procedure permitting insurers
to
use any rate within 30 days after filing it with the Insurance
Commissioner unless the rate is disapproved by the Insurance
Commissioner. On December 1, 1993, the Insurance Commissioner
ordered an additional 12.7 percent minimum premium rate decrease
effective January 1, 1994 for new and renewal policies entered
into
on and after January 1, 1994. The Reform Legislation also
increased
statutory workers' compensation benefits for temporary and
permanent
disability commencing July 1, 1994 and increasing in 1995 and
1996,
expanded the rights of employers under workers' compensation
insurance policies and introduced several reforms intended to
reduce
workers' compensation costs. The reforms include a tightening of
the standards for job-related stress and post-termination claims,
introducing measures designed to curb medical costs, limiting the
frequency of medical-legal evaluations, capping the amount of
compensable vocational rehabilitation expenses and strengthening
penalties for fraudulent claims. The Reform Legislation also
provides for the licensing of "managed" health care organizations
to
provide care for injuries covered by workers' compensation and
generally permits employers to require employees to obtain
medical
services for
22
their work-related injuries for a certain period of time from a
health care organization selected by the employer, unless the
employee chooses to be treated by a physician designated by the
employee prior to the injury.
If the workers' compensation cost savings resulting
from the
Reform Legislation are inadequate to offset the impact of premium
rate reductions, increased benefits and expanded employers'
rights,
the profitability of the Company's workers' compensation
insurance
operations could be adversely affected. Management believes that
this effect may be mitigated by Republic Indemnity's ability to
reduce its relatively high policyholder dividends, although a
reduction in dividends could affect premium volume. In addition,
greater price competition is expected to result when the repeal
of
the minimum premium rates that now govern all workers'
compensation
insurers becomes effective, and Republic Indemnity's operations
could be affected adversely. The Company believes that the
Reform
Legislation's provisions relating to "managed" health care
organizations will probably result in certain workers'
compensation
insurers seeking affiliation, contractual or otherwise, with one
or
more health care organizations. The Company continues to
evaluate
the implications of these provisions but is unable to predict
whether their ultimate impact on its workers' compensation
insurance
operations will be positive or adverse. While Republic Indemnity
has continued to operate on a profitable basis, no assurances can
be
given that it could continue to do so in the face of adverse
regulatory developments.
Republic Indemnity reported earned premiums of $394.1
million
for 1992, a 12 percent increase over 1991 earned premiums of
$351.6
million. Underwriting results remained favorable for these
operations as evidenced by the 1992 combined ratio of 99.6
percent
as compared to 99.5 percent for the 1991 period.
Interest and Dividend Income
Interest and dividend income of the Parent Company investments
increased $7.9 million in 1993, as compared with 1992, due
primarily
to a $14.6 million increase in interest income on the General
Cable
notes largely attributable to the inclusion of a full year of
interest in 1993 as compared with 1992. The interest income on
the
General Cable notes in 1993 consisted of $25.4 million on the
General Cable Note, all of which was paid or is payable with
Interest Notes, $1.2 million of interest on the short-term note
(the
full principal and accrued interest of which was paid in cash on
July 2, 1993) and $1.8 million of interest on the Interest Notes
(payable in cash). For a discussion of the recoverability of the
General Cable Note and Interest Notes and for more information
regarding the payment in full by General Cable of the Interest
Notes
and accrued interest, see Note 2 of Notes to Financial Statements
and "Liquidity and Capital Resources - Investing and Financing
Activity", respectively. The increase in interest income due to
the
General Cable notes was partially offset by lower interest income
on
the Parent Company investment portfolio attributable to a
decrease
in average yields, partially offset by higher average investment
balances, as compared with 1992.
Interest and dividend income of the Parent Company
investments for
1992 and 1991 was $45.5 million and $35.5 million, respectively.
The increase in interest and dividend income for 1992, as
compared
with 1991, was due to 1992 interest income of $13.8 million on
the
General Cable notes (consisting of $12.7 million of interest on
the
General Cable Note paid with an Interest Note and $1.1 million of
interest on the short-term note paid in cash), partially offset
by
reduced average yields on investments during 1992 as compared
with
1991. Also, the 1991 results include net realized losses of $4.3
million on sales of debt securities in the Parent Company
investment
portfolio.
General Cable may elect to pay interest on the General Cable
Note
with Interest Notes if certain earnings levels are not achieved
by
General Cable. The recognition of interest income on the General
Cable notes by the Company is subject to periodic evaluations of
General Cable's financial position, cash flows and operating
results
by the Company's management.
Interest and Debt Expense
Interest and debt expense for 1993 decreased $6.8 million
compared
with 1992 due primarily to the Company's July 30, 1993 redemption
of
all of its 11 percent subordinated debentures.
Interest and debt expense increased to $69.6 million in 1992
from
$65.3 million in 1991, due primarily to the incurrence of
interest
expense for the full year of 1992 on the $150.0 million principal
amount of the Company's 10 7/8 percent subordinated notes which
were issued in May 1991.
23
Other Expense (Income) - Net
Other expense (income) - net consists of the following:
(In Millions)
For the Years Ended December 31, 1993 1992 1991
Settlement of claims and
contingencies, net $ 6.3 $ 6.5 $
(3.2)
Minority interests in earnings
of consolidated subsidiaries (1.5) (1.4)
(.6)
Taxes other than income 6.7 6.7
6.2
Other 4.1 4.3
2.7
Total $ 15.6 $ 16.1 $
5.1
The component, "Settlement of claims and contingencies,
net", in
the above table includes expense in 1993 which was primarily
attributable to a $2 million provision for environmental costs
relating to the Company's previously-owned petroleum products
pipeline operations and to certain litigation settlements, none
of
which are individually, or in the aggregate, material to the
Company's results of operations.
The expense reported in such component in 1992 was primarily
attributable to a $4 million provision recorded in connection
with
an agreement with the U.S. Environmental Protection Agency for
the
settlement of post-reorganization environmental claims relating
to
the clean-up of cadmium contamination at a previously-owned
battery
manufacturing facility. The income reported in such component in
1991 was almost entirely due to the favorable resolutions of
certain
contingencies related to the 1986 sale of the Company's petroleum
products pipeline operations.
Income Taxes
For 1993, the Company recorded an income tax benefit of $52.6
million as compared with income tax expense of $33.2 million and
$29.2 million for 1992 and 1991, respectively. The 1993 benefit
is
attributable to an increase of $132.0 million in the Company's
net
deferred tax asset due to revisions to the estimated future
taxable
income during the Company's tax loss carryforward period. For
more
information concerning these adjustments, see Note 7 of Notes to
Financial Statements.
As of December 31, 1993, the Company's gross deferred
tax
asset was $491.0 million, which after a valuation allowance of
$195.2 million resulted in a net deferred tax asset of $295.8
million. The net deferred tax asset represents the portion of
the
gross deferred tax asset which management believes is more likely
than not to be realized consistent with the recognition criteria
as
set forth in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes".
Management believes that it is more likely than not
that the
net deferred tax asset at December 31, 1993 will be realized
primarily through the generation of taxable income during the
loss
carryforward period. This belief derives from an analysis of
estimated future taxable income based on certain assumptions
concerning future events during the loss carryforward period.
The
estimate of future taxable income used in determining the net
deferred tax asset is not necessarily indicative of the Company's
future results of operations. As is the case with any estimate
of
future results, there will be differences between assumed and
actual
economic and business conditions of future periods. Moreover,
the
estimate may also be affected by unpredictable future events,
including but not necessarily limited to changes in the Company's
capital structure and future acquisitions and dispositions.
Therefore, the analysis of estimated future taxable income will
be
reviewed and updated periodically, and any required adjustments,
which may increase or decrease the net deferred tax asset, will
be
made in the period in which the developments on which they are
based
become known. Management believes that any future adjustments in
the net deferred tax asset will not be as significant as those
reported in 1993.
The increase in income tax expense in 1992, as compared
with
1991, is primarily due to a higher 1992 effective tax rate
coupled
with an increase in the Company's 1992 pre-tax income. Income
tax
expense for 1991 also includes a $2.0 million benefit from
adjustments to the Company's provision for deferred state taxes.
24
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in Millions, Except Per Share Amounts and Ratios)
1993 1992
1991 1990 1989
Income Statement Data:(1)
Net Written Premiums $1,378.9 $1,067.3
$ 864.6 $ 345.1 $ 220.9
Insurance Revenues:
Premiums Earned $1,273.6 $ 998.7
$ 845.6 $ 342.0 $ 231.1
Net Investment Income 114.7 105.0
97.9 51.6 36.8
Net Realized Gains (Losses) 17.5 23.6
26.5 (9.0) 3.1
Other Revenues 357.5 297.6
305.4 395.3 400.0
Total Revenues $1,763.3 $1,424.9
$1,275.4 $ 779.9 $ 671.0
Income from Continuing Operations
before Income Taxes:
Insurance Operations $ 167.4 $ 143.5
$ 144.5 $ 36.8 $ 37.4
Other Operations 22.7 (59.4)
(65.1) 58.8 103.6
$ 190.1 $ 84.1
$ 79.4 $ 95.6 $ 141.0
Income from Continuing Operations(2) $ 242.7 $ 50.9
$ 50.2 $ 62.9 $ 92.6
Income from Continuing Operations
Per Share(2) $ 5.03 $ 1.08
$ 1.03 $ 1.03 $ 1.32
Balance Sheet Data
(at year-end):(1)
Investments Held by Insurance
Operations $1,602.7 $1,304.2
$1,121.9 $ 997.2 $ 488.3
Cash, Temporary Investments and Marketable
Securities Other Than Those of Insurance
Operations 611.2 395.1
537.3 458.6 1,146.7
Total Assets 4,049.6 3,486.2
3,330.0 3,280.1 2,962.9
Unpaid Losses and Loss Adjustment
Expenses, Policyholder Dividends
and Unearned Premiums 1,425.5 1,069.0
889.5 823.4 457.5
Debt 523.2 656.1
665.9 516.2 374.0
Common Shareholders' Equity 1,722.3 1,502.8
1,479.0 1,634.2 1,826.8
Book Value Per Share of Common Stock 36.30 32.40
31.23 31.00 27.84
Total Debt to Total Capital 23% 30%
31% 24% 17%
Certain Financial Ratios
and Other Data:
Cash Dividends Declared Per Share
of Common Stock $ .85 $ .81
$ .71 $ .53 $ .42
Statutory Surplus of Insurance
Operations $ 567.3 $ 453.6
$ 392.9 $ 345.0 $ 157.7
Statutory Net Written Premiums to
Statutory Surplus(3) 2.4x 2.3x
2.3x 2.2x 2.0x
GAAP Combined Ratio 96.2% 97.5%
97.0% 99.9% 101.6%
Statutory Combined Ratio 94.0% 96.5%
98.5% 100.1% 98.1%
Industry Statutory Combined Ratio for
Property and Casualty Insurers(4) 109.2% 115.8%
108.8% 109.6% 109.2%
(1) The Company's principal insurance operations were acquired
on
March 31, 1989 and December 31, 1990 in business
acquisitions
accounted for as purchases. Results of operations of the
acquired businesses are included from the effective dates of
the acquisitions and the net assets of the acquired
companies
are included as of the effective dates. Year-to-year
comparisons are also affected by business dispositions and
by
restructuring provisions and certain unusual charges. See
Note 2 of Notes to Financial Statements and "Management's
Discussion and Analysis - Results of Operations" for further
information.
(2) The 1993 results include a $132 million, or $2.74 per share,
tax benefit attributable to an increase in the Company's net
deferred tax asset. See Note 7 of Notes to Financial
Statements and "Management's Discussion and Analysis -
Results
of Operations".
(3) For 1989 and 1990, the writings to surplus ratio is based on
statutory surplus of Republic Indemnity only, excluding the
statutory surplus of the NSA Group, which was acquired on
December 31, 1990 and a reinsurance subsidiary which had
insignificant written premiums in both years.
(4) Ratios for 1989 and 1990 are derived from A.M. Best's
Aggregates and Averages Property/Casualty (1992 edition).
The
ratios for 1991 and 1992 and the ratio estimate for 1993 are
derived from Best's Insurance Management Reports
Property/Casualty Supplement (January 3, 1994 edition).
25
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
INCOME STATEMENT
For the years
ended December 31,
(In Millions, Except Per Share Amounts) 1993
1992 1991
Revenues
Insurance operations
Premiums earned $1,273.6 $
998.7 $ 845.6
Net investment income 114.7
105.0 97.9
Net realized gains 17.5
23.6 26.5
Other operations
Net sales 198.3
255.4 279.7
Interest and dividend income 53.4
45.5 35.5
Net realized gains (losses) 105.8
(3.3) (9.8)
1,763.3
1,424.9 1,275.4
Expenses
Insurance operations
Losses 726.9
579.5 488.9
Loss adjustment expenses 130.0
107.1 90.4
Commissions and other insurance
expenses 288.3
229.7 187.3
Policyholder dividends 93.2
67.5 58.9
Other operations
Cost of sales 88.9
143.8 157.6
Operating expenses 105.7
107.3 105.9
Corporate and administrative expenses 20.2
20.2 25.8
Interest and debt expense 62.8
69.6 65.3
Gain on issuance of common stock
by a subsidiary -
- (.2)
Provision for loss on sale of subsidiaries
and asset impairment 41.6
- 11.0
Other expense (income), net 15.6
16.1 5.1
1,573.2
1,340.8 1,196.0
Income from continuing operations before
income taxes 190.1
84.1 79.4
Income tax (expense) benefit 52.6
(33.2) (29.2)
Income from continuing operations 242.7
50.9 50.2
Discontinued operations:
Income (loss) from discontinued
operations 2.8
1.7 (47.6)
Loss on disposal (13.5)
- -
Cumulative effect of accounting change -
252.8 -
Net income $ 232.0 $
305.4 $ 2.6
Earnings per share data:
Continuing operations $ 5.03 $
1.08 $ 1.03
Discontinued operations (.22)
.04 (.98)
Cumulative effect of accounting change -
5.36 -
$ 4.81 $
6.48 $ .05
Weighted average number of common shares 48.2
47.2 48.7
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
26
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEET
(In Millions, Except Share Data) December
31,
1993
1992
Assets
Investments held by insurance operations
Fixed maturity securities
Held for investment-stated at amortized
cost (market $1,173.0 and $951.2) $1,113.0 $
924.2
Available for sale-stated at market
(cost $408.7 and $310.1) 432.8
325.8
Short-term investments 56.9
44.1
Equity in affiliates -
10.1
1,602.7
1,304.2
Parent Company investments
Fixed maturity securities
Held for investment-stated at amortized
cost (market $251.7 and $252.7) 248.9
250.8
Short-term investments 387.9
211.8
General Cable Corporation notes 286.8
255.0
Equity in affiliates 20.1
83.7
943.7
801.3
Cash 32.4
36.2
Accrued investment income 43.4
41.9
Agents' balances and premiums receivable 289.9
198.4
Reinsurance receivable 47.6
-
Other receivables 51.4
57.4
Deferred policy acquisition costs 77.4
50.4
Property, plant and equipment 95.2
97.6
Cost in excess of net assets acquired 406.8
368.4
Deferred tax asset 295.8
245.4
Net assets of discontinued operations 9.8
111.5
Other assets 153.5
173.5
Total $4,049.6
$3,486.2
Liabilities And Common Shareholders' Equity
Unpaid losses and loss adjustment expenses $ 961.4 $
763.5
Policyholder dividends 111.8
81.2
Unearned premiums 352.3
224.3
Debt 523.2
656.1
Minority interests in subsidiaries 15.1
16.6
Accounts payable and other liabilities 363.5
241.7
Total liabilities 2,327.3
1,983.4
Common Stock, $1.00 par value - outstanding or
issuable 47,446,094 and 46,382,170 shares 47.4
46.4
Capital surplus 746.2
738.9
Retained earnings (from October 25, 1978) 912.3
707.0
Net unrealized gains on investments 16.4
10.5
Total common shareholders' equity 1,722.3
1,502.8
Total $4,049.6
$3,486.2
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
27
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CASH FLOWS
For
the years ended
December 31,
(In Millions) 1993
1992 1991
Cash flows of operating activities:
Income from continuing operations $ 242.7
$ 50.9 $ 50.2
Adjustments to reconcile income from continuing
operations to net cash provided by continuing
activities
Deduction in lieu of current Federal
income tax -
- 24.3
Deferred Federal income tax (57.9)
28.9 -
Depreciation, depletion and amortization 32.8
33.5 34.2
Net gain on disposals of businesses, investments
and property, plant and equipment (80.6)
(19.2) (10.9)
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures of
businesses
Increase in receivables (96.9)
(47.2) (5.7)
(Increase) decrease in other assets 6.7
8.3 (33.5)
Increase (decrease) in accounts payable and
other liabilities 12.7
(16.9) (.4)
Increase in unpaid losses and loss
adjustment expenses 94.8
99.6 62.2
Increase (decrease) in policyholder
dividends 30.4
11.7 (3.1)
Increase in unearned premiums 105.7
68.6 19.0
Litigation settlement 15.6
- -
Other, net (1.9)
(.3) (5.7)
Net cash flows of operating activities 304.1
217.9 130.6
Cash flows of investing activities:
Purchases of investments (735.5)
(1,009.2) (1,014.3)
Sales and maturities of investments 734.3
712.5 904.5
Net (increase) decrease in temporary investments (139.8)
220.6 (87.3)
Acquisitions of businesses, net of cash acquired (95.3)
- (2.3)
Capital expenditures (17.5)
(14.6) (19.7)
Sales of businesses 89.7
- -
Other, net (1.4)
2.0 22.2
Net cash flows of investing activities (165.5)
(88.7) (196.9)
Cash flows of financing activities:
Repayment of debt (135.1)
(13.1) (4.5)
Common Stock dividends (38.2)
(36.8) (32.3)
Exercise of stock options and conversion of
Career Shares 24.0
12.6 11.6
Purchases of Company Common Stock (1.9)
(36.8) (142.7)
Issuance of debt 1.8
3.1 151.8
Other, net (1.3)
.2 (1.0)
Net cash flows of financing activities (150.7)
(70.8) (17.1)
Net cash flows from continuing operations (12.1)
58.4 (83.4)
Net cash (to) from discontinued operations 8.3
(36.6) 68.1
Increase (decrease) in cash (3.8)
21.8 (15.3)
Cash - beginning of year 36.2
14.4 29.7
Cash - end of year $ 32.4
$ 36.2 $ 14.4
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
28
AMERICAN PREMIER UNDERWRITERS, INC. AND CONSOLIDATED
SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective March 25, 1994, the Company changed its corporate name
from The Penn Central Corporation to American Premier
Underwriters,
Inc. in order to better reflect its new identity as a property
and
casualty insurance specialist.
Principles of Consolidation
All majority-owned subsidiaries are consolidated, with the
exception
of the Company's defense services operations sold in August, 1993
and those businesses included in the 1992 Spin-off to the
Company's
shareholders of the Company's principal manufacturing operations
which have been classified as discontinued operations.
Intercompany
transactions and balances are eliminated. Certain amounts in the
consolidated financial statements for years prior to 1993 have
been
reclassified to conform to the current presentation.
Revenue Recognition
Premiums are earned ratably over the terms of the insurance
policies, net of reinsurance ceded.
Income Taxes
Effective January 1, 1992, the Company elected to adopt Statement
of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". Prior years' financial statements have not been
restated to apply the provisions of this pronouncement. In
periods
prior to January 1, 1992, to the extent that no Federal income
tax
was payable because of the pre-reorganization net operating loss
carryforward or tax losses attributable to disposition of pre-
reorganization assets and liabilities, a deduction in lieu of
current Federal income tax (which was not accruable or payable)
was
made from income and credited to capital surplus. Due to the
Company's adoption of SFAS No. 109, this presentation has been
discontinued. Refer to Note 7 for further explanation of the
adoption of SFAS No. 109 and the cumulative effect of the
accounting
change.
Investments
During 1992, the Company revised its accounting policy for all
investments in fixed maturity securities. Such securities which
will be held for indefinite periods of time are classified as
available for sale and are stated at market value, with net
unrealized gains or losses (net of deferred income taxes)
credited
or charged to shareholders' equity. Investments in fixed
maturity
securities which the Company has both the intent and the ability
to
hold to maturity are stated at cost, adjusted for amortization of
discount or premium unless there is an impairment of value which
is
determined to be other than temporary, in which case they are
carried at estimated net realizable value. In certain limited
circumstances, such as individual issuer credit deterioration, a
major business combination or disposition or if required by
insurance or other regulators, the Company may dispose of such
investments prior to their scheduled maturities. The Company is
not
aware of any such circumstances which would be likely to cause a
material amount of fixed maturity securities currently classified
as
held for investment to be sold prior to maturity. Short-term
investments are carried at amortized cost which approximates
market
value. The Company uses the "specific identification" method of
determining the cost of investments sold. For further
information,
see Notes 3 and 4.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation
is
provided principally using the straight-line method over the
expected useful lives of the assets. Upon sale or retirement of
significant assets, the cost and related accumulated depreciation
are eliminated from the accounts, as applicable, and the
resulting
gain or loss is included in income.
Cost in Excess of Net Assets Acquired
The excess of the acquisition cost over the net assets of
businesses
acquired is being amortized using the straight-line method over
periods not exceeding 40 years. At December 31, 1993 and 1992,
accumulated amortization of cost in excess of net assets acquired
totaled $42.9 million and $37.5 million, respectively.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs applicable to unearned premiums
are computed on a basis which gives recognition to underwriting
expenses (commissions, premium taxes and certain other
underwriting
costs), loss, loss adjustment expense and policyholder dividend
ratios and the anticipated expenses necessary to maintain
policies
in force. The deferred costs are limited to the difference
between
unearned premiums and expected related losses, loss
29
adjustment expenses and policyholder dividends, with subsequent
amortization to income occurring ratably over the terms of the
related policies. Limits on deferred costs are calculated
separately for significant lines of business without any
consideration for anticipated investment income.
Unpaid Losses and Loss Adjustment Expenses
The net liabilities stated for unpaid losses and loss adjustment
expenses are based on (a) the accumulation of case estimates for
losses reported 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 of expenses for investigating and
adjusting claims based on experience. 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 recorded liabilities for unpaid
losses
and loss adjustment expenses are adequate. Changes in estimates
of
the liabilities for unpaid losses and loss adjustment expenses
are
included in income in the period in which determined.
Policyholder Dividends
Dividends payable to policyholders represent management's
estimate
of amounts payable on participating policies which share in
favorable underwriting results. The estimate is accrued during
the
period in which the related premium is earned. Changes in
estimates
are included in income in the period determined. Policyholder
dividends do not become legal liabilities unless and until
declared
by the boards of directors of the insurance companies.
Unearned Premiums
Unearned premiums represent that portion of premiums written
which
is applicable to the unexpired terms of policies in force,
generally
computed by the application of daily pro rata fractions. On
reinsurance assumed, unearned premiums are based on reports
received
from the ceding reinsurers and insurance pools and associations.
Reinsurance
Portions of the Company's policy coverages are reinsured under
contracts with various reinsurers. The more significant
contracts
represent excess of loss treaties designed to limit the Company's
potential liability on significant policy coverages. Reinsurance
contracts do not relieve the Company from its obligations to
policyholders. Effective January 1, 1993, the Company adopted
SFAS
No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration
and Long-Duration Contracts". This statement requires ceding
insurers to (a) report separately as assets estimated reinsurance
receivables arising from reinsurance contracts and amounts paid
to
reinsurers relating to the unexpired portions of such contracts
and
(b) include corresponding amounts in unpaid losses and loss
adjustment expenses on a gross basis. Prior to the adoption of
SFAS
No. 113, assets related to reinsurance activities were recorded
as
reductions to the liabilities stated for unpaid losses and loss
adjustment expenses and unearned premiums. Financial statements
of
prior periods have not been restated to reflect the provisions of
this statement.
Income on reinsurance contracts is recognized based on
reports
received from ceding reinsurers and insurance pools and
associations.
Capital Surplus
Adjustments to claims and contingencies arising from events or
circumstances preceding the Company's 1978 reorganization are
reflected in capital surplus if the adjustments are not clearly
attributable to post-reorganization events or circumstances.
Such
pre-reorganization claims and contingencies consist principally
of
personal injury claims by former employees of the Company's
predecessor and claims relating to the generation, disposal or
release into the environment of allegedly hazardous substances
arising out of railroad operations disposed of prior to the 1978
reorganization. In periods prior to January 1, 1992, the
deduction
in lieu of current Federal income tax was credited to capital
surplus.
Fair Value of Financial Instruments
Financial instruments are defined as cash, evidence of an
ownership
interest in an entity, or contracts relating to the receipt,
delivery or exchange of financial instruments. The estimated
fair
value amounts of the Company's financial instruments have been
determined by the Company using available market information and
appropriate valuation methodologies. However, considerable
judgement is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts
that
the Company could realize in current market transactions.
30
The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair
value
amounts. In addition, the fair value estimates presented herein
are
based on pertinent information available to management as of
December 31, 1993. Although management is not aware of any
factors
that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes
of
these financial statements since that date and, therefore,
current
estimates of fair value may differ significantly from the amounts
presented herein. The terms "fair value" and "market value" are
used interchangeably in the financial statements and the notes
thereto. Unless otherwise denoted, stated values of financial
instruments approximate fair value.
New Accounting Pronouncements
In May 1993, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 115, "Accounting for Certain Investments in Debt
and
Equity Securities", which the Company is required to adopt no
later
than 1994. The Company's planned adoption of SFAS No. 115 during
1994 is not expected to have a material effect on the Company's
financial position or results of operations.
In November 1992, the FASB issued SFAS No. 112, "Employers'
Accounting for Postemployment Benefits", which the Company is
required to adopt no later than 1994. An actuarial evaluation of
the Company's postemployment benefits has been prepared. Based
on
this evaluation, the Company's planned adoption of SFAS No. 112
during 1994 is not expected to have a material effect on the
Company's financial position or results of operations.
2. ACQUISITIONS AND DIVESTITURES
On February 10, 1994, the Company announced that it is
considering
a proposal from American Financial Corporation ("AFC") for the
purchase by the Company of the personal lines insurance
businesses
owned by Great American Insurance Company ("GAIC") for a proposed
purchase price of approximately $380 million in cash. GAIC's
personal lines insurance businesses principally provide standard
private passenger automobile insurance and multiperil homeowners'
insurance. GAIC is a wholly-owned subsidiary of AFC. Completion
of
a transaction would be subject to certain conditions, including
approval by a special committee of the Company's directors which
has
been empowered to negotiate all aspects of the proposed
acquisition,
including the proposed purchase price, receipt by the Company of
an
appropriate fairness opinion from an independent investment
banking
firm, and any required regulatory approvals. AFC beneficially
owned
40.5 percent of the Company's outstanding common shares at
December
31, 1993 and AFC's Chairman, Chief Executive Officer and
principal
shareholder is Chairman and Chief Executive Officer of the
Company.
AFC's proposal would include the transfer by GAIC of an
investment
portfolio consisting principally of investment grade bonds with a
market value of approximately $450 million. GAIC's personal
lines
businesses reported net earned premiums of $342 million and $322
million for 1993 and 1992, respectively. GAIC estimates that on
a
stand-alone basis the personal lines businesses had pro forma
accident year statutory combined ratios of 99.0 percent and 99.1
percent for 1993 and 1992, respectively. GAIC also estimates
that
the net book value of the businesses that would be transferred at
closing would be approximately $200 million.
Leader National
On May 20, 1993, the Company purchased Leader National Insurance
Company ("Leader National") for $38 million in cash. Leader
National writes non-standard private passenger automobile
insurance
and, to a lesser extent, non-standard commercial automobile
insurance. The acquisition was accounted for as a purchase and
the
purchase price was allocated to the identifiable net assets of
Leader National based upon an estimate of their fair values. The
purchase price was approximately equal to the fair value of the
net
assets acquired. Leader National's assets, liabilities and
results
of operations are included with those of the Company's other
private
passenger automobile insurance companies as of the purchase date.
Sale of Non-insurance Businesses
On November 9, 1993, the Company sold all of its 1,982,646 shares
of
the common stock of Tejas Gas Corporation ("Tejas") in an
underwritten public offering for net proceeds of $106.6 million.
The Company's pre-tax gain from the sale was approximately $80.0
million.
On August 25, 1993, the Company sold its defense
services
operations, excluding certain real estate being retained for sale
by
the Company, to Tracor, Inc. for $94 million in cash, subject to
a
post-closing working capital adjust
31
ment. As a result of the sale, the Federal Systems segment has
been
classified as discontinued operations for all periods presented.
On May 25, 1993, the Company sold all of its 2,308,900
limited
partnership units of Buckeye Partners, L.P. ("Buckeye Units") in
an
underwritten public offering for net proceeds of $71.6 million,
of
which $10.7 million was related to Buckeye Units held in the
insurance operations' investment portfolio and $60.9 million was
attributable to Buckeye Units held in the Parent Company
investment
portfolio. The Company's pre-tax gain from the sale was
approximately $18.5 million. Of this amount, $2.8 million is
related to the insurance operations' investments and accordingly,
is
included in "net realized gains" from insurance investments. The
balance of $15.7 million, attributable to the Parent Company
investments, is included in "net realized gains (losses)".
The intended divestitures of businesses announced in
December
1992 included five small diversified industrial companies, two of
which were sold during 1993 for cash and notes aggregating $8
million. For 1993, the operations sold and to be sold had
aggregate
sales of $107.2 million and operated at break-even. At December
31,
1993, the aggregate book value of the three businesses remaining
to
be sold was $36.1 million, net of a provision recorded in 1993 to
adjust such book value to net realizable value.
In December 1992, the Company sold G&H Technology, Inc.
for a
note of approximately $11.0 million.
Spin-off of Principal Manufacturing Operations
On July 1, 1992, substantially all of the stock of the Company's
subsidiary, General Cable Corporation ("General Cable"), which
had
been formed to own the Company's wire and cable, materials
handling
machinery and equipment and marine equipment manufacturing
businesses (the "General Cable Businesses"), was spun off to the
Company's shareholders (the "Spin-off"). As a result of the
Spin-
off, the General Cable Businesses have been classified as
discontinued operations for all periods presented.
As part of the Spin-off, the Company retained a $255
million
9.98 percent subordinated note due 2007 issued by General Cable
(the
"General Cable Note"), and also retained approximately 11.6
percent
of the General Cable shares ("Retained Shares") for satisfaction
of
General Cable options granted by the Company to holders of
Company
stock options and Career Shares and for distribution from time to
time under the Company's 1978 Plan of Reorganization. At
December
31, 1993, AFC owned 44.6 percent of the outstanding shares of
General Cable, excluding the Company's Retained Shares. Interest
due prior to 1998 on the General Cable Note may be paid with
additional notes ("Interest Notes") in lieu of cash if certain
earnings levels are not achieved by General Cable. Specifically,
if
General Cable's consolidated net income for the twelve-month
period
ending on June 30 or December 31, as the case may be, immediately
preceding any interest payment date is less than $5.0 million,
General Cable may elect to pay up to 50 percent of such interest
with additional notes. If General Cable has a consolidated net
loss
exceeding $2.5 million for such twelve-month period, it may elect
to
pay up to 100 percent of such interest with additional notes.
During 1993, General Cable paid 100 percent, or $31.8 million, of
the interest due on the General Cable Note with Interest Notes in
lieu of cash.
On February 14, 1994, General Cable delivered to the
Company
cash and promissory notes issued by a subsidiary of Rowan
Companies,
Inc. ("Rowan") totalling $52.1 million as a partial payment of
the
General Cable notes. The cash portion of the payment was $10.4
million. The Rowan notes, which are guaranteed by Rowan, have a
face value of $41.7 million, an interest rate of 7 percent and
are
due in 1999. Quarterly interest payments are payable in cash
beginning March 31, 1994. The cash and Rowan notes resulted from
the sale by General Cable of its Marathon LeTourneau unit to
Rowan.
As a result of these receipts, the Company credited General Cable
with $48.1 million of principal and interest payments on the
General
Cable notes which resulted in the payment in full of the $31.8
million of Interest Notes and reduced the principal amount of the
General Cable Note to $241.4 million from $255.0 million at
December
31, 1993.
Under the terms of General Cable's revolving credit and
letter
of credit facility with certain commercial banks, General Cable
is
required to exercise its option, if available, to pay interest on
the General Cable Note with Interest Notes in lieu of cash. In
view
of General Cable's consolidated net losses of $57.6 million for
the
twelve months ended December 31,1993, the Company expects that
General Cable will pay approximately $12.0 million of interest
due
on
32
March 31, 1994 with an Interest Note. One-third of the principal
amount of each Interest Note, plus accrued interest, is due and
payable on each of the fourth, fifth and sixth anniversary dates
of
its issuance.
The principal of the General Cable Note is scheduled to
be
repaid as follows: $12.75 million on September 30, 1998 and
September 30, 1999; $25.5 million on September 30 in each of the
years 2000 through 2006; and the remaining unpaid balance on
September 30, 2007. Management has been unable to obtain
sufficient
objective information required to reliably estimate the fair
value
of the General Cable Note and the Interest Notes (collectively
the
"Notes") at December 31, 1993. In particular, General Cable does
not have any outstanding publicly traded debt instruments, nor
does
General Cable have a public debt rating. In addition, the cash
flow
required by the provisions of the General Cable Note can not be
accurately projected, and there are no readily available
comparable
instruments actively trading in the public debt markets.
Accordingly, management concluded that determination of the
estimated fair value of the Notes is impracticable at December
31,
1993.
The Company's management has evaluated the
recoverability of
the Notes held at December 31, 1993 and does not believe, based
on
available evidence, that it is probable that the Notes are
impaired.
In arriving at this conclusion, the Company considered, among
other
things, the following data as reported by General Cable at
December
31, 1993: its debt to capital ratio; its cash and net working
capital position and its cash flow and liquidity since the date
of
the Spin-off; its property, plant and equipment, net of
accumulated
depreciation; its tangible net assets, before deducting the
amount
of the Notes and its operating results.
Under the terms of an intercompany agreement between
the
Company and General Cable, the net advances from the Company to
the
General Cable Businesses between January 1, 1992 and the date of
the
Spin-off, aggregating $36.9 million, were converted into a short-
term note ("Short-Term Note"), payable to the Company in full on
or
before June 30, 1993, including interest. In July 1993, General
Cable entered into a three-year $65 million revolving credit and
letter of credit facility with certain commercial banks which
enabled General Cable to repay in full to the Company the
Short-Term
Note and accrued interest thereon in the amount of $39.2 million
on
July 2, 1993.
The principal pro forma effect on the Company's 1992
pre-tax
income from continuing operations, assuming the Spin-off had
occurred on January 1, 1991, is the inclusion of interest income
attributable to the General Cable Note and Short-Term Note for
the
six months ended June 30, 1992. Assuming a prime rate of 6
percent
per annum for the Short-Term Note, such income would have added
$13.8 million, or $.18 per share, for 1992 and $27.7 million, or
$.40 per share, for 1991.
Discontinued Operations
Discontinued operations includes the following:
Years Ended December 31, 1993 1992
1991
Revenues:
Federal Systems $274.8 $414.0 $
419.7
General Cable Businesses - 469.3
1,024.5
$274.8 $883.3
$1,444.2
Pre-tax Income (Loss):
Federal Systems $ 4.8 $ 18.9 $
19.7
General Cable Businesses - (19.5)
(91.2)
$ 4.8 $ (.6) $
(71.5)
Income (Loss) from
Discontinued Operations:
Federal Systems $(10.7) $ 11.2 $
13.2
General Cable Businesses - (9.5)
(60.8)
$(10.7) $ 1.7 $
(47.6)
Income (Loss) Per Share from
Discontinued Operations:
Federal Systems $ (.22) $ .24 $
.27
General Cable Businesses - (.20)
(1.25)
$ (.22) $ .04 $
(.98)
The loss from discontinued operations in 1993 includes
a loss
on disposal of the former Federal Systems segment of $13.5
million,
or $.28 per share, primarily attributable to a reduction of
deferred
tax assets. For 1992, results of the General Cable Businesses
were
for the six months ended June 30, 1992, up to the Spin-off date.
The
loss from discontinued operations in 1991 includes provisions for
restructuring and consolidation of facilities and the write-down
of
goodwill within the wire and cable operations of the General
Cable
Businesses totaling $57.7 million, or $1.18 per share.
33
3. INSURANCE OPERATIONS
Investments of Insurance Operations
Amortized cost, gross unrealized gains and losses and market
values
of the insurance operations' investments in fixed maturity
securities at December 31, 1993 and 1992 are presented in the
tables
below.
Included at December 31, 1993 are unrated or less than
investment grade corporate securities with a carrying value of
$117.9 million (market value $122.4 million). Investments of
insurance operations also include a net receivable for securities
sold but not settled of $.1 million at December 31, 1993 and a
net
payable for securities purchased but not settled of $3.8 million
at
December 31, 1992.
Gross Gross
Amortized Unrealized Unrealized
Market
December 31, 1993 Cost Gains Losses
Value
(In Millions)
Held for investment
Corporate securities $ 826.7 $ 50.8 $ 2.6
$ 874.9
Public utilities 192.1 7.5 .5
199.1
Mortgage-backed securities 85.9 3.6 -
89.5
State and local obligations 8.3 1.2 -
9.5
Total held for investment 1,113.0 63.1 3.1
1,173.0
Available for sale
Corporate securities 267.2 17.4 1.8
282.8
Public utilities 22.1 1.1 .2
23.0
Mortgage-backed securities 62.1 4.2 .1
66.2
U.S. government securities 51.5 3.3 -
54.8
State and local obligations 5.7 .2 -
5.9
Total available for sale 408.6 26.2 2.1
432.7
Total fixed maturity
securities $1,521.6 $ 89.3 $ 5.2
$1,605.7
Gross Gross
Amortized Unrealized Unrealized
Market
December 31, 1992 Cost Gains Losses
Value
(In Millions)
Held for investment
Corporate securities $ 635.8 $ 22.7 $ 3.0
$ 655.5
Public utilities 184.3 5.4 .2
189.5
Mortgage-backed securities 95.0 1.6 .6
96.0
State and local obligations 9.1 1.1 -
10.2
Total held for investment 924.2 30.8 3.8
951.2
Available for sale
Corporate securities 192.0 9.2 .4
200.8
Public utilities 16.9 .6 -
17.5
Mortgage-backed securities 60.9 3.4 -
64.3
U.S. government securities 44.1 2.9 -
47.0
Total available for sale 313.9 16.1 .4
329.6
Total fixed maturity
securities $1,238.1 $ 46.9 $ 4.2
$1,280.8
34
The amortized cost and market value of the insurance
operations' investments in fixed maturity securities at December
31,
1993 are shown below by contractual maturity. Expected
maturities
may differ from contractual maturities because certain borrowers
have the right to call or prepay obligations.
(In Millions)
Amortized Market
Cost Value
Due in one year or less $ 14.4 $ 14.7
Due after one year through five years 224.6 239.2
Due after five years through ten years 884.5 930.3
Due after ten years 250.1 265.8
1,373.6 1,450.0
Mortgage-backed securities 148.0 155.7
Total $1,521.6 $1,605.7
At December 31, 1993 and 1992, short-term investments
principally consisted of U.S. Treasury securities and commercial
paper.
Investment Income of Insurance Operations
Investment income consists of the following:
(In Millions)
Years Ended December 31, 1993 1992 1991
Income from fixed maturity
securities $117.4 $105.6 $ 97.8
Income from equity securities .5 2.1 2.3
Gross investment income 117.9 107.7 100.1
Investment expenses (3.2) (2.7) (2.2)
Net investment income $114.7 $105.0 $ 97.9
Realized gains (losses) consist of the following:
(In Millions)
Years Ended December 31, 1993 1992 1991
Gross realized gains on:
Fixed maturity securities $ 15.6 $ 23.3 $ 22.5
Equity securities 2.8 1.5 8.6
Gross realized losses on:
Fixed maturity securities (.9) (1.2) (2.3)
Equity securities - - (2.3)
Net realized gains (losses) $ 17.5 $ 23.6 $ 26.5
Income from fixed maturity securities includes income
from
short-term investments. Proceeds from sales of investments in
fixed
maturity securities during 1993, 1992 and 1991, excluding
proceeds
from sales at or near maturity, totaled $155.9 million, $409.4
million and $564.3 million, respectively.
Restrictions on Transfers of Funds and Assets
The Company's insurance operations are subject to state
regulations
which limit, by reference to specified measures of statutory
operating results and policyholders' surplus, the dividends that
can
be paid to the Company without prior regulatory approval. Under
these restrictions, the maximum amount of dividends which can be
paid to the Company during 1994 by these subsidiaries is $96.5
million. At December 31, 1993 and 1992, statutory capital and
surplus totaled $567.3 million and $453.6 million, respectively.
Reinsurance
The insurance operations assume and cede a portion of their
written
business with other insurance companies in the normal course of
business. To the extent that any reinsuring companies are unable
to
meet their obligations under agreements covering reinsurance
ceded,
the Company's insurance subsidiaries would remain liable.
Amounts
deducted from insurance losses and loss adjustment expenses and
net
written and earned premiums in connection with reinsurance ceded
to
affiliates and non-affiliated companies, as well as amounts
included
in net written and earned premiums for reinsurance assumed from
affiliates and non-affiliated companies, were as follows:
(In Millions)
December 31, 1993 1992
Reinsurance ceded:
Reserves for unpaid loss and
loss adjustment expenses
Affiliates $ 14.0 $18.9
Non-affiliates 29.1 25.5
35
(In Millions)
Years Ended December 31, 1993 1992 1991
Reinsurance ceded:
Premiums written
Non-affiliates $ 9.3 $ 5.9 $ 2.1
Premiums earned
Non-affiliates 8.9 6.4 6.1
Incurred losses and loss adjustment
expenses
Affiliates (2.5) (8.8) (12.6)
Non-affiliates 3.8 4.4 4.8
Reinsurance assumed:
Premiums written
Affiliates 101.2 56.0 62.8
Non-affiliates 74.4 46.1 17.9
Premiums earned
Affiliates 78.2 56.1 62.8
Non-affiliates 60.1 36.4 15.5
The allowance for uncollectible reinsurance was $1.9
million
and $1.5 million, respectively, at December 31, 1993 and 1992.
Other
Statutory net income for 1993, 1992 and 1991 was $93.0 million,
$81.6 million and $75.1 million, respectively. Deferred policy
acquisition costs amortized to income were $243.8 million, $195.9
million and $121.2 million for 1993, 1992 and 1991, respectively.
Additionally during 1991, insurance in-force of approximately
$11.0
million was amortized to expense.
At December 31, 1993 and 1992, reserves for
uncollectible
premium receivable were $5.6 million and $3.5 million,
respectively.
Substantially all of the policies written in the
workers'
compensation insurance operations during 1993, 1992 and 1991 were
eligible for policyholder dividend consideration.
4. PARENT COMPANY INVESTMENTS
Amortized cost, gross unrealized gains and losses and market
values
of the Parent Company investments in fixed maturity securities
held
for investment, other than the General Cable Notes, at December
31,
1993 and 1992 are presented in the tables below.
At December 31, 1993 the carrying value of unrated or less
than
investment grade corporate securities, other than the General
Cable
Notes, totaled $19.9 million of which $5.4 million had readily
available market values equal to their carrying values.
Gross Gross
Amortized Unrealized Unrealized
Market
December 31, 1993 Cost Gains Losses
Value
(In Millions)
Corporate securities $ 175.1 $ 3.1 $ .3
$ 177.9
Public utilities 31.6 - -
31.6
U.S. government securities 26.5 - -
26.5
Mortgage-backed securities 1.2 - -
1.2
Other debt securities 14.5 - -
14.5
Total fixed maturity
securities $ 248.9 $ 3.1 $ .3
$ 251.7
Gross Gross
Amortized Unrealized Unrealized
Market
December 31, 1992 Cost Gains Losses
Value
(In Millions)
Corporate securities $ 149.0 $ 1.5 $ .2
$ 150.3
U.S. government securities 86.4 .6 -
87.0
Mortgage-backed securities 3.1 - -
3.1
Other debt securities 12.3 - -
12.3
Total fixed maturity
securities $ 250.8 $ 2.1 $ .2
$ 252.7
36
Proceeds from sales of Parent Company investments
during 1992
and 1991, excluding proceeds from sales at or near maturity
totaled
$5.3 million and $29.3 million, respectively. No gains or losses
were realized on such securities in 1992. Gross realized gains
and
gross realized losses included in interest and dividend income
from
such sales of investments in 1991 totaled $.2 million and $4.5
million, respectively.
Amortized cost and market value of Parent Company
investments
in fixed maturity securities, other than the General Cable Notes,
at
December 31, 1993 are shown below by contractual maturity.
Expected
maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations.
(In Millions)
Amortized Market
Cost Value
Due in one year or less $ 35.6 $ 35.8
Due after one year through five years 145.3 145.2
Due after five years through ten years 59.6 62.2
Due after ten years 7.2 7.3
247.7 250.5
Mortgage-backed securities 1.2 1.2
Total $ 248.9 $ 251.7
At December 31, 1993 and 1992, short-term investments
principally consisted of U.S. Treasury securities and commercial
paper.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
(In Millions)
December 31, 1993 1992
Land $ 14.6 $ 14.8
Buildings and leasehold improvements 20.1 19.8
Machinery, equipment and office furnishings 132.8 124.5
Oil and gas properties 34.3 33.7
Construction in progress 1.2 .7
203.0 193.5
Less - Accumulated depreciation 107.8 95.9
Total $ 95.2 $ 97.6
6. DEBT
Debt consists of the following:
(In
Millions)
1993
1992
Estimated
Estimated
Carrying Fair
Carrying Fair
December 31, Amount Value
Amount Value
Subordinated notes, 10 7/8%, due 2011
(net of unamortized debt issue costs
of $1.1 and $1.2, respectively) $148.9 $189.0
$148.8 $155.7
Subordinated notes, 10 5/8%, due 2000
(net of unamortized debt issue costs
of $1.0 and $1.2, respectively) 149.0 175.5
148.8 156.7
Subordinated notes, 9 3/4%, due 1999
(net of unamortized debt issue costs
of $.8 and $.9, respectively) 199.2 226.0
199.1 200.0
Subordinated debentures, 11%, due 1997 - -
133.3 133.3
Subordinated debentures, 9 1/2%,
due 2002 16.2 16.2
16.2 16.2
Other 9.9 9.9
9.9 9.9
Total $523.2 $616.6
$656.1 $671.8
37
On July 30, 1993, the Company redeemed all $133.3
million
principal amount of its outstanding 11 percent subordinated
debentures due December 15, 1997 at the redemption price of 100
percent of the principal amount of each debenture plus accrued
and
unpaid interest to the redemption date.
During May 1991, the Company publicly issued
$150.0 million
principal amount of 10 7/8 percent subordinated notes due May 1,
2011, and during April 1990, the Company publicly issued $150.0
million principal amount of 10 5/8 percent subordinated notes due
April 15, 2000.
Certain loan agreements contain several covenants and
restrictions, none of which significantly impacted the Company's
operations at December 31, 1993. The 10 7/8, 10 5/8 and 9 3/4
percent notes and the 9 1/2 percent debentures are subordinated
in
right of payment to all debt of the Company outstanding at any
time,
except for debt which is by its terms not superior to the notes
and
debentures.
On February 16, 1994, the Company called for redemption
on March 25,
1994 all of the outstanding $16.2 million principal amount of its
9
1/2 percent subordinated debentures, plus accrued interest.
Annual maturities of debt outstanding at December 31,
1993,
are as follows:
(In Millions)
1994 $ 3.0
1995 .3
1996 .1
1997 .1
1998 .1
After 1998 519.6
At December 31, 1993, the Company had unutilized letter
of
credit facilities totaling $56.9 million which, if drawn, will
bear
interest at rates which approximate the prime rates offered by
various banks.
Estimated fair values for debt issues that are not
quoted on an
exchange were calculated using interest rates that are currently
available to the Company for issuance of debt with similar terms
and
remaining maturities.
7. INCOME TAXES
The Company has reported as of the beginning of its 1993 tax
year,
an aggregate consolidated net operating loss carryforward for
Federal income tax purposes of $825 million and an aggregate
capital
loss carryforward of $384 million. The 1993 consolidated Federal
income tax return will report a remaining net operating loss
carryforward currently estimated at $610 million, which will
expire
at the end of 1996 unless previously utilized, and a remaining
capital loss carryforward estimated at $262 million which will
expire at the end of 1997, unless previously utilized. Also, as
of
December 31, 1993, the Company has investment tax credit
carryforwards totaling approximately $9.6 million (which will
expire
in various amounts between 1994 and 2000 unless previously used),
and alternative minimum tax credit ("AMT") carryforwards of
approximately $13.6 million.
During 1992, the Company elected to adopt SFAS No. 109,
effective January 1, 1992, without restating prior years'
financial
statements. SFAS No. 109 changes the methods of accounting for
income taxes and the criteria for recognition of deferred tax
assets. More specifically, a deferred tax asset is recognized
for
those carryforwards and temporary differences which will provide
future tax benefits. A deferred tax liability is recognized for
temporary differences which will result in taxable amounts in
future
years. The cumulative effect resulting from adopting SFAS No.
109
as of January 1, 1992 was income of $252.8 million, or $5.36 per
share for continuing operations. As a result of adopting SFAS
No.
109, common shareholders' equity increased $300.8 million, or
$6.38
per share, which amount includes $48.0 million, or $1.02 per
share,
attributable to the tax effect of the pre-reorganization net
operating loss carryforward, as well as the cumulative effect of
accounting change.
The Company has calculated its provision for income
taxes for
1993 and 1992 in accordance with SFAS No. 109. For periods prior
to
1992, to the extent that no Federal income tax was payable
because
of the pre-reorganization net operating loss carryforward or tax
losses attributable to disposition of pre-reorganization assets
and
liabilities, a deduction in lieu of current Federal income tax
was
deducted from income and credited to capital surplus.
Components of the 1993 and 1992 provisions for income
tax
benefit (expense) were as follows:
38
(In Millions)
Years Ended December 31, 1993
1992
Current
Federal $(4.4) $
(2.8)
Foreign, state & local (.9)
(1.5)
Total current (5.3)
(4.3)
Deferred
Federal 59.4
(28.9)
Foreign, state & local (1.5) -
Total deferred 57.9
(28.9)
Total $52.6
$(33.2)
The provision for income taxes for 1991 consists
primarily of
the deduction in lieu of current Federal income tax.
Consolidated income tax expense differs from the amount
computed using the United States statutory income tax rate for
the
reasons set forth in the following table:
(In Millions)
Years Ended December 31, 1993
1992
Income before income taxes $190.1 $
84.1
Expected tax at U.S. statutory
income tax rate $(66.5)
$(28.6)
Amortization of goodwill (3.8)
(3.5)
Revision to valuation allowance 132.0 -
Loss disallowance (6.9) -
Other, net (2.2)
(1.1)
Consolidated income tax $ 52.6
$(33.2)
The Company's substantial tax loss carryforwards and
temporary
differences give rise to deferred tax assets. Based on an
analysis
of the likelihood of realizing the Company's gross deferred tax
asset (taking into consideration applicable statutory
carryforward
periods), the Company determined that the recognition criteria
set
forth in SFAS No. 109 are not met for the entire gross deferred
tax
asset and, accordingly, the gross deferred tax asset is reduced
by
a valuation allowance. The analysis of the likelihood of
realizing
the gross deferred tax asset is reviewed and updated
periodically.
Any required adjustments to the valuation allowance are made in
the
period in which the developments on which they are based become
known. Results for 1993 include tax benefits of $132 million
attributable to such adjustments. Approximately $30 million of
the
adjustments is attributable to three transactions occurring
during
the second quarter of 1993, specifically (a) the sale of the
Buckeye
Units, (b) the call for redemption of the 11 percent subordinated
debentures and (c) the acquisition of Leader National.
Approximately $33 million is attributable to the sale of the
Company's Tejas shares. The balance is principally due to the
effect on the estimated future taxable income during the
Company's
loss carryforward period of better 1993 operating results than
previously estimated as well as the effect of the increase in the
statutory income tax rate.
Carryforwards and temporary differences which give rise
to the
deferred tax asset are as follows:
(In Millions)
Amount of Deferred Tax
Assets
at Current Tax Rates
December 31,
1993 1992
Net operating loss carryforward $213.5 $278.4
Capital loss carryforwards 93.3 80.6
Insurance claims and reserves 114.0 78.8
Other, net 70.2 81.9
Gross deferred tax asset 491.0 519.7
Valuation allowance (195.2) (274.3)
Net deferred tax asset $295.8 $245.4
8. PENSION PLANS AND OTHER RETIREMENT BENEFITS
The Company provides retirement benefits, primarily through
contributory and noncontributory defined contribution plans, for
the
majority of its regular full-time employees except those covered
by
certain labor contracts. Company contributions under the defined
contribution plans sponsored by the Company approximate, on
average,
five percent of each eligible employee's covered compensation.
In
addition, the Company sponsors employee savings plans under which
the Company matches a specified portion of contributions made by
eligible employees.
Expense related to defined contribution plans for 1993,
1992
and 1991 totaled $5.5 million, $6.0 million and $4.9 million,
respectively. The Company also provides defined benefit pension
plan retirement benefits for certain employees. The related
amounts
included in the accompanying financial statements are not
material
to the Company's financial condition.
39
9. EMPLOYEE STOCK OPTION AND PURCHASE PLANS
Under the Company's Stock Option Plan, options to purchase shares
of
Common Stock may be granted to officers and other key employees,
and
to non-employee directors of the Company. The exercise price may
not be less than the fair market value of the Common Stock at the
date of the grant. The options granted to officers and key
employees generally become exercisable to the extent of 20
percent
of the shares covered each year, beginning one year from the date
of
grant, and expire ten years from the date of grant. The options
granted to non-employee directors of the Company generally become
fully exercisable upon grant and expire approximately ten years
from
the date of grant.
Under the now terminated Career Share Purchase Plan
(the
"Career Share Plan"), officers and other key employees of the
Company purchased shares of the Company's Preference Stock
(designated Career Shares). Outstanding Career Shares are
convertible, at the holder's option, into a specified number of
shares of Common Stock determined by reference to the fair market
value (as defined) of a share of Common Stock as of the date the
Career Shares were offered for purchase.
Career Shares are generally not entitled to vote; are
entitled
to cumulative annual cash dividends per share (if declared by the
Board of Directors) equal to 9.3 percent of their purchase price
per
share; are superior to the rights of holders of shares of Common
Stock with respect to dividends; and have no preference to the
rights of holders of shares of Common Stock in the event of
liquidation. Under certain conditions, holders of Career Shares
issued under the Career Share Plan are entitled to sell to the
Company any or all of their shares and the Company is entitled to
repurchase all outstanding Career Shares.
The number of common shares available with respect to
the
Company's Stock Option and Career Share Plans and activity under
these Plans are as follows:
Common Stock Equivalents
Available
Exercise or
Under
Conversion
Plans Outstanding
Prices Per Share
Balance at December 31, 1992 531,709 4,967,802
$15.80 - $25.12
Activity during 1993:
Additional authorization 2,000,000
Stock options granted (441,000) 441,000
Stock options exercised (1,072,397)
$15.80 - $25.12
Stock options terminated 7,964 (7,964)
Balance at December 31, 1993 2,098,673 4,328,441
$15.80 - $31.38
Exercisable or convertible (vested)
at December 31, 1993 2,918,116
$15.80 - $31.38
The Company's Employee Stock Purchase Plan ("ESPP")
provides
eligible employees with the opportunity to purchase from the
Company, through regular payroll deductions, shares of the
Company's
Common Stock at 85 percent of its fair market value on the
purchase
date. A maximum of 3,000,000 common shares can be purchased
under
the ESPP, and through December 31, 1993, employees had purchased
265,420 shares.
10. CAPITAL STOCK
The Company is authorized to issue 22,699,464 shares of
Preference
Stock, without par value, in one or more series. At December 31,
1993 and 1992 there were 212,698 shares of Preference Stock
outstanding, all of which are designated Career Shares.
The Company is authorized to issue 200,000,000 shares of
Common Stock. At December 31, 1993, there were 47,446,094 shares
of
Common Stock outstanding or issuable, including 1,377,932 shares
set
aside for issuance to certain pre-reorganization creditors and
other
claimants. Holders of Common Stock have
one vote per share.
During 1993, the Company purchased 45,522 shares of its
Common
Stock for $1.3 million paid or to be paid in cash. During 1992,
the
Company purchased 1,471,002 shares of its Common Stock for $30.2
million paid or to be paid in cash.
40
During 1991, the Company purchased 6,188,150 shares of
its
Common Stock for $149.9 million, including approximately
5,071,000
shares for approximately $121.7 million pursuant to the Company's
January 4, 1991 offer to purchase shares for $24.00 per share.
AFC,
which beneficially owned approximately 42 percent of the
Company's
outstanding common shares before the purchase, did not tender any
of
its shares pursuant to the offer.
At December 31, 1993, the Company had reserved
6,427,114
shares of Common Stock for issuance in connection with the
Company's
Stock Option Plan and Career Share Plan. If all stock options
outstanding at December 31, 1993 were exercised (whether or not
then
exercisable) and all Career Shares outstanding at December 31,
1993
were converted, the total number of shares of Common Stock
outstanding or issuable at December 31, 1993 would increase from
47,446,094 to 51,774,535.
11. CONTINGENCIES
Claims are pending against the Company for reimbursement of
clean-up
costs under the Comprehensive Environmental Response,
Compensation
and Liability Act ("CERCLA") for alleged contamination caused by
release of polychlorinated biphenyls at the Paoli, Pennsylvania
railyard ("Paoli Yard") formerly owned by the Company's railroad
predecessor, Penn Central Transportation Company ("PCTC"). A
Record
of Decision was issued by the U.S. Environmental Protection
Agency
on July 21, 1992 presenting a final selected remedial action for
the
Paoli Yard in accordance with CERCLA having an estimated cost of
approximately $28.3 million. In March 1992, the Company filed a
lawsuit seeking to enjoin the U.S. Government, Consolidated Rail
Corporation ("Conrail") and other parties from prosecuting claims
against the Company for such clean-up costs on the grounds that
the
Paoli Yard environmental claims are barred by: (1) the terms by
which the Paoli Yard was transferred by PCTC to Conrail "as is"
in
1976 pursuant to the Regional Rail Reorganization Act of 1973
(the
"Rail Act"); (2) the 1980 settlement of the Valuation Case
proceedings to determine compensation to be paid by the U.S.
Government for the railroad properties transferred by PCTC
pursuant
to the Rail Act; and (3) the U.S. Constitution. In addition, the
Company believes that it has other substantial defenses to claims
for clean-up costs at the Paoli Yard, including its position that
other parties are responsible for substantial percentages of such
clean-up costs, and the Company intends to make claims against
certain insurance carriers for reimbursement of any clean-up
costs
that the Company may incur. The Company has not established any
accrual for potential liability for clean-up costs at the Paoli
Yard.
There are certain other claims involving the Company
and
certain of its subsidiaries, including claims relating to the
generation, disposal or release into the environment of allegedly
hazardous substances and pre-reorganization personal injury
claims,
that allege or involve amounts that are potentially substantial
in
the aggregate.
The Paoli Yard litigation and the preponderance of the other
claims
arose out of railroad operations disposed of by PCTC prior to its
1978 reorganization and, accordingly, any ultimate liability
resulting therefrom in excess of previously established loss
accruals would be attributable to such pre-reorganization events
and
circumstances. In accordance with the Company's reorganization
accounting policy, any such ultimate liability will reduce the
Company's capital surplus and shareholders' equity, but will not
be
charged to income. See Notes 1 and 12.
The Company believes that its maximum aggregate
potential
exposure at December 31, 1993 with respect to the foregoing
environmental claims (other than Paoli Yard), net of related loss
accruals, was approximately $15 million for claims arising out of
pre-reorganization operations and in the range of $1 million to
$4
million for claims arising out of post-reorganization operations
(which range depends upon the method of remediation, if any,
required). The Company believes that it has meritorious defenses
in
such matters, including its position that other parties are
responsible for substantial percentages of such amounts claimed
and,
in the case of the post-reoganization matter referred to above,
its
belief that the relevant regulatory authority will permit
remediation to be deferred until there is a change in the use of
the
facility which the Company believes is unlikely.
In management's opinion, the outcome of the foregoing
claims
will not, individually or in the aggregate, have a material
adverse
effect on the financial condition or results of operations of the
Company. In making this assessment, management has taken into
account previously established loss accruals in its financial
statements and probable recoveries from insurance carriers and
other
third parties.
41
12. CHANGES IN COMMON SHAREHOLDERS' EQUITY
Unrealized
Gains
Common Stock Capital
Retained (Losses) On
(Dollars in Millions) Shares Amount Surplus
Earnings Investments Total
Balance, December 31, 1990 52,711,265 $52.7 $ 860.7
$736.3 $(15.5) $1,634.2
Increase equal to deduction
in lieu of current Federal
income tax, which is not
accruable or payable .8
.8
Net income
2.6 2.6
Dividends declared on
Common Stock
(33.8) (33.8)
Exercise of stock options
and conversion of Career
Shares 745,128 .8 15.6
16.4
Purchases of Company
Common Stock (6,188,150) (6.2) (143.7)
(149.9)
Issuance of Common Stock
under ESPP 92,713 .1 2.4
2.5
Adjustment of estimated pre-
reorganization liabilities (8.0)
(8.0)
Change in net unrealized gains
(losses) on investments
14.5 14.5
Other, net (.3)
(.3)
Balance, December 31, 1991 47,360,956 $47.4 $ 727.5
$705.1 $ (1.0) $1,479.0
Portion of deferred tax
asset attributable to
pre-reorganization net
operating loss carryforward 48.0
48.0
Net income
305.4 305.4
Dividends declared on
Common Stock
(38.1) (38.1)
Exercise of stock options
and conversion of Career
Shares 397,015 .4 5.6
6.0
Purchases of Company
Common Stock (1,472,495) (1.5) (28.7)
(30.2)
Issuance of Common Stock
under ESPP 96,694 .1 1.9
2.0
Adjustment of estimated pre-
reorganization liabilities (15.0)
(15.0)
Distribution of equity to
shareholders from spin-off
of General Cable
Corporation
(264.5) (264.5)
Change in net unrealized gains
(losses) on investments
11.5 11.5
Other, net (.4)
(.9) (1.3)
Balance, December 31, 1992 46,382,170 $46.4 $ 738.9
$707.0 $ 10.5 $1,502.8
Net income
232.0 232.0
Dividends declared on
Common Stock
(40.0) (40.0)
Exercise of stock options
and conversion of Career
Shares 1,072,397 1.1 21.8
22.9
Purchases of Company
Common Stock (45,522) (1.3)
(1.3)
Issuance of Common Stock
under ESPP 37,049 1.1
1.1
Adjustment of estimated pre-
reorganization liabilities (14.0)
(14.0)
Adjustment to the distribution
of equity to shareholders
from spin-off of General
Cable Corporation
13.3 13.3
Change in net unrealized gains
(losses) on investments
5.9 5.9
Other, net (.1) (.3)
(.4)
Balance, December 31, 1993 47,446,094 $47.4 $ 746.2
$912.3 $ 16.4 $1,722.3
42
During 1993, the Company settled a lawsuit it had
brought
against the former owner of a business that was acquired by the
Company in 1990 and was included in the General Cable Businesses
spun-off to shareholders in July 1992. After the General Cable
Spin-off, the Company retained the right to receive any amounts
recovered in the lawsuit. The net amount of cash received by the
Company in the settlement (net of a provision for certain
obligations and associated litigation expense) has been accounted
for as an adjustment to the distribution of equity to
shareholders
resulting from the General Cable Spin-off.
13. EARNINGS PER SHARE
Earnings per share are calculated on the basis of the weighted
average number of shares of common stock outstanding during the
period and the dilutive effect, if material, of assumed
conversion
of common stock equivalents (stock options and Career Shares).
For
the year ended December 31, 1993, the potential dilution
represented
by shares issuable from the exercise of outstanding stock options
and conversion of outstanding Career Shares, using the treasury
stock method, assuming the proceeds from such issuance would be
used
to repurchase common stock at the average market price during the
period, approximated three percent, the applicable threshold
specified by the Accounting Principles Board Opinion No. 15. For
1992 and 1991, such dilution was less than three percent and is
therefore not reflected in the earnings per share presentation
for
such periods.
14. COMMITMENTS
The Company has agreed to guarantee several third party
obligations
which are not material individually or in the aggregate. The
Company has also entered into various operating lease agreements
related principally to certain administrative and manufacturing
facilities and transportation equipment. Future minimum rental
payments required under noncancelable lease agreements at
December
31, 1993 were as follows: 1994--$18.3 million, 1995--$17.5
million,
1996--$13.5 million, 1997--$5.8 million, 1998--$3.7 million and
$4.8
million thereafter, before deduction of minimum sublease income
of
$19.4 million, in the aggregate, from January 1, 1994 through the
expiration of the leases. Rental expense recorded under
operating
leases was $13.3 million in 1993 and 1992 and $11.1 million in
1991.
15. SEGMENT INFORMATION
The Company's only industry segment is specialty property and
casualty insurance.
16. STATEMENT OF CASH FLOWS
For purposes of this Statement, the Company considers only cash
on
hand or in banks to be cash or cash equivalents.
For the years ended December 31, 1993, 1992 and 1991, income
taxes
paid were $4.8 million, $5.5 million and $6.2 million,
respectively.
For the same periods interest paid totaled $62.7 million, $68.9
million and $62.1 million, respectively.
On March 31, 1993, and September 30, 1993 General Cable
elected to
pay 100 percent, or $31.8 million in the aggregate, of the
interest
due on those dates on the General Cable Note with Interest Notes
in
lieu of cash. These non-cash transactions, which increased the
Parent Company investments and decreased accrued investment
income,
are not included in the Statement of Cash Flows.
In December 1992, the Company received a note for
approximately
$11.0 million in consideration of the sale of G & H Technology,
Inc.
This transaction was a non-cash investing transaction which is
not
included in the Statement of Cash Flows.
On June 30, 1992, in consideration of the transfer of the
General
Cable Businesses and the advance of $25.0 million in cash, the
Company received the $255.0 million, 9.98 percent subordinated
note
of General Cable. To the extent of $230.0 million, this
transaction
was a non-cash investing transaction which is not included in the
Statement of Cash Flows.
In September 1991, a previously consolidated
majority-owned
subsidiary redeemed all of the stock held by the Company in
exchange
for a percentage of the subsidiary's net assets equal to the
Company's percentage ownership of such stock. As a consequence
of
the transaction, the Company's minority interest of $14.3 million
was eliminated and certain other asset and liability accounts
were
reduced by a corresponding amount in the aggregate.
43
17. RELATED PARTY TRANSACTIONS
During 1990, the Company acquired the NSA Group which was a
related
party of AFC. The purchase price was subject to adjustment in
1995,
based on 1991-1994 pre-tax earnings of the NSA Group, by a
reduction
of up to $20.0 million or an increase of up to $40.0 million, in
each case plus interest. In December 1993, the Company, having
concluded based on the NSA Group's pre-tax earnings subsequent to
1990 that it was highly probable that the maximum $40.0 million
purchase price adjustment would be payable by the Company, paid
$40.0 million, plus $12.8 million of interest, to GAIC, a wholly-
owned insurance subsidiary of AFC, in full settlement of the
purchase price contingency in order to cut off the accrual of
interest at the relatively high rate prescribed by the
acquisition
agreement. Also, as part of the agreement for the purchase of
the
NSA Group, AFC, through GAIC, provides stop-loss protection to
the
Company which, in effect, guarantees the adequacy of unpaid loss
and
allocated loss adjustment expense reserves of the NSA Group (net
of
reinsurance and salvage and subrogation recoveries) related to
periods prior to 1991 under policies written and assumed by the
NSA
Group.
In 1988, the Company's workers' compensation insurance
operations ("Republic Indemnity") entered into a reinsurance
contract with GAIC to cover the aggregate losses on workers'
compensation coverage for the accident years 1980-1987,
inclusive.
The contract provides for coverage by GAIC of net aggregate paid
losses of Republic Indemnity in excess of $440 million, up to a
maximum of $35.1 million. Cumulative paid losses at December 31,
1993 pertaining to claims during this period totaled $435.8
million.
In addition, GAIC has agreed to reimburse Republic Indemnity for
its
loss adjustment expenses pertaining to this period up to a
maximum
of $4.9 million.
The Chairman, Chief Executive Officer and principal
shareholder of
AFC, which beneficially owned approximately 40.5 percent of the
Company's outstanding common shares at December 31, 1993, is also
the Chairman and Chief Executive Officer of the Company.
44
Responsibility for Financial Reporting
The financial statements of American Premier
Underwriters,
Inc. and Consolidated Subsidiaries are the responsibility of the
Company's management, and have been prepared in accordance with
generally accepted accounting principles. To help insure the
accuracy and integrity of its financial data, the Company
maintains
a strong system of internal controls designed to provide
reasonable
assurances that assets are safeguarded and that transactions are
properly executed and recorded. The internal control system and
compliance therewith are monitored by the Company's internal
audit
department.
The financial statements have been audited by the
Company's
independent auditors, Deloitte & Touche. Their report is shown
on
this page. The independent auditors, whose appointment by the
Board
of Directors was ratified by the Company's shareholders, express
their opinion on the Company's financial statements based on
procedures which they consider to be sufficient to form their
opinion.
The Audit Committee of the Board of Directors meets
periodically with representatives of Deloitte & Touche and the
Company's internal audit department and financial management to
review accounting, internal control, auditing and financial
reporting matters.
INDEPENDENT AUDITORS' REPORT
American Premier Underwriters, Inc.
We have audited the accompanying balance sheets of
American
Premier Underwriters, Inc. and Consolidated Subsidiaries as of
December 31, 1993 and 1992 and the related statements of income
and
cash flows for each of the three years in the period ended
December
31, 1993. These financial statements are the responsibility of
the
Company's management. Our responsibility is to express an
opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts
and disclosures in the financial statements. An audit also
includes
assessing the accounting principles used and significant
estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present
fairly, in
all material respects, the financial position of American Premier
Underwriters, Inc. and Consolidated Subsidiaries at December 31,
1993 and 1992, and the results of its operations and its cash
flows
for each of the three years in the period ended December 31, 1993
in
conformity with generally accepted accounting principles. As
discussed in Note 1 to the financial statements, in 1992 the
Company
changed its method of accounting for income taxes to conform with
Statement of Financial Accounting Standards No. 109.
Deloitte & Touche
Cincinnati, Ohio
February 16, 1994
(March 25, 1994 with respect to the change
of the Company's name as discussed in
Note 1 to the financial statements)
45
Quarterly Financial Data
(Unaudited)
Summarized quarterly financial data for 1993 and 1992
are set
forth below. Quarterly results have been influenced by
acquisitions
and divestitures and by seasonal factors inherent in the
Company's
businesses. The 1993 results include tax benefits of $15.0
million
($.32 per share), $45.0 million ($.96 per share) and $65.0
million
($1.33 per share) for the first, second and third quarters,
respectively, attributable to increases in the Company's net
deferred tax asset. In addition, the table below gives effect to
the classification of certain businesses as discontinued
operations.
(In Millions,
Except Per 1st Quarter 2nd Quarter 3rd
Quarter 4th Quarter Total
Share Amounts) 1993 1992 1993 1992 1993
1992 1993 1992 1993 1992
Revenues $370.2 $332.6 $426.6 $350.6 $443.7
$363.9 $522.8 $377.8 $1,763.3 $1,424.9
Income
from continuing
operations 31.1 10.4 75.0 11.2 86.2
11.3 50.4 18.0 242.7 50.9
Cumulative effect
of accounting
change - 252.8 - - -
- - - - 252.8
Net income 33.9 260.0 75.0 11.0 82.1
14.1 41.0 20.3 232.0 305.4
Income per
share from
continuing
operations .67 .22 1.60 .23 1.77
.24 1.03 .38 5.03 1.08
Cumulative effect
of accounting
change per
share - 5.33 - - -
- - - - 5.36
Net income per
share .73 5.48 1.60 .23 1.68
.30 .84 .43 4.81 6.48
46
DIVIDEND POLICY AND STOCK MARKET PRICES
American Premier Underwriters, Inc. Common Stock is listed and
traded principally on the New York Stock Exchange. On March 10,
1994, there were approximately 13,563 holders of record of Common
Stock.
During each of the first three quarters of 1992, the Board
of
Directors declared dividends of $.20 per share, and during the
fourth quarter of 1992 declared a dividend of $.21 per share.
The
Board declared dividends of $.21 per share in each of the first
three quarters of 1993, and $.22 per share in the fourth quarter
of
1993, the latter of which was paid in January 1994.
The following table sets forth the high and low stock prices
of the
Company's Common Stock for the last two years, as reported on the
New York Stock Exchange Composite Tape.
1993 1992
High Low High Low
First Quarter $28 5/8 $23 1/2 $27 1/8 $22 5/8
Second Quarter 33 7/8 25 1/2 23 7/8 19 5/8
Third Quarter 39 3/4 30 3/8 20 3/8 18 1/4
Fourth Quarter 34 1/8 29 24 7/8 18
47