SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
June 30, 1994 No. 1-11632
AMERICAN ANNUITY GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Delaware No. 06-1356481
250 East Fifth Street, Cincinnati, Ohio 45202
(513) 333-5300
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, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of August 5, 1994, there were 39,141,080 shares of the Registrant's
Common Stock outstanding.
Page 1 of 16
AMERICAN ANNUITY GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
June 30, December 31,
1994 1993
ASSETS
Investments:
Fixed maturities:
Held to maturity - at amortized cost
(market - $2,966.6 and $2,751.9) $3,076.5 $2,633.2
Available for sale - at market
(amortized cost - $1,336.8 and $1,667.0) 1,309.5 1,754.5
Equity securities - at market (cost - $12.8
and $12.8) 25.1 25.9
Investment in affiliate 26.7 25.2
Mortgage loans on real estate 46.0 52.1
Real estate, net of accumulated depreciation 26.8 26.1
Policy loans 173.5 166.6
Short-term investments 41.4 57.0
Total investments 4,725.5 4,740.6
Cash 8.9 15.0
Marketable securities, restricted in use 3.6 4.4
Accrued investment income 71.8 66.9
Deferred policy acquisition costs, net 52.4 39.2
Other assets 40.3 47.7
Total assets $4,902.5 $4,913.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Annuity policyholders' funds accumulated $4,397.6 $4,256.7
Long-term debt 199.5 225.9
Payable for securities purchased 7.6 68.0
Payable to affiliates, net 3.3 28.3
Accounts payable, accrued expenses and other
liabilities 83.4 84.6
Total liabilities 4,691.4 4,663.5
Series A Preferred Stock - 29.9
Common Stock, $1 par value
-100,000,000 shares authorized
- 39,141,080 and 35,097,447 shares outstanding 39.1 35.1
Capital surplus 333.1 301.0
Retained earnings (deficit) (155.2) (172.6)
Unrealized gain (loss) on marketable securities,
net of deferred income taxes and insurance
adjustments (5.9) 56.9
Total stockholders' equity 211.1 250.3
Total liabilities and stockholders'
equity $4,902.5 $4,913.8
2
AMERICAN ANNUITY GROUP, INC. 10-Q
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(In millions, except per share amounts)
Three months ended Six months ended
June 30, June 30,
1994 1993 1994 1993
Revenues:
Net investment income $ 92.1 $ 88.3 $182.5 $174.7
Realized gains on sales of investments - 12.7 0.6 26.2
Equity in net earnings of affiliate 1.3 0.5 2.9 1.8
Other income 0.7 0.6 1.0 0.8
94.1 102.1 187.0 203.5
Costs and Expenses:
Benefits to annuity policyholders 60.2 57.4 119.4 116.6
Interest on borrowings and
other debt expenses 5.7 5.5 11.7 10.8
Amortization of deferred policy
acquisition costs 1.8 4.1 3.5 8.2
Provision for GALIC relocation expenses- - - 8.0
Other operating and general expenses 9.3 9.5 18.6 16.9
77.0 76.5 153.2 160.5
Income before taxes, extraordinary items
and accounting change 17.1 25.6 33.8 43.0
Provision for income taxes 6.0 8.7 11.9 14.6
Income from continuing operations 11.1 16.9 21.9 28.4
Discontinued operations, net of tax (2.6) - (2.6) -
Income before extraordinary items and
cumulative effect of accounting change8.5 16.9 19.3 28.4
Extraordinary items, net of tax (0.3) - (1.4) -
Cumulative effect of accounting change - - (0.5) -
Net Income $ 8.2 $ 16.9 $ 17.4 $ 28.4
Preferred dividend requirement - 0.9 0.9 1.8
Net income applicable to
Common Stock $ 8.2 $ 16.0 $ 16.5 $ 26.6
Average Common Shares outstanding 39.1 35.1 37.1 35.1
Earnings (loss) per share:
Continuing operations $0.28 $0.46 $0.56 $0.76
Discontinued operations (0.07) - (0.07) -
Extraordinary items (0.01) - (0.04) -
Cumulative effect of accounting
change - - (0.01) -
Net income $0.20 $0.46 $0.44 $0.76
3
AMERICAN ANNUITY GROUP, INC. 10-Q
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions)
Six months ended
June 30,
1994 1993
Preferred Stock:
Balance at beginning of period $ 29.9 $ 29.4
Exchanged for Common Stock (30.0) -
Accretion of discount 0.1 0.2
Balance at end of period $ - $ 29.6
Common Stock:
Balance at beginning of period $ 35.1 $ 35.1
Issued during the period 4.0 -
Balance at end of period $ 39.1 $ 35.1
Capital Surplus:
Balance at beginning of period $301.0 $306.3
Common Stock issuance 33.0 -
Preferred dividends declared (0.8) (0.7)
Accretion of preferred stock discount (0.1) (0.2)
Balance at end of period $333.1 $305.4
Retained Earnings (Deficit):
Balance at beginning of period ($172.6) ($212.6)
Net Income 17.4 28.4
Balance at end of period ($155.2) ($184.2)
Unrealized Gains (Losses), Net:
Balance at beginning of period $ 56.9 $ 28.4
Change during period (62.8) 17.4
Balance at end of period ($ 5.9) $ 45.8
4
AMERICAN ANNUITY GROUP, INC. 10-Q
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Six months ended
June 30,
1994 1993
Operating activities:
Net income $ 17.4 $ 28.4
Adjustments:
Extraordinary losses on retirement of debt 1.4 -
Cumulative effect of accounting change 0.5 -
Benefits to annuity policyholders 119.4 116.6
Amortization of deferred policy
acquisition costs 3.5 8.2
Equity in net earnings of affiliate (2.9) (1.8)
Depreciation and amortization (1.8) 3.1
Realized gains on investing activities (0.6) (26.2)
Increase in accrued investment income (4.9) (6.6)
Increase in deferred policy acquisition costs (13.5) (6.9)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 7.5 (9.2)
Other, net 0.4 10.8
126.4 116.4
Investing activities:
Purchases of:
Fixed maturity investments (757.4) (1,204.8)
Equity securities (0.3) -
Real estate, mortgage loans and other assets (17.4) -
Maturities and paydowns of fixed maturity
investments 136.6 206.2
Sales of:
Fixed maturity investments 457.6 607.1
Equity securities 0.5 16.0
Real estate, mortgage loans and other assets 20.8 1.8
Increase in policy loans (6.8) (2.4)
Other, net - 0.4
(166.4) (375.7)
Financing activities:
Annuity receipts 210.6 213.8
Annuity benefits and withdrawals (172.5) (154.6)
Additions to long-term debt 4.4 125.0
Reductions of long-term debt (23.4) (132.7)
Cash dividends paid (0.8) (0.7)
18.3 50.8
Net decrease in cash and short-term investments (21.7) (208.5)
Cash and short-term investments
at beginning of period 72.0 256.5
Cash and short-term investments
at end of period $ 50.3 $ 48.0
5
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting Policies
Basis of Presentation The accompanying consolidated financial
statements for American Annuity Group, Inc. ("AAG" or the "Company") and
subsidiaries are unaudited, but management believes that all adjustments
(consisting only of normal recurring accruals unless otherwise disclosed
herein) necessary for fair presentation have been made. The results of
operations for interim periods are not necessarily indicative of results
to be expected for the year. The financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore
do not include all information and footnotes necessary to be in
conformity with generally accepted accounting principles. Certain
reclassifications have been made to prior periods to conform to the
current year's presentation.
American Financial Corporation and subsidiaries ("AFC") owned 31,319,629
shares (80%) of AAG's Common Stock at June 30, 1994.
Investments When available, fair values for investments are based on
prices quoted in the most active market for each security. If quoted
prices are not available, fair value is estimated based on present
values, fair values of comparable securities, or similar methods.
AAG implemented Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
beginning December 31, 1993. This standard requires that (i) debt
securities be classified as "held to maturity" and reported at amortized
cost if AAG has the positive intent and ability to hold them to
maturity, (ii) debt and equity securities be classified as "trading" and
reported at fair value, with unrealized gains and losses included in
earnings, if they are bought and held principally for selling in the
near term and (iii) debt and equity securities not classified as held to
maturity or trading be classified as "available for sale" and reported
at fair value, with unrealized gains and losses reported as a separate
component of stockholders' equity. Only in certain limited
circumstances, such as significant issuer credit deterioration or if
required by insurance or other regulators, may a company change its
intent to hold a certain security to maturity without calling into
question its intent to hold other debt securities to maturity in the
future.
Short-term investments are carried at cost; mortgage loans on real
estate are generally carried at amortized cost; policy loans are stated
at the aggregate unpaid balance. Carrying amounts of these investments
approximate their fair value.
Gains or losses on sales of securities are recognized at the time of
disposition with the amount of gain or loss determined on the specific
identification basis. When a decline in the value of a specific
investment is considered to be other than temporary, a provision for
impairment is charged to earnings and the carrying value of that
investment is reduced. Premiums and discounts on CMOs are amortized
over their expected average lives using the interest method.
Investment in Affiliates AAG's investments in equity securities of
companies that are 20% to 50% owned by AFC and its subsidiaries are
carried at cost, adjusted for a proportionate share of their
undistributed earnings or losses.
6
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Deferred Policy Acquisition Costs ("DPAC") DPAC (principally new
commissions, advertising, underwriting, policy issuance and sales
expenses that vary with and are primarily related to the production of
new business) are deferred and amortized, with interest, in relation to
the present value of expected gross profits on the policies. These
gross profits consist principally of net investment income and future
surrender charges, less interest on policyholders' funds and future
policy administration expenses. DPAC is reported net of unearned
revenue relating to certain policy charges that represent compensation
for future services. These unearned revenues are recognized as income
using the same assumptions and factors used to amortize DPAC.
Beginning with the implementation of SFAS No. 115 in 1993, to the extent
that unrealized gains (losses) from securities classified as "available
for sale" would result in adjustments to DPAC, unearned revenues and
policyholder liabilities had those gains (losses) actually been
realized, such balance sheet amounts are adjusted, net of deferred
taxes.
Annuity Policyholders' Funds Accumulated Annuity premium deposits and
benefit payments are generally recorded as increases or decreases in
"annuity policyholders' funds accumulated" rather than as revenue and
expense. Increases in this liability for interest credited are charged
to expense and decreases for surrender charges are credited to other
income.
The fair value of the liability for annuities in the payout phase is
assumed to be the present value of the anticipated cash flows,
discounted at current interest rates. Fair value of annuities in the
accumulation phase is assumed to be the policyholders' cash surrender
amount.
Income Taxes As of December 31, 1992, AAG and its 80%-owned
subsidiaries were consolidated with AFC for federal income tax
purposes.
AAG and GALIC have separate tax allocation agreements with AFC which
designate how tax payments are shared by members of the tax group. In
general, both companies compute taxes on a separate return basis. GALIC
is obligated to make payments to (or receive benefits from) AFC based on
taxable income without regard to temporary differences. In accordance
with terms of AAG's indentures, AAG receives GALIC's tax allocation
payments for the benefit of AAG's deductions arising from current
operations. If GALIC's taxable income (computed on a statutory
accounting basis) exceeds a current period net operating loss of AAG,
the taxes payable by GALIC associated with the excess are payable to
AFC. If the AFC tax group utilizes any of AAG's net operating losses or
deductions that originated prior to 1993, AFC will pay to AAG an amount
equal to the benefit received.
The Company recognizes deferred tax assets if it is more likely than not
that a benefit will be realized. Deferred income tax assets and
liabilities are determined based on differences between financial
reporting and tax bases and are measured using enacted tax rates.
Current and deferred tax assets and liabilities are aggregated with
other amounts receivable or payable to affiliates.
Debt Issuance Costs Debt expenses are amortized over the terms of the
respective borrowings on the interest method.
7
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Statement of Cash Flows For cash flow purposes, "investing activities"
are defined as making and collecting loans and acquiring and disposing
of debt or equity instruments and property and equipment. "Financing
activities" include annuity receipts, surrenders and withdrawals and
obtaining resources from owners and providing them with a return on
their investments. All other activities are considered "operating".
For purposes of the Statement of Cash Flows, all unrestricted, highly
liquid investments with a maturity of three months or less at time of
purchase are classified as short-term investments.
Benefit Plans AAG and certain of its subsidiaries provide certain
benefits to former employees. Effective January 1, 1994, AAG
implemented SFAS No. 112, "Employers' Accounting for Postemployment
Benefits".
AAG participates in an Employee Stock Ownership Retirement Plan
("ESORP") covering all employees who are qualified as to age and length
of service. The ESORP is a trusteed, noncontributory plan which invests
in securities of AAG for the benefit of the employees of AAG and its
subsidiaries. Contributions are discretionary by the directors of AAG
and are charged against earnings in the year for which they are
declared. Qualified employees having vested rights in the plan are
entitled to benefit payments at age 60.
B. Investments
The carrying value of AAG's fixed maturity portfolio was comprised of
the following at June 30, 1994:
Held to Available
Maturity for Sale Total
U. S. Government and government
agencies and authorities 0% 2% 2%
Public utilities 10 2 12
Collateralized mortgage obligations 15 16 31
All other corporate 45 10 55
70% 30% 100%
The carrying values of investments were determined after deducting
cumulative provisions for impairment aggregating $12.6 million and
$14.4 million at June 30, 1994 and December 31, 1993, respectively.
"Investing activities" related to fixed maturity investments during
1994 in AAG's Statement of Cash Flows consisted of the following:
Held to Available
Maturity for Sale Total
Purchases ($475.1) ($282.3)($757.4)
Maturities and paydowns 21.6 115.0 136.6
Sales 5.4 452.2 457.6
8
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
C. Investment in Affiliates
Investment in affiliates represents AAG's 5% ownership of the common
stock of Chiquita Brands International, which is accounted for under
the equity method. AFC and its other subsidiaries own an additional
41% interest in the common stock of Chiquita. Chiquita is a leading
international marketer, processor and producer of quality food
products. The market value of AAG's investment in Chiquita was
approximately $32 million at June 30, 1994, compared to $31 million at
December 31, 1993.
In the first quarter of 1994, AAG recorded a pretax extraordinary
charge of $1.1 million, representing its proportionate share of
Chiquita's loss on the retirement of debt.
D. Deferred Policy Acquisition Costs
The DPAC balances at June 30, 1994 and December 31, 1993 are shown net
of unearned revenues of $152.6 million and $146.2 million,
respectively.
E. Bank Credit Agreement
In 1994, AAG entered into a $30 million, four-year revolving Credit
Agreement with two banks. Loans under the Credit Agreement bear
interest at floating rates based on prime or Eurodollar rates and are
collateralized by 15% of the Common Stock of GALIC. As of June 30,
1994, there were no amounts borrowed under the Credit Agreement. AAG
borrowed $11 million under the Credit Agreement in connection with
certain debt repurchases in the third quarter of 1994 (see Note F).
F. Long-Term Debt
Long-term debt consisted of the following (in millions):
June 30, December 31,
1994 1993
AAG 11-1/8% Senior Subordinated
Notes due 2003 $110.4 $125.0
AAG 9-1/2% Senior Notes due 2001 84.0 100.0
Miscellaneous debt of subsidiary 5.1 0.9
Total $199.5 $225.9
On March 31, 1994, AAG retired $7.1 million principal amount of its 11-
1/8% Notes in exchange for approximately 810,000 shares of Common Stock,
realizing a pretax loss of $570,000.
During the second quarter of 1994, AAG retired $16.0 million principal
amount of its 9-1/2% Notes and $7.5 million principal amount of its 11-
1/8% Notes for cash, realizing a net pretax loss of $516,000.
9
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
During July and early August 1994, AAG purchased $22.0 million principal
amount of its 9-1/2% Notes and $6.5 million principal amount of its 11-
1/8% Notes for cash, realizing a pretax loss of $560,000.
AAG has no scheduled principal payments on its long-term debt until the
year 2001.
G. Stockholders' Equity
The Company is authorized to issue 25,000,000 shares of Preferred Stock,
par value $1.00 per share. In connection with the acquisition of GALIC,
AAG issued 450,000 shares of Series A Cumulative Preferred Stock to a
subsidiary of AFC. The Series A Preferred Stock had a redemption value
of $100 per share and paid dividends at the rate of $7.00 per share per
annum. The preferred shares issued were recorded at $29.4 million
(imputed dividend rate of 12% through 2007) with the excess proceeds of
$15.6 million credited to capital surplus. On March 31, 1994, AAG issued
approximately 3.2 million shares of Common Stock in exchange for the
Series A Preferred shares.
H. Contingencies
The Company is presently conducting investigations or clean-up
activities relating to the discontinued operations in accordance with
consent agreements with state environmental agencies. Based on the
costs incurred over the past several years and discussions with
independent environmental consultants, management does not believe that
these clean-up activities will have a material effect upon the Company's
financial position, results of operations or cash flows.
"Marketable securities, restricted in use" consists primarily of amounts
held in escrow with respect to certain clean-up activities due to sales
of various discontinued operations.
I. Statutory Information
GALIC is required to file financial statements with state insurance
regulatory authorities prepared on an accounting basis prescribed or
permitted by such authorities (statutory basis). For the six months
ended June 30, 1994, GALIC's statutory net income was $29.3 million
compared to $20.9 million for the same period in 1993. Certain
statutory balance sheet amounts were as follows (in millions):
June 30, December 31,
1994 1993
Policyholders' surplus $253.9 $251.3
Asset valuation reserve 73.3 70.3
Interest maintenance reserve 32.2 35.7
Through August 5, 1994, AAG received $40.0 million in capital
distributions from GALIC. Any additional dividends or capital
distributions by GALIC in 1994 are subject to prior approval of
regulatory authorities.
10
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
AAG is organized as a holding company with nearly all of its operations
being conducted by its subsidiary, 100% owned Great American Life Insurance
Company ("GALIC"). The parent corporation, however, has continuing
expenditures for administrative expenses, corporate services, liabilities in
connection with discontinued operations and, most importantly, for the
payment of interest on borrowings. Since its business is financial in
nature, AAG does not prepare its consolidated financial statements using a
current-noncurrent format. Consequently, certain traditional ratios and
financial analysis tests are not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Funds AAG has a four-year, $30 million revolving line
of credit agreement with two banks. Borrowings thereunder may be used for
general corporate purposes. Based upon the current level of GALIC's
operations and anticipated growth, AAG believes that it will have sufficient
resources to meet its liquidity requirements.
In 1994 (through August 5), AAG (i) issued 4.0 million shares of Common
Stock in exchange for all of its Preferred Stock and $7.1 million principal
amount of its long-term debt and (ii) repurchased $52.0 million principal
amount of its long-term debt (including $14 million purchased by GALIC) for
$51.6 million in cash. As a result, AAG's annual preferred dividends and
consolidated interest payments have been reduced by over $8.2 million.
AAG's ability to make payments for interest and other holding company costs
is dependent primarily on cash payments from GALIC. Through August 5, 1994,
$53.1 million in such payments had been made by GALIC. The amount of
dividends and capital distributions which can be paid by GALIC is subject to
restrictions relating to capital and surplus and statutory net income. In
addition, any dividend or distribution paid from other than earned surplus
is considered an extraordinary dividend and may be paid only after prior
approval. Any additional dividends or capital distributions by GALIC in
1994 are subject to prior approval of regulatory authorities. Management
does not believe this requirement will have an impact on AAG's liquidity for
the balance of 1994.
Ratios AAG's ratio of earnings to fixed charges was 3.6 for the first six
months of 1994. The ratio of AAG's consolidated debt to equity was 0.95 at
June 30, 1994, compared to 0.90 at December 31, 1993 and 1.24 at December
31, 1992. AAG's consolidated debt to equity ratio, adjusted to reflect all
1994 repurchases of AAG's long-term debt as if they had occurred as of June
30, would have been 0.86.
11
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Investments The Ohio Insurance Code contains rules restricting the types
and amounts of investments which are permissible for an Ohio life insurer,
including GALIC. These rules are designed to ensure the safety and
liquidity of the insurer's investment portfolio. The NAIC is considering
the formulation of a model investment law which, if adopted, would have to
be considered by Ohio for adoption. The formulation is in the preliminary
stages and management believes its impact on GALIC's operations will not be
material.
The National Association of Insurance Commissioners ("NAIC") assigns quality
ratings to publicly traded as well as privately placed securities. These
ratings range from Class 1 (highest quality) to Class 6 (lowest quality).
The following table shows GALIC's fixed maturity portfolio by NAIC
designation (and comparable Standard & Poor's Corporation rating) as of June
30, 1994.
NAIC % of Total
Rating Comparable S&P Rating Market Value
1 AAA, AA, A 56%
2 BBB 38
Total investment grade 94
3 BB 4
4 B 2
5 CCC, CC, C *
6 D -
Total non-investment grade 6
Total fixed maturities 100%
[FN]
* less than 1%
Management believes that the high credit quality of GALIC's investment
portfolio should generate a stable and predictable overall investment
return.
AAG invests primarily in fixed maturity investments which approximated 93%
of its investment portfolio at June 30, 1994. GALIC generally invests in
securities with intermediate-term maturities with an objective of optimizing
interest yields while maintaining an appropriate relationship of maturities
between GALIC's assets and expected liabilities. GALIC's fixed maturity
portfolio is classified into two categories: "held to maturity" and
"available for sale" (see Note A to the financial statements).
As of June 30, 1994, the unrealized gains on GALIC's fixed maturity
portfolio had decreased $343 million since year end 1993. This decrease,
representing approximately 8% of the carrying value of GALIC's bond
portfolio, resulted from an increase in the general level of interest rates.
At June 30, 1994, none of the Company's fixed maturity investments were non-
performing. In addition, AAG's mortgage loans and real estate represented
only 1.5% of total assets. The majority of mortgage loans and real estate
was purchased in the latter half of 1993.
12
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
At June 30, 1994, collateralized mortgage obligations ("CMOs") represented
approximately 31% of fixed maturity investments. As of June 30, 1994,
interest only (I/O), principal only (P/O) and other "high risk" CMOs were
less than one percent of total investments. GALIC invests primarily in CMOs
which are structured to minimize prepayment risk. In addition, the majority
of CMOs held by GALIC were purchased at a discount to par value. Management
believes that the structure and discounted nature of the CMOs will minimize
the effect of prepayments on earnings over the anticipated life of the CMO
portfolio.
Substantially all of GALIC's CMOs are AAA-rated by Standard & Poor's
Corporation and are collateralized by GNMA, FNMA and FHLMC single-family
residential pass-through certificates. The market in which these securities
trade is highly liquid. Aside from interest rate risk, AAG does not believe
a material risk (relative to earnings or liquidity) is inherent in holding
such investments.
RESULTS OF OPERATIONS
Pretax Earnings and General Pretax earnings from operations (before
realized gains and non-recurring charges) were $33.2 million in the first
six months of 1994 compared to $24.8 million for the same period in 1993.
This improvement can be attributed primarily to the increased interest rate
spreads achieved thus far in 1994.
All of GALIC's products are fixed rate annuities which permit GALIC to
change the crediting rate at any time (subject to minimum interest rate
guarantees of 3% to 4% per annum). As a result, management has been able to
react to changes in interest rates and maintain a desired interest rate
"spread" with little or no effect on persistency.
The following table summarizes GALIC's annuity receipts (in millions):
Three months ended Six months ended
June 30, June 30
1994 1993 1994 1993
FPDAs:
First Year $ 11 $ 13 $ 22 $ 25
Renewal 59 61 114 122
70 74 136 147
SPDAs 46 33 75 67
Total Annuity Receipts $116 $107 $211 $214
Annuity premiums increased 8% during the second quarter of 1994 compared to
the same period in 1993 due primarily to strong growth in sales of single
premium products. For the six months ended June 30, premiums decreased by
approximately 1% in 1994 compared to 1993.
13
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Net Investment Income GALIC's net investment income increased 4% over its
comparable period in 1993. An increase in average fixed maturity
investments more than offset a decrease in interest rates available in the
marketplace. Investment income is reflected in the Income Statement net of
investment expenses of $2.5 million in 1994 and $2.4 in 1993, respectively.
Realized Gains Individual securities are sold from time to time as market
opportunities appear to present optimal situations under AAG's investment
strategies.
Equity in Net Earnings of Chiquita Brands International Chiquita's
quarterly results are subject to significant seasonal variations and are not
necessarily indicative of its results of operations for a full fiscal year.
Seasonal pricing generally produces stronger earnings in the first six
months of the year.
Benefits to Annuity Policyholders GALIC's benefits to annuity policyholders
increased 2% over the comparable period in 1993. The average crediting rate
on funds held by GALIC has decreased from 6.2% at December 31, 1992 to 5.3%
at December 31, 1993 and June 30, 1994. The rate at which GALIC credits
interest on annuity policyholders' funds is subject to change based on
management's judgment of market conditions.
Amortization of Deferred Policy Acquisition Costs (DPAC) DPAC amortization
in the first six months of 1994 was $3.5 million compared to $8.2 million
during the same period in 1993. The decrease resulted primarily from a
year-end 1993 review of DPAC assumptions, which resulted in changes in
certain factors, including (i) estimated future profits on deferred
annuities that have suspended premium payments but have not lapsed, (ii) the
time frame over which DPAC is amortized, and (iii) estimated future spreads
on in-force annuity policies.
Provision for GALIC Relocation Expenses In 1993, GALIC relocated its
corporate offices from Los Angeles to Cincinnati. The estimated pretax cost
of this move ($8.0 million) was expensed in the first quarter of 1993.
Discontinued Operations During the second quarter of 1994, AAG recorded a
$4.0 million pretax charge primarily related to additional reserves for
potential environmental liabilities associated with the Company's former
manufacturing facilities.
Extraordinary Items On March 31, 1994, AAG retired $7.1 million principal
amount of its 11-1/8% Senior Subordinated Notes realizing a pretax loss of
$570,000. During the second quarter of 1994, AAG retired $16.0 million
principal amount of its 9-1/2% Senior Notes and $7.5 million principal
amount of its 11-1/8% Senior Subordinated Notes for cash, realizing a net
pretax loss of $516,000.
In addition, AAG recorded a pretax charge of $1.1 million, representing
AAG's proportionate share of Chiquita's extraordinary loss on the retirement
of certain of its debt in the first quarter of 1994.
Accounting Change Effective January 1, 1994, AAG implemented SFAS No. 112,
"Employers' Accounting for Postemployment Benefits", and recorded a pretax
charge of $740,000 for the projected future costs of providing certain
benefits to former employees of GALIC.
14
AMERICAN ANNUITY GROUP, INC. 10-Q
PART II
OTHER INFORMATION
ITEM 4
Submissions of Matters to a Vote of Security Holders
The Registrant's annual shareholders' meeting was held June 13, 1994.
Proxies were solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934. All of the nine nominees for director proposed by the
Registrant were elected to the Board of Directors.
In addition to the election of directors, shareholders also voted (a) to
approve the 1994 Stock Option Plan [Proposal No. 2], (b) to approve the 1994
Directors' Stock Appreciation Rights Plan [Proposal No. 3] and (c) to ratify
the issuance of 3,238,162 shares of Common Stock in exchange for 450,000
shares of Series A Preferred Stock [Proposal No. 4]. The votes cast for,
against or withheld, the number of abstentions and broker non-votes as to
each matter voted on at the 1994 Annual Meeting is set forth below:
Against/
For Withheld Abstain Non-Votes
Election of Directors:
Carl H. Lindner 37,192,420 NA 32,140 NA
S. Craig Lindner 37,192,721 NA 31,839 NA
Robert A. Adams 37,197,464 NA 27,096 NA
John T. Lawrence III 37,203,540 NA 21,020 NA
A. Leon Fergenson 37,202,215 NA 22,345 NA
Ronald G. Joseph 37,203,575 NA 20,985 NA
William R. Martin 37,201,431 NA 23,129 NA
Alfred W. Martinelli 37,201,054 NA 23,506 NA
Ronald F. Walker 37,203,028 NA 21,532 NA
Proposal No. 2 33,621,198 1,484,865 27,129 2,091,368
Proposal No. 3 34,951,439 131,079 27,506 2,114,536
Proposal No. 4 35,021,308 59,938 28,778 2,114,536
[FN]
NA - Not Applicable
15
AMERICAN ANNUITY GROUP, INC. 10-Q
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
American Annuity Group, Inc.
August 11, 1994 BY:_________________
William J. Maney
Senior Vice President, Treasurer
and Chief Financial Officer
16