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
September 30, 1995 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 November 1, 1995, there were 43,067,454 shares of the Registrant's
Common Stock outstanding.
AMERICAN ANNUITY GROUP, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
September 30, December 31,
1995 1994
ASSETS
Investments:
Fixed maturities:
Held to maturity - at amortized cost
(market - $3,517.7 and $3,062.4) $3,433.6 $3,273.7
Available for sale - at market
(amortized cost - $1,421.3 and
$1,326.4) 1,473.6 1,258.6
Equity securities - at market (cost
- $9.7 and $10.7) 25.0 21.7
Investment in affiliate 22.6 20.8
Mortgage loans on real estate 47.6 47.2
Real estate, net of accumulated
depreciation 36.0 28.0
Policy loans 202.4 185.5
Short-term investments 19.3 26.0
Total investments 5,260.1 4,861.5
Cash 36.0 36.7
Accrued investment income 86.8 77.7
Deferred policy acquisition costs, net 75.0 65.1
Other assets 40.9 48.9
Total assets $5,498.8 $5,089.9
LIABILITIES AND STOCKHOLDERS' EQUITY
Annuity policyholders' funds accumulated $4,857.6 $4,618.1
Notes payable 149.7 183.3
Payable for securities purchased 12.7 -
Payable to affiliates, net 30.1 16.8
Deferred taxes (benefits) on unrealized
gains (losses) 21.2 (15.6)
Accounts payable, accrued expenses and
other liabilities 77.2 82.9
Total liabilities 5,148.5 4,885.5
Preferred Stock - -
Common Stock, $1 par value
-100,000,000 shares authorized
- 43,067,454 and 39,141,080 shares
outstanding 43.1 39.1
Capital surplus 364.1 330.8
Accumulated deficit at December 31, 1992 (212.6) (212.6)
Retained earnings since January 1, 1993 116.3 76.1
Unrealized gain (loss) on marketable
securities, net of deferred income
taxes and insurance adjustments 39.4 (29.0)
Total stockholders' equity 350.3 204.4
Total liabilities and stockholders'
equity $5,498.8 $5,089.9
AMERICAN ANNUITY GROUP, INC. 10-Q
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(In millions, except per share amounts)
Three Nine
months ended months ended
September 30, September 30,
1995 1994 1995 1994
Revenues:
Net investment income $102.3 $94.9 $297.1$277.4
Realized gains on sales of investments 6.9 0.1 7.0 0.7
Equity in net earnings (losses)
of affiliate (0.7) (3.8) 2.2 (0.9)
Other income 0.7 0.5 1.6 1.5
109.2 91.7 307.9 278.7
Costs and Expenses:
Benefits to annuity policyholders 65.7 61.3 194.2 180.7
Interest on borrowings and
other debt expenses 4.3 5.0 13.4 16.7
Amortization of deferred policy
acquisition costs 2.6 1.2 6.2 4.7
Other operating and general expenses 11.0 9.7 32.1 28.3
83.6 77.2 245.9 230.4
Income from continuing operations before
income taxes 25.6 14.5 62.0 48.3
Provision for income taxes 9.0 5.1 21.8 17.0
Income from continuing operations 16.6 9.4 40.2 31.3
Discontinued operations, net of tax - - - (2.6)
Income before extraordinary item and
cumulative effect of accounting change 16.6 9.4 40.2 28.7
Extraordinary item, net of tax - (0.4) - (1.8)
Accounting change, net of tax - - - (0.5)
Net Income $16.6 $ 9.0 $ 40.2 $26.4
Preferred dividend requirement - - - 0.9
Net income applicable to Common Stock $16.6 $ 9.0 $ 40.2 $25.5
Average Common Shares outstanding 40.8 39.1 39.7 37.8
Earnings (loss) per common share:
Continuing operations $0.41 $0.24 $1.01 $0.80
Discontinued operations - - - (0.07)
Extraordinary items - (0.01) - (0.05)
Cumulative effect of accounting change - - - (0.01)
Net income $0.41 $0.23 $1.01 $0.67
AMERICAN ANNUITY GROUP, INC. 10-Q
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions)
Nine months ended
September 30,
1995 1994
Preferred Stock:
Balance at beginning of period $ - $ 29.9
Exchanged for Common Stock - (30.0)
Accretion of discount - 0.1
Balance at end of period $ - $ -
Common Stock:
Balance at beginning of period $ 39.1 $ 35.1
Issued during the period 4.0 4.0
Balance at end of period $ 43.1 $ 39.1
Capital Surplus:
Balance at beginning of period $330.8 $301.0
Common Stock issuance 33.3 33.0
Preferred dividends declared - (0.8)
Accretion of preferred stock discount - (0.1)
Balance at end of period $364.1 $333.1
Accumulated Deficit at December 31, 1992: ($212.6) ($212.6)
Retained Earnings Since January 1, 1993:
Retained earnings from January 1, 1993 to
beginning of period $ 76.1 $ 40.0
Net income 40.2 26.4
Balance at end of period $116.3 $ 66.4
Unrealized Gains (Losses), Net:
Balance at beginning of period ($ 29.0) $ 56.9
Change during period 68.4 (70.8)
Balance at end of period $ 39.4 ($ 13.9)
AMERICAN ANNUITY GROUP, INC. 10-Q
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Nine months ended
September 30,
1995 1994
Operating activities:
Net income $ 40.2 $ 26.4
Adjustments:
Extraordinary losses on retirement of debt - 2.8
Cumulative effect of accounting change - 0.7
Benefits to annuity policyholders 194.2 180.7
Amortization of deferred policy
acquisition costs 6.2 4.7
Equity in net (earnings) losses of affiliate (2.2) 0.9
Depreciation and amortization 2.4 0.6
Realized gains on investing activities (7.0) (0.7)
Increase in accrued investment income (9.1) (12.6)
Increase in deferred policy acquisition costs (24.8) (19.8)
Increase in accounts payable, accrued
expenses and other liabilities 8.3 1.0
Other, net (0.2) 0.6
208.0 185.3
Investing activities:
Purchases of:
Fixed maturity investments (743.5) (914.5)
Equity securities - (0.5)
Real estate, mortgage loans and other assets (15.7) (19.0)
Maturities and paydowns of fixed
maturity investments 106.5 180.7
Sales of:
Fixed maturity investments 407.7 495.1
Equity securities 1.6 3.8
Real estate, mortgage loans and other assets 5.2 21.4
Increase in policy loans (16.9) (12.6)
(255.1) (245.6)
Financing activities:
Annuity receipts 338.3 313.1
Annuity surrenders, benefits and withdrawals (302.5) (244.2)
Additions to notes payable 13.0 18.9
Reductions of notes payable (46.4) (54.7)
Issuance of Common Stock 37.3 -
Cash dividends paid - (0.8)
39.7 32.3
Net decrease in cash and short-term investments (7.4) (28.0)
Cash and short-term investments at
beginning of period 62.7 72.0
Cash and short-term investments at
end of period $ 55.3 $ 44.0
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.
In April 1995, American Financial Group, Inc. ("AFG") acquired 100% of
the common stock (79% of the voting stock) of American Financial
Corporation ("AFC"). AFG and its subsidiaries owned 35,059,995 shares
(81%) of AAG's Common Stock at November 1, 1995.
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.
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Investment in Affiliate AAG's investments in equity securities of
companies that are 20% to 50% owned by AFG and its subsidiaries are
carried at cost, adjusted for a proportionate share of their
undistributed earnings or losses.
Deferred Policy Acquisition Costs ("DPAC") DPAC (principally
commissions, advertising, policy issuance and sales expenses that vary
with and are primarily related to the production of new business) is
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.
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 receipts and benefit
payments are generally recorded as increases or decreases in "annuity
policyholders' funds accumulated" rather than as revenue and expense.
Increases in this liability for interest credited are charged to expense
and decreases for surrender charges are credited to other income.
Income Taxes AAG and its 80%-owned subsidiaries are consolidated with
AFC for federal income tax purposes.
AAG and Great American Life Insurance Company ("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.
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
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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".
Short term investments having original maturities of three months or
less when purchased are considered to be cash equivalents for purposes
of financial statements.
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 sponsors an Employee Stock Ownership Retirement Plan ("ESORP")
covering all employees who are qualified as to age and length of
service. The ESORP, which invests primarily in securities of AAG, is a
trusteed, noncontributory plan for the benefit of the employees of AAG
and its participating 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. 1995 Acquisition
On May 25, 1995, AAG entered into an agreement to acquire Laurentian
Capital Corporation ("Laurentian" or "LCC"), a Philadelphia-based life
insurance holding company with total assets of approximately $1.1
billion and revenues of $138 million in 1994 and $112 million in the
first nine months of 1995. Laurentian's principal insurance
subsidiaries are Loyal American Life Insurance Company ("Loyal") and
Prairie States Life Insurance Company ("Prairie").
Loyal, located in Mobile, Alabama, markets various forms of life,
accident and health insurance and annuities, principally with the
sponsorship of credit unions and banks that endorse Loyal's products to
their members. It also writes life and health insurance through
independent brokers.
Prairie, located in Rapid City, South Dakota, provides individual life
insurance and annuity products to fund pre-need contracts entered into
by funeral directors to provide funeral services at a later date.
AAG will pay approximately $106 million for the outstanding common stock
of Laurentian and will repay $45 million of Laurentian indebtedness
concurrently with the acquisition. Approximately $90 million of the
purchase price will come from funds available for investment at GALIC.
AAG will fund the balance of the cost of acquiring Laurentian with
borrowings under its line of credit and cash on hand (including the
proceeds from the stock offering completed in August 1995). AAG expects
the acquisition to be completed in mid-November 1995.
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
C. Investments
The carrying value of AAG's fixed maturity portfolio was comprised of
the following at September 30, 1995:
Held to Available
Maturity for Sale Total
U. S. Government and government
agencies and authorities 0% 2% 2%
Public utilities 11 1 12
Mortgage-backed securities 16 14 30
All other corporate 43 13 56
70% 30% 100%
"Investing activities" related to fixed maturity investments in AAG's
Statement of Cash Flows consisted of the following (in millions):
Held to Available
Maturity for Sale Total
1995
Purchases ($206.9) ($536.6) ($743.5)
Maturities and paydowns 41.9 64.6 106.5
Sales 6.2 401.5 407.7
1994
Purchases ($603.6) ($310.9) ($914.5)
Maturities and paydowns 30.5 150.2 180.7
Sales 5.4 489.7 495.1
D. Investment in Affiliate
AAG's investment in affiliate (carrying value of $22.6 million at
September 30, 1995) reflects AAG's 5% ownership (2.7 million shares) of
the common stock of Chiquita Brands International ("Chiquita") which is
accounted for under the equity method. American Financial Group and
its other subsidiaries own an additional 42% 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 $46 million at September
30, 1995, compared to $36 million at December 31, 1994.
E. Deferred Policy Acquisition Costs
The DPAC balances at September 30, 1995 and December 31, 1994 are shown
net of unearned revenues of $156.7 million and $158.8 million,
respectively.
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
F. Notes Payable
Notes payable consisted of the following (in millions):
September 30, December 31,
1995 1994
Direct obligations of AAG:
11-1/8% Senior Subordinated
Notes due 2003 $103.9 $103.9
9-1/2% Senior Notes due 2001 41.5 44.0
Bank Credit Line due 1998 - 30.0
Subsidiary debt 4.3 5.4
Total $149.7 $183.3
Loans under the credit agreement bear interest at floating rates based
on prime or Eurodollar rates and are collateralized by 20% of the common
stock of GALIC. AAG used a portion of the proceeds of the stock
offering completed in August 1995 to repay all outstanding borrowings
under the credit agreement. AAG will borrow funds under its bank line
to finance a portion of the Laurentian acquisition.
In January 1995, AAG repurchased $2.5 million principal amount of its
notes payable, realizing no material gain or loss.
AAG has no scheduled principal payments on its 9-1/2% Notes and 11-1/8%
Notes until 2001.
G. Stockholders' Equity
The Company is authorized to issue 25,000,000 shares of Preferred Stock,
par value $1.00 per share.
In August 1995, AAG sold 3.92 million shares of Common Stock under a
rights offering to existing shareholders at $9.50 per share.
On March 31, 1994, AAG issued approximately 3.2 million shares of Common
Stock in exchange for its outstanding Series A Preferred Stock. The
Preferred shares had a redemption value of $100 per share and paid
dividends at the rate of $7.00 per share per annum.
On December 31, 1992, AAG purchased GALIC from AFC for $468 million.
"Retained earnings since January 1, 1993" reflects AAG's results since
the acquisition of GALIC.
H. Contingencies
The Company is continuing its investigations and clean-up activities 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.
AMERICAN ANNUITY GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In 1991, the Company's predecessor business identified possible
deficiencies in procedures for reporting quality assurance information
to the Defense Electronics Supply Center ("DESC") with respect to it's
former manufacturing operations. Over the last several years, the
Company has been engaged in negotiations with the United States
Government with respect to the settlement of claims the Government might
have arising out of the reporting deficiencies. Based on these
negotiations, the Company believed it had sufficient reserves to cover
the estimated settlement amount. In March 1995, the Company received
notification from the government indicating additional reporting
deficiencies. The Company is in the process of evaluating this
information and is unable to ascertain the validity of these new claims
or the amounts involved. It is impossible to determine the impact, if
any, of these alleged claims on the Company and its financial condition.
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 nine months
ended September 30, 1995, GALIC's statutory net income was $42.4 million
compared to $41.8 million for the same period in 1994. Certain
statutory balance sheet amounts were as follows (in millions):
September 30, December 31,
1995 1994
Policyholders' surplus $271.6 $255.9
Asset valuation reserve 83.6 79.5
Interest maintenance reserve 27.7 27.7
The amount of dividends which can be paid by GALIC without prior
approval of regulatory authorities is subject to restrictions relating
to capital and surplus and statutory net income. Based on earned
surplus at December 31, 1994, GALIC may pay approximately $49.7 million
in dividends in 1995 without prior approval. In the first nine months
of 1995, AAG received $34.8 million in capital distributions from GALIC.
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 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 and principal
on borrowings. Since its continuing 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.
In May 1995, AAG entered into an agreement to acquire Laurentian Capital
Corporation ("LCC") for $151 million (including the repayment of outstanding
LCC debt). AAG expects to finance the acquisition with borrowings under its
line of credit and cash on hand (including the proceeds from the stock
offering consummated in August 1995). See Note B.
LIQUIDITY AND CAPITAL RESOURCES
Ratios AAG's ratio of earnings to fixed charges was 5.4 for the first nine
months of 1995 compared to 3.9 for the first nine months of 1994. The ratio
of AAG's consolidated debt to equity, excluding the effects of unrealized
gains and losses on stockholders' equity, was .48 at September 30, 1995,
compared to .79 at December 31, 1994 and 1.17 at December 31, 1993. These
same ratios including the effects of unrealized gains and losses were .43,
.90, and .90, respectively.
The National Association of Insurance Commissioners' ("NAIC") risk-based
capital ("RBC") formulas determine the amount of capital that an insurance
company needs to ensure that it has an acceptably low expectation of
becoming financially impaired. At September 30, 1995, GALIC's capital
ratios significantly exceeded RBC requirements.
Sources and Uses of Funds AAG's ability to make payments of interest and
principal on its debt and other holding company costs is dependent on
payments from GALIC in the form of capital distributions and income tax
payments. Through September 30, 1995, $57.3 million in such payments had
been received from GALIC.
The amount of 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
regulatory approval. The maximum amount of dividends payable by GALIC in
1995 without prior regulatory approval is approximately $49.7 million.
Capital distributions of $34.8 million were paid in the first nine months of
1995.
In August 1995, AAG raised $37.2 million through the sale of Common Stock.
See Note G.
AAG has a $50 million revolving bank line with three banks which was totally
available at September 30, 1995. Amounts outstanding under this agreement
bear interest at variable rates tied to either Prime or LIBOR, at the
discretion of the Company. Borrowings thereunder may be used for general
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
corporate purposes. AAG previously used the amounts borrowed under the bank
line primarily to repurchase its outstanding debt. AAG expects to borrow
approximately $23 million in connection with the acquisition of Laurentian.
Based upon the current level of operations and anticipated growth, AAG
believes that it will have sufficient resources to meet its liquidity
requirements.
Investments The Ohio Insurance Code contains rules restricting the types
and amounts of investments which are permissible for Ohio life insurers.
These rules are designed to ensure the safety and liquidity of insurers'
investment portfolios. The National Association of Insurance Commissioners
("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 AAG's
operations will not be material.
The 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 the Company's fixed
maturity portfolio by NAIC designation (and comparable Standard & Poor's
Corporation rating) as of September 30, 1995:
NAIC % of Total
Rating Comparable S&P Rating Market Value
1 AAA, AA, A 62%
2 BBB 33
Total investment grade 95
3 BB 3
4 B 2
5 CCC, CC, C *
6 D *
Total non-investment grade 5
Total fixed maturities 100%
* less than 1%
Management believes that AAG's high quality investment portfolio should
generate a stable and predictable overall investment return.
AAG invests primarily in fixed income investments which, including loans and
short-term investments, comprised over 98% of its investment portfolio at
September 30, 1995. AAG generally invests in securities with intermediate-
term maturities with an objective of optimizing interest yields while
maintaining an appropriate relationship of maturities between AAG's assets
and expected liabilities. AAG'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 September 30, 1995, the pretax unrealized gain on AAG's fixed maturity
portfolio was $136.4 million compared to a pretax unrealized loss of
($279.1) million as of December 31, 1994. This improvement, representing
approximately 9% of the carrying value of AAG's bond portfolio, resulted
from a decrease in the general level of interest rates.
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
AAG has little exposure to mortgage loans and real estate, which represented
only 1.5% of total assets at September 30, 1995. The majority of mortgage
loans and real estate was purchased within the last two years.
At September 30, 1995, AAG's mortgage-backed securities portfolio, which
consisted primarily of collateralized mortgage obligations ("CMOs"),
represented approximately 30% of fixed maturity investments. AAG invests
primarily in CMOs which are structured to minimize prepayment risk. In
addition, the majority of CMOs held by AAG were purchased at a discount to
par value. As of September 30, 1995, interest only (I/O), principal only
(P/O) and other "high risk" CMOs were less than six tenths of one percent of
total assets. 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 AAG's CMOs are AAA-rated by Standard & Poor's
Corporation and are collateralized primarily by GNMA, FNMA and FHLMC single-
family residential pass-through certificates. The market in which these
securities trade is highly liquid. Aside from interest rate risk, 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) for the third quarter and first
nine months of 1995 were $18.7 million and $55.0 million, respectively,
compared to $14.4 million and $47.6 million for the same periods in 1994.
These improvements are attributable to growth in invested assets, as well as
the absence of certain unusual charges and non-recurring losses in the
results of AAG's affiliate, Chiquita Brands International, Inc.
The following table summarizes GALIC's annuity receipts (in millions):
Three Nine
months ended months ended
September 30, September 30,
1995 1994 1995 1994
Flexible Premium Deferred Annuities:
First Year $ 9 $ 7 $ 33 $ 28
Renewal 37 38 145 152
46 45 178 180
Single Premium Deferred Annuities 47 57 160 133
Total annuity receipts $93 $102 $338 $313
Annuity premiums decreased 9% during the third quarter of 1995 compared to
the same period in 1994; the decline is attributed to reduced consumer
demand for fixed-rate annuities during periods of lower interest rates. AAG
will soon begin marketing a variable-rate annuity, which the Company thinks
will be attractive to consumers during periods of lower interest rates.
Annuity premiums have increased 8% during the first nine months of 1995
compared to the first nine months of 1994 due to growth in sales of single
premium products.
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
AMERICAN ANNUITY GROUP, INC. 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
guarantees of 3% to 4% per annum). As a result, the Company has been able
to react to changes in interest rates and maintain a desired interest rate
spread with little or no effect on persistency.
Net Investment Income Net investment income increased 8% in the third
quarter and 7% in the first nine months of 1995 compared to the respective
periods in 1994 due primarily to an increase in the Company's average fixed
maturity investment base. Investment income is reflected in the Income
Statement net of investment expenses of $3.8 million in 1995 and $3.6
million in 1994.
Realized Gains Individual securities are sold from time to time as market
opportunities appear to present optimal situations under AAG's investment
strategies. Realized gains are reflected net of any associated amortization
of deferred policy acquisition costs.
Equity in Net Earnings of Affiliate 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.
In the third quarter of 1994, Chiquita recorded charges and losses from the
shutdown of non-productive farms in Honduras and a scaling back of its
Japanese operations. AAG's proportionate share of these losses was $2.9
million, pretax.
Benefits to Annuity Policyholders Benefits to annuity policyholders
increased approximately 7% over the comparable three month and nine month
periods in 1994 due primarily to an increase in average annuity policyholder
funds accumulated. The rate at which GALIC credits interest on annuity
policyholders' funds is subject to change based on management's judgment of
market conditions.
Interest on Borrowings and Other Debt Expenses Interest expense decreased
14% in the third quarter and 20% in the first nine months of 1995 compared
to the same periods in 1994 due to debt repurchases. A portion of these
repurchases was financed with borrowings under AAG's bank line of credit.
The bank line bears interest at a variable rate which has been lower than
the fixed rate of interest on the long-term debt repurchased.
Other Operating and General Expenses Other operating and general expenses
increased in the third quarter and first nine months of 1995 over the
comparable 1994 periods due primarily to an increase in marketing expenses
related to new distribution channels.
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 approximately $7.1
million principal amount of its 11-1/8% Senior Subordinated Notes realizing
a pretax loss of approximately $570,000. In addition, AAG recorded a pretax
charge of approximately $1.1 million in the first quarter of 1994,
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.
AMERICAN ANNUITY GROUP, INC. 10-Q
PART II
OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule as of September 30, 1995. For
submission in electronic filing only.
(b) Report on Form 8-K - None.
AMERICAN ANNUITY GROUP, INC. 10-Q
PART II
OTHER INFORMATION
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.
November 13, 1995 BY:/s/William J. Maney
William J. Maney
Senior Vice President, Treasurer
and Chief Financial Officer