1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-11733
AMERICAN STATES FINANCIAL CORPORATION
INDIANA NO. 35-1976549
State of Incorporation I.R.S. Employer Identification No.
500 NORTH MERIDIAN STREET
INDIANAPOLIS , INDIANA 46204 - 1275 (317) 262-6262
Address of principal executive offices Telephone Number
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 [ ] No [ X ]
Shares of common stock outstanding as of August 7, 1996: 60,050,515
The exhibit index to this report is located on page 20.
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December, 31
1996 1995
----------- ------------
(Dollars in Thousands)
ASSETS
Investments:
Securities available-for-sale at fair value:
Fixed maturity (amortized cost: 1996 - $3,498,796; 1995 - $3,590,601) $3,616,959 $3,860,883
Equity (cost: 1996 - $337,622; $1995 - $374,232) 397,445 437,685
Mortgage loans 33,747 33,319
Short-term investments 122,665 63,170
Other invested assets 37,727 35,178
_________ _________
Total investments 4,208,543 4,430,235
Cash 13,486 12,708
Premium receivable 414,854 377,802
Deferred policy acquisition costs 208,760 199,192
Properties to be sold 41,029 41,403
Property and equipment 30,819 29,823
Accrued investment income 63,542 66,173
Federal income taxes 171,320 93,552
Cost in excess of net assets of acquired subsidiaries 99,481 101,190
Ceded reinsurance on claims and claims expense reserves 173,854 136,939
Miscellaneous 57,224 43,073
_________ _________
Total Assets $5,482,912 $5,532,090
======== ========
(continued on next page)
See accompanying notes to consolidated financial statements.
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AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, December, 31
1996 1995
--------- -----------
(Dollars in Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Losses, loss adjustment expense and future policy benefits $2,912,815 $2,828,337
Unearned premiums 729,059 718,478
_________ _________
Total policy liabilities and accruals 3,641,874 3,546,815
Commissions and other expenses 111,653 134,031
Outstanding checks 68,130 67,308
Other liabilities 143,010 115,229
Notes payable 99,414 -
Debt with affiliate 200,000 -
_________ _________
Total liabilities 4,264,081 3,863,383
Shareholders' equity:
Common stock, no par value: 195,000,000 shares authorized, shares issued
and outstanding: 1996 - 60,050,515; 1995 - 50,000,000 304,792 387,547
Net unrealized gain on securities available-for-sale 113,974 211,767
Retained earnings 800,065 1,069,393
_________ _________
Total shareholders' equity 1,218,831 1,668,707
_________ _________
Total liabilities and shareholders' equity $5,482,912 $5,532,090
======== ========
See accompanying notes to consolidated financial statements.
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AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
--------- --------- ------- --------
(Dollars in Thousands,
Except Per Share Data)
Revenue:
Premiums and other revenue $424,483 $431,525 $848,477 $870,247
Net investment income 66,156 67,191 134,489 133,652
Realized gain on investments 7,374 6,256 28,470 33,471
__________ __________ __________ __________
Total revenue 498,013 504,972 1,011,436 1,037,370
Benefits and expenses:
Benefits and settlement expenses 332,342 359,246 655,905 664,650
Commissions 72,510 72,300 144,382 144,424
Operating and administrative expenses 51,051 56,986 102,224 116,036
Taxes, licenses and fees 8,322 10,080 20,240 22,118
Interest on debt 1,835 - 1,835 -
__________ __________ __________ __________
Total benefits and expenses 466,060 498,612 924,586 947,228
Income before federal income taxes 31,953 6,360 86,850 90,142
Federal income taxes (credit) 2,194 (10,415) 10,178 7,880
__________ __________ __________ __________
Net income $29,759 $16,775 $76,672 $82,262
========== ========== ========== ==========
Net income per share $.55 $.34 $1.48 $1.65
========== ========== ========== ==========
Weighted average shares outstanding 53,644,692 50,000,000 51,832,414 50,000,000
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
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AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six Months Ended
June 30,
1996 1995
--------- ----------
(Dollars in Thousands)
Common stock:
Balance at beginning of period
Issued in stock offering $ 387,547 $ 387,547
Issued to employee benefit plans 215,482 -
Assumption and issuance of debt with affiliate 1,161 -
(299,398) -
---------- ----------
Balance at end of period (304,792) 387,547
Net unrealized gain (loss) on securities available-for-sale:
Balance at beginning of period 211,767 (9,110)
Change during the period (97,793) 159,632
---------- ----------
Balance at end of period 113,974 150,522
Retained earnings:
Balance at beginning of period 1,069,393 1,090,129
Dividend of assets to affiliate (299,866) -
Cash dividends declared to affiliate (46,134) (92,000)
Net income 76,672 82,262
---------- ----------
Balance at end of period 800,065 1,080,391
Total shareholders' equity $1,218,831 $1,618,460
========== ==========
See accompanying notes to consolidated financial statements.
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AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
June 30,
1996 1995
----------- -----------
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $76,672 $82,262
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Deferred policy acquisition costs (4,270) (7,449)
Premiums and fees in course of collection (37,052) (33,647)
Accrual of discount on investments (9,617) (8,771)
Amortization of premium on investments 2,767 3,870
Accrued investment income (1,800) 4,592
Policy liabilities and accruals 76,793 22,012
Federal income taxes (25,110) (32,025)
Provisions for depreciation 3,850 5,269
Gain on sale of investments (28,470) (33,471)
Ceded reinsurance on claims and claims expense reserves (36,914) (1,348)
Other (21,514) 2,744
-------- --------
Net adjustments (81,337) (78,224)
-------- --------
Net cash provided by (used in) operating activities (4,665) 4,038
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale: Purchase of investments (753,087) (622,579)
Sales of investments 583,064 595,498
Maturities and redemptions 38,401 38,903
Purchase of mortgage loans and other investments (7,011) (5,220)
Sale or maturity of mortgage loans and other investments 3,945 23,549
Net (increase) decrease in short-term investments (59,495) 87,630
Net purchase of property and equipment (4,472) (2,704)
Other 16,518 1,424
-------- --------
Net cash provided by (used in) investing activities (182,137) 116,501
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 215,482 -
Universal life investment contract deposits 24,837 23,816
Universal life investment contract withdrawals (6,605) (4,427)
Dividends paid to affiliate (46,134) (137,000)
-------- --------
Net cash provided by (used in) financing activities 187,580 (117,611)
-------- --------
Net increase in cash 778 2,928
Cash at beginning of period 12,708 11,134
-------- --------
Cash at end of period $ 13,486 $ 14,062
======== ========
See accompanying notes to consolidated financial statements.
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AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following notes should be read in conjunction with the notes to
consolidated financial statements included in the American States Financial
Corporation prospectus dated May 22, 1996. Unless the context otherwise
indicates; (i) the "Company" refers to American States Financial Corporation
and its wholly-owned, consolidated subsidiaries; (ii) "ASI" refers to American
States Insurance Company, the Company's sole direct wholly-owned subsidiary,
and its consolidated subsidiaries; and (iii) the "Subsidiaries" refer to the
direct and indirect subsidiaries of the Company, which include ASI and its
subsidiaries. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1996.
1. ORGANIZATION AND BASIS OF PRESENTATION
On February 5, 1996, the Company was incorporated in the State of Indiana
to serve as the holding company for ASI. The formation of the Company was done
in contemplation of an initial public offering. On April 22, 1996, ASI
declared, and on May 15, 1996, it distributed to its parent, Lincoln National
Corporation ("LNC"), a dividend of $300 million, consisting primarily of
tax-exempt securities ("Dividended Assets"). On May 16, 1996, LNC transferred
all of the outstanding shares of ASI to the Company in exchange for 50,000,000
shares of the Company's common stock. Concurrently with the transfer of the
ASI stock, the Company assumed $100 million of LNC debt ("Assumed Debt") and
issued a $200 million note to LNC (the "Term Note").
On May 29, 1996, the Company issued 10,000,000 shares of common stock at
$23 per share to the public (the "Offering"). The net proceeds from the
Offering (after deduction of underwriting discounts and offering expenses) were
$215.5 million. The Company contributed $140.5 million of such net proceeds to
ASI to enable it to invest in taxable securities for its investment portfolio
to partially replace the Dividended Assets. The remainder of the net proceeds
were retained by the Company for general corporate purposes. As a result of
the Offering, LNC's ownership was reduced to approximately 83%.
The 50,000,000 shares held by LNC are "restricted shares" as defined by
Rule 144 of the Securities Act of 1993, as amended (the "Securities Act").
Such shares may not be resold in the absence of registration under the
Securities Act or exemptions from such registration, including, among others,
the exemption provided by Rule 144 under the Securities Act. As an affiliate
of the Company, LNC is subject to certain volume restrictions on the sale of
shares of the Company's common stock. The Company and LNC have agreed not to
sell or otherwise dispose of any shares of the Company's common stock or
securities convertible into or exercisable for the Company's common stock
until, at the earliest, September 19, 1996 without the prior written consent of
the representatives of the underwriters.
The Company's common stock is publicly traded on the New York Stock
Exchange under the symbol "ASX".
The transfer of ASI stock to the Company by LNC in exchange for Company
common stock and the Assumed Debt and Term Note have been accounted for similar
to a pooling of interests in the consolidated financial statements of the
Company, in that the assets, liabilities, shareholders' equity and the results
of operation of the Company and its subsidiaries have been combined at
historical carrying values.
The consolidated financial statements as of and for the periods ended June
30, 1996 and 1995, are unaudited. In the opinion of management, these
financial statements include all adjustments, consisting only of normal
recurring items, which are necessary to present fairly the Company's financial
position and results of operations on a basis consistent with that of prior
audited consolidated financial statements. The balance sheet at December 31,
1995, has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. Significant
intercompany balances and transactions have been
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AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)
eliminated. Certain amounts from prior periods were reclassified to conform to
the 1996 presentation. Net income and shareholders' equity have not been
affected by these reclassifications.
The Company underwrites property and casualty insurance, concentrating on
providing commercial insurance to small to medium-sized businesses and
preferred personal lines coverages to individuals. As a complement to its
property and casualty operations, the Company also markets life insurance. The
Company writes business throughout the United States with the greatest volume
in the Midwest and Pacific Northwest.
2. FEDERAL INCOME TAXES
Through December 31, 1995, a consolidated federal income tax return was
filed by LNC and included the Company. Pursuant to an agreement with LNC, the
Company provided for income taxes on the basis of a separate return
calculation; however, certain deductions, credits, losses, and other items that
may be limited or not allowed on a separate return basis are allowed. The
taxes computed were remitted to or collected from LNC.
A new tax sharing agreement is pending execution. This new agreement,
when executed, will be effective January 1, 1996, and will result in the
Company providing income taxes on a stand-alone basis. This new agreement
would have had no impact on the provision for federal income taxes for 1995 or
1996 had it been implemented January 1, 1995.
The effective tax rate on pre-tax income is lower than the prevailing
corporate federal income tax rate primarily due to tax-exempt interest on
municipal securities.
3. NOTES PAYABLE AND DEBT WITH AFFILIATE
The Assumed Debt is governed by an agreement between the Company and LNC
(the "Assumption Agreement") which provides for the payment by the Company of
the currently outstanding 7 1/8% notes due July 15, 1999, originally issued to
the public by LNC on July 15, 1992. LNC will continue to be the primary
obligor of this public debt; however, pursuant to the Assumption Agreement,
the Company will make a $100 million principal payment on July 15, 1999 to
repay the holders of the public debt. The Assumption Agreement also provides
that interest at 7 1/8% is payable semi-annually by the Company.
The Term Note will pay interest quarterly at a rate of 50 basis points
over the rate on three year Treasury Notes from the Effective Date through and
including November 14, 1997, 50 basis points over the rate on two year Treasury
Notes from November 15, 1997 through and including November 14, 1998 and 50
basis points over the rate on one-year Treasury Bills from November 15, 1998
through the maturity date. The Term Note will be payable in three equal
principal payments due on August 15, 1997, 1998 and 1999. Pursuant to the
provisions on the Term Note, the Company will have the right to prepay the Term
Note at any time. The Term Note also contains covenants that will, among other
things, (i) require the Company to maintain certain levels of adjusted
consolidated net worth (as defined in the Term Note), and (ii) restrict the
ability of the Company to incur indebtedness in excess of 50% of its adjusted
consolidated net worth and to enter into a major corporate transaction unless
the Company is the survivor and would not be in default.
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AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. NOTES PAYABLE AND DEBT WITH AFFILIATE (Continued)
On May 29, 1996, the Company entered into a revolving credit agreement
under which the Company may borrow and repay amounts up to a maximum of $200
million (the "Line of Credit"). Borrowings under the Line of Credit will bear
interest generally at variable rates tied to LIBOR, an adjusted certificate of
deposit rate or other short-term indices. No debt was outstanding using the
Line of Credit at June 30, 1996.
4. CONTINGENCIES
On February 14, 1996, three of the Company's property and casualty
insurance subsidiaries were among 23 underwriters of real property insurance
named defendants in a case alleging that their underwriting, sales and
marketing practices violate a number of civil rights laws (including, without
limitation, the Fair Housing Act) and constitute a civil conspiracy. Brought
in the United States District Court for the Western District of Missouri, the
plaintiffs seeks to represent themselves and a putative class of similarly
situated persons in the State of Missouri. The relief sought includes
unspecified compensatory damages, punitive damages and attorneys' fees. While
it is too early to evaluate the plaintiff's specific allegations, management
believes, based upon current information, that the Company's underwriting,
sales and marketing practices have complied in all material respects with the
applicable requirements of both state and federal law. The Company intends to
vigorously defend this action.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF OPERATION
Three Months Ended June 30, 1996 and 1995
The discussion which follows compares the results of the second quarter
ended June 30, 1996 to the second quarter ended June 30, 1995:
CONSOLIDATED
The Company's revenues decreased 1.4% or $7.0 million to $498.0 million in
the second quarter of 1996 from $505.0 million in the second quarter of 1995.
Net premiums earned and other revenue decreased 1.6% or $7.0 million to $424.5
million in the second quarter of 1996 from $431.5 million in the second quarter
of 1995. Net investment income decreased 1.5% or $1.0 million to $66.2 million
in the second quarter of 1996 from $67.2 million in the second quarter of 1995.
Realized gains on investments increased 17.5% or $1.1 million to $7.4 million
in the second quarter of 1996 from $6.3 million in the second quarter of 1995.
Benefits and settlement expenses decreased 7.5% or $26.9 million to $332.3
million in the second quarter of 1996 from $359.2 million in the second quarter
of 1995. Commissions increased .3% or $.2 million to $72.5 million in the
second quarter of 1996 from $72.3 million in the second quarter of 1995.
Operating and administrative expenses decreased 10.4% or $5.9 million to $51.1
million in the second quarter of 1996 from $57.0 million in the second quarter
of 1995. The company incurred interest on debt of $1.8 million in the second
quarter of 1996 from the Assumed Debt and Term Note.
Net income for the second quarter of 1996 was $29.8 million or 55 cents
per share compared to $16.8 million or 34 cents per share for the second
quarter of 1995. Excluding realized gain on investments, the Company earned
$26.5 million or 49 cents per share for the second quarter of 1996 compared to
$13.1 million or 26 cents per share for the second quarter of 1995.
PROPERTY AND CASUALTY
The following table sets forth certain summarized financial data and key
operating ratios for the Company's property and casualty operations for the
quarters ended June 30, 1996 and 1995. All ratios are computed using data
reported in accordance with statutory accounting principles ("SAP").
Three Months Ended
June 30,
1996 1995
----------- -----------
(Dollars in Millions)
Net premiums written $419.2 $433.6
Net premiums earned and other revenue $410.1 $417.0
Losses and loss adjustment expense 319.9 347.2
Other costs and expenses 126.5 134.0
------ -----
Underwriting loss (36.3) (64.2)
Net investment income 57.6 59.0
Realized gain on investments 6.9 5.8
Federal income tax expense (credit) .8 (12.3)
------ ------
Net income $ 27.4 $ 12.9
====== ======
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
Loss ratio 66.8% 69.5%
Loss adjustment expense ratio 11.6 14.2
Underwriting expense ratio 30.6 30.5
Policyholder dividend ratio .1 .1
----- -----
Combined ratio 109.1% 114.3%
===== =====
Net Premiums Written
Net premiums written decreased 3.3% or $14.4 million to $419.2 million in
the second quarter of 1996 from $433.6 million in the second quarter of 1995.
The decline in net premiums written is largely attributable to three factors.
First and most pervasive is intensifying commercial lines competition with the
impact most evident in workers' compensation and larger accounts. In addition,
premium volume from state-mandated workers' compensation pools continues to
decline. Finally, the Company continues its planned reduction of exposure in
California and Florida. For the states of California and Florida, net
premiums written decreased by 12.9% in the second quarter of 1996 compared to
the second quarter of 1995. For all other states, net premiums written
decreased by 2.1% in the second quarter of 1996 compared to the second quarter
of 1995.
Net Premiums Earned and Other Revenue
Net premiums earned and other revenue (primarily finance and service fees)
decreased 1.7% or $6.9 million to $410.1 million in the second quarter of 1996
from $417.0 million in the second quarter of 1995.
Losses and Loss Adjustment Expense ("LAE")
Loss and LAE decreased 7.9% or $27.3 million to $319.9 million in the
second quarter of 1996 from $347.2 million in the second quarter of 1995. The
SAP loss ratio for the second quarter of 1996 was 66.8% compared to 69.5% for
the second quarter of 1995. The 2.7 point decrease in the quarter was
primarily due to a decrease in natural peril losses and a modest improvement in
the underlying loss ratio.
The SAP LAE ratio was 11.6% and 14.2% for the second quarter of 1996 and
1995, respectively. The improvement in the LAE ratio in the second quarter of
1996 compared to the second quarter of 1995 is primarily due to (i) lower LAE
reserves, driven primarily by lower related loss reserves and (ii) a reduction
in errors and omission insurance expense. The decrease in insurance expense in
1996 as compared to 1995 is due to the settlement of a lawsuit in 1995.
Other Costs and Expenses
Other costs and expenses decreased 5.6% or $7.5 million to $126.5 million
in the second quarter of 1996 from $134.0 million in the second quarter of
1995. The realignment of field offices and implementation of internal cost
controls, announced in the fourth quarter of 1995, continued to produce 1996
expense savings in line with expectations. In addition, in 1995 the Company
incurred two unusual expense charges: (i) a charge off of an involuntary
property pool account receivable and (ii) the Company made a payment related to
a guarantee of business transferred to a third party in 1991. Concurrent with
this payment in 1995, the guarantee was terminated, precluding the possibility
of future payments. The SAP underwriting expense ratio increased by .1 point
to 30.6% due to a decline in net premiums written.
Combined Ratio
The SAP combined ratio, after policyholder dividends, was 109.1% and
114.3% for the second quarter of 1996 and 1995, respectively. As outlined
above, this improvement was primarily generated by improvements in losses and
loss adjustment expenses.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
Net Investment Income
Net investment income decreased 2.4% or $1.4 million to $57.6 million in
the second quarter of 1996 from $59.0 million in the second quarter of 1995.
This decrease is due primarily to a decline in total average invested assets
caused by the distribution of the Dividended Assets, as well as a slight
decline in the overall investment portfolio yield. The yield on invested
assets (excluding realized and unrealized gains) was 6.39% and 6.40% for the
second quarters of 1996 and 1995, respectively.
Federal Income Tax Expense (Credit)
Federal income tax expense was $.8 for the second quarter of 1996 compared
to a federal income tax credit of $(12.3) million for the second quarter of
1995. The increase in expense is due primarily to improved underwriting
results.
LIFE
The following table sets forth certain summarized financial data for the
Company's life insurance operations for the quarters ended June 30, 1996 and
1995.
Three Months Ended
June 30,
1996 1995
----------- -----------
(Dollars in Millions)
Account values - Universal life and Annuities $329.9 $301.1
Life insurance in-force 15,518.9 15,034.8
Invested assets (at amortized cost) 454.8 429.3
Policy income $ 14.4 $ 14.5
Benefits and expenses 17.5 17.3
Net investment income 8.2 8.3
Realized gain on investments .3 .4
Federal income tax expense 2.0 2.0
---- ----
Net income $ 3.4 $ 3.9
==== ====
Policy income was essentially flat in the second quarter of 1996 compared
to the second quarter of 1995. Account values at June 30, 1996 increased by
9.6% from June 30, 1995. Despite an increase in invested assets, net
investment income decreased 1.2% in the second quarter of 1996 compared to the
second quarter of 1995. The yield on invested assets (excluding realized and
unrealized gains) was 7.31% and 7.78% for the second quarters of 1996 and 1995,
respectively. The majority of the decrease in yield is due to a higher
effective yield on mortgage backed securities in 1995. This higher effective
yield was caused by a shortening of estimated prepayment patterns on the
underlying securities, which in turn accelerated income recognition. Net
income for the second quarter of 1996 was lower compared to the second quarter
of 1995 primarily due to higher mortality.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
Six Months Ended June 30, 1996 and 1995
The discussion which follows compares the results of the six months ended
June 30, 1996 to the six months ended June 30, 1995:
CONSOLIDATED
The Company's revenues decreased 2.5% or $26.0 million to $1,011.4 million
in the first six months of 1996 from $1,037.4 million in the first six months
of 1995. Net premiums earned and other revenue decreased 2.5% or $21.7
million to $848.5 million in the first six months of 1996 from $870.2 million
in the first six months of 1995. Net investment income increased .6% or $.8
million to $134.5 million in the first six months of 1996 from $133.7 million
in the first six months of 1995. Realized gains on investments decreased 14.9%
or $5.0 million to $28.5 million in the first six months of 1996 from $33.5
million in the first six months of 1995.
Benefits and settlement expenses decreased 1.3% or $8.8 million to $655.9
million in the first six months of 1996 from $664.7 million in the first six
months of 1995. Commissions were $144.4 million for the first six months of
1996 and 1995. Operating and administrative expenses decreased 11.9% or $13.8
million to $102.2 million in the first six months of 1996 from $116.0 million
in the first six months of 1995. The company incurred interest on debt from
the Assumed Debt and Term Note of $1.8 million in the first six months of 1996.
Net income for the first six months of 1996 was $76.7 million or $1.48 per
share compared to $82.3 million or $1.65 per share for the first six months of
1995. Excluding realized gain on investments, the Company earned $59.8 million
or $1.15 per share for the first six months of 1996 compared to $61.4 million
or $1.23 per share for the first six months of 1995.
PROPERTY AND CASUALTY
The following table sets forth certain summarized financial data and key
operating ratios for the Company's property and casualty operations for the six
months ended June 30, 1996 and 1995. All ratios are computed using data
reported in accordance with SAP.
Six Months Ended
June 30,
1996 1995
----------- -----------
(Dollars in Millions)
Net premiums written $824.9 $859.3
Net premiums earned and other revenue $819.6 $841.8
Losses and loss adjustment expense 630.9 641.5
Other costs and expenses 255.8 271.7
----- -----
Underwriting loss (67.1) (71.4)
Net investment income 117.3 117.4
Realized gain on investments 28.1 33.6
Federal income tax expense 7.1 4.4
---- ----
Net income $ 71.2 $ 75.2
==== ====
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
Loss ratio 65.9% 63.7%
Loss adjustment expense ratio 11.5 13.1
Underwriting expense ratio 31.2 31.5
Policyholder dividend ratio .2 .1
----- -----
Combined ratio 108.8% 108.4%
===== =====
Net Premiums Written
Net premiums written decreased 4.0% or $34.4 million to $824.9 million in
the first six months of 1996 from $859.3 million in the first six months of
1995. The decline in net premiums written is largely attributable to three
factors. First and most pervasive is the intensifying commercial lines
competition with the impact most evident in workers' compensation and larger
accounts. In addition, premium volume from state-mandated workers'
compensation pools continues to decline. Finally, the Company continues its
planned reduction of exposure in California and Florida. For the states of
California and Florida, net premiums written decreased 10.9% in the first six
months of 1996 compared to the first six months of 1995. For all other states,
net premiums written decreased 3.2% in the first six months of 1996 compared to
the first six months of 1995.
Net Premiums Earned and Other Revenue
Net premiums earned and other revenue (primarily finance and service fees)
decreased 2.6% or $22.2 million to $819.6 million in the first six months of
1996 from $841.8 million in the first six months of 1995.
Losses and Loss Adjustment Expense
Loss and LAE decreased 1.7% or $10.6 million to $630.9 million in the
first six months of 1996 from $641.5 million in the first six months of 1995.
The SAP loss ratio for the first six months of 1996 was 65.9% compared to 63.7%
for the first six months of 1995. The 2.2 point increase was due to an
increase of $22.6 million in natural peril losses resulting from widespread
severe winter storm activity and frequent wind and hail storms across the
Midwest. Natural peril losses were $99.3 million and $76.7 million for the
first six months of 1996 and 1995, respectively.
The SAP LAE ratio was 11.5% and 13.1% for the first six months of 1996 and
1995, respectively. The improvement in the LAE ratio in the first six months of
1996 compared to the first six months of 1995 was due to (i) lower LAE reserve
levels in 1996 due to lower related loss reserves (ii) incurred costs relating
to division consolidation and an early retirement plan for certain levels of
management in 1995 and (iii) a reduction in insurance expense in 1996.
Other Costs and Expenses
Other costs and expenses decreased 5.9% or $15.9 million to $255.8 million
in the first six months of 1996 from $271.7 million in the first six months of
1995. Costs incurred relating to the division consolidation and early
retirement added to expenses in the first six months of 1995. In addition, the
realignment of field offices and implementation of internal cost controls,
which was announced in late 1995, continued to produce cost savings in 1996.
In 1995, the Company incurred two unusual expense charges: (i) a charge off of
an involuntary property pool account receivable and (ii) the Company made a
payment related to a guarantee of business transferred to a third party in
1991. Concurrent with this payment in 1995, the guarantee was terminated,
precluding the possibility of future payments. The SAP underwriting expense
ratio improved only .3 points to 31.2% due to a decline in net written
premium.
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15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
Combined Ratio
The SAP combined ratio, after policyholder dividends, was 108.8% and
108.4% for the first six months of 1996 and 1995, respectively. During the
first six months of 1996, natural peril losses added 12.2 points to the SAP
loss ratio compared to 9.2 points for the first six months of 1995.
Net Investment Income
Net investment income decreased $.1 million to $117.3 million in the first
six months of 1996 from $117.4 million in the first six months of 1995. The
yield on invested assets (excluding realized and unrealized gains) was 6.55%
and 6.34% for the first six months of 1996 and 1995, respectively. The
increase in yield was offset by a decline in total average invested assets
caused by the distribution of Dividended Assets.
Federal Income Tax Expense
Income tax expense was $7.1 million for the first six months of 1996
compared to $4.4 million for the first six months of 1995. The increase in
expense is due primarily to improved underwriting results.
LIFE
The following table sets forth certain summarized financial data for the
Company's life insurance operations for the six months ended June 30, 1996 and
1995.
Six Months Ended
June 30,
1996 1995
----------- -----------
(Dollars in Millions)
Account values - Universal life and Annuities $ 329.9 $ 301.1
Life insurance in-force 15,518.9 15,034.8
Invested assets (at amortized cost) 454.8 429.3
Policy income $ 28.9 $ 28.4
Benefits and expenses 35.7 33.9
Net investment income 16.8 16.3
Realized gain (loss) on investments .2 (.2)
Federal income tax expense 3.7 3.5
-------- --------
Net income $ 6.5 $ 7.1
======== ========
Policy income increased 1.8% in the first six months of 1996 compared to
the first six months of 1995. Account values at June 30, 1996, increased by
9.6% from June 30, 1995. Net investment income increased 3.1% in the first six
months of 1996 compared to the first six months of 1995. The overall increase
in net investment income reflects the growth in account values as well as the
general growth in invested assets. This increase occurred despite a drop in
yield on average invested assets (excluding realized and unrealized gains).
The yield was 7.59% and 7.74% for the first six months of 1996 and 1995,
respectively. Net income for the first six months of 1996 was lower compared
to the first six months of 1995 primarily due to higher mortality.
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16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of funds available to the Company and its Subsidiaries
are premiums, investment income and proceeds from the sale or maturity of
invested assets. Such funds are used principally for the payment of claims,
operating expenses, commissions, dividends, debt service and the purchase of
investments. Cash outflows can be variable because of the potential for large
losses either individually or in the aggregate. Accordingly, the Company
maintains investment programs generally intended to provide adequate funds to
pay claims without the forced sale of investments. Finally, as noted below,
the Company has a $200 million Line of Credit, and intends to establish a
Medium Term Note Program, to augment its available liquidity.
Invested Assets
Since a substantial portion of the Company's revenues are generated from
its invested assets, the performance, quality and liquidity of its investment
portfolio materially effects the Company's financial condition and results of
operations. The Company pursues a total return investment strategy which seeks
an attractive level of current income combined with long-term capital
appreciation. The following table details, at carrying value, the distribution
of the Company's investment portfolio at June 30, 1996 (dollars in millions):
Fixed maturity securities:
Tax-exempt municipal $1,972.4 46.9%
US government 316.3 7.5
Mortgage-backed and asset-backed 294.3 7.0
Corporate and other 953.1 22.6
Redeemable preferred stock 80.9 1.9
Equities:
Perpetual preferred stock 175.4 4.2
Common stock 222.0 5.3
Mortgage loans 33.7 0.8
Short-term investments 122.7 2.9
Other 37.7 0.9
-------- -----
Total $4,208.5 100.0%
======== =====
The total investment portfolio decreased $221.7 million in the first six
months of 1996. This decrease is the net result of (i) the distribution of
Dividended Assets to LNC, (ii) a decrease in unrealized gains on securities
available-for-sale and (iii) an increase in invested assets from the proceeds
of the Offering.
The Company attempts to minimize the risk of loss due to default by the
borrower by maintaining a quality investment portfolio. As of June 30, 1996,
approximately 90% of the Company's bond portfolio is rated "A" or higher, or
was a U.S. government obligation, and $25.4 million, or .7% of the carrying
value of the bond portfolio, was rated below investment grade (Ba and below).
Ratings are based on the ratings, if any, assigned by Moody's and/or Standard &
Poors. If ratings were split, the rating used is generally the higher of the
two. Approximately $220.4 million of securities are private placements for
which ratings have been assigned by the Company based generally on equivalent
ratings supplied by the NAIC.
As of June 30, 1996, 46.9% of the Company's investment portfolio consisted
of tax-exempt municipal securities as compared to 53.6% as of December 31,
1996. The Company has been reducing its position in tax-exempt municipal
securities in order to provide for greater diversification of the portfolio
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17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
and to give the Company greater margin relative to the possibility of being in
a federal alternative minimum tax position.
The Company's fixed maturity securities are classified as
available-for-sale and accordingly, are carried at fair value. The difference
between amortized cost and fair value, less deferred income taxes, is reflected
as a component of shareholders' equity.
Cash Provided by (Used by) Operations
Net cash provided by (used by) operating activities was $(4.7) million for
the first six months of 1996 compared to $4.0 million for the first six months
of 1995. The increase in cash used by operating activities is primarily due to
a decrease in premiums collected offset in part by a decrease in claims and
operating expenses paid.
Notes Payable and Debt with Affiliate
As disclosed in note 3 to the Notes to Consolidated Financial Statements,
in the second quarter of 1996 the Company assumed $100 million of Assumed Debt
and issued a $200 million Term Note. The Company is obligated to make
principal repayments totaling $66.7 million in 1997 and 1998, and $166.7
million in 1999. In addition, the Company is obligated to make interest
payments on this debt. Interest is payable on outstanding principle at a rate
of 7 1/8% per annum on the Assumed Debt, and at a variable rate (generally 50
basis points over three, two and one year U.S. Treasury obligations) on the
Term Note. The current rate on the Term Note is approximately 6.7%.
Line of Credit
On May 29, 1996, the Company entered the Line of Credit with third party
financial institutions under which the Company may borrow and repay amounts up
to a maximum of $200 million. Borrowings under the Line of Credit will bear
interest generally at variable rates tied to LIBOR, an adjusted certificate of
deposit rate or other short-term indices. The Company will use borrowings
under the Line of Credit to assist in funding short-term cash management
requirements. No debt was outstanding using this agreement at June 30, 1996.
Medium Term Note Program
For additional liquidity, the Company intends to establish a medium-term
note program (the "MTN Program") within the next year. The MTN Program, if
established, would enable the Company to issue debt when the principal payments
on the Assumed Debt and the Term Note become due and, from time to time, for
general corporate purposes.
Subsidiary Dividend Restrictions
Historically, ASI has paid dividends to LNC, as its parent, based upon its
annual operating results and statutory surplus requirements. After taking into
account the one-time distribution of the Dividended Assets paid by ASI to LNC,
ASI will not be able to pay any additional dividends to the Company for the
twelve month period commencing on May 15, 1996 ("Twelve Month Period") without
notifying the Indiana Commissioner of Insurance and giving the Commissioner 30
days within to object. Regulatory restrictions on the ability of ASI to pay
dividends or make other payments to the Company could affect the Company's
ability to pay dividends and service its debt.
Offering Proceeds
On May 29, 1996, the company issued 10,000,000 shares of common stock to
the public at $23 per share. The net proceeds to the Company, after the
underwriting discount and other issue costs, was $215.5 million. The Company
contributed $140.5 million of the net proceeds to ASI to enable it to invest in
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18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
taxable securities for its investment portfolio to replace the Dividended
Assets. The Company retained $75.0 million of the net proceeds from the
Offering for general corporate purposes, including the funding of its regular
cash dividends, debt service obligations and other general corporate
obligations during the Twelve Month Period. Until utilized for such purposes,
the net proceeds from the Offering not contributed to ASI is invested and will
continue to be invested in short-term, interest bearing, investment-grade
securities. Based upon an assumed quarterly dividend of $.21 per share and the
terms of the Assumed Debt, Term Note and Line of Credit, the Company expects
that it will need approximately $50 million to fund regular quarterly cash
dividends and approximately $20 million to fund debt service obligations and
other general corporate obligations during the Twelve Month Period.
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19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the Notes to Consolidated Financial Statements - Contingencies regarding
pending and threatened litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
10.0 (1) Investment Management Agreement, dated July 1, 1996, between
Lincoln Investment Management, Inc. and American States Lloyds
Insurance Company
10.0 (2) Investment Management Agreement, dated May 29, 1996, between
Lincoln Investment Management, Inc. and Registrant
10.0 (3) Investment Management Agreement, dated June 1, 1996, between
Lincoln Investment Management, Inc. and American States Life
Insurance Company
10.0 (4) Investment Management Agreement, dated July 1, 1996, between
Lincoln Investment Management, Inc. and American States Insurance
Company of Texas
10.0 (5) Investment Management Agreement, dated June 1, 1996, between
Lincoln Investment Management, Inc. and American States Insurance
Company, American Economy Insurance Company and American States
Preferred Insurance Company
11.0 Computations of Earnings Per Share
27.0 Financial Data Schedule
b) Reports on Form 8-K.
None.
19
20
AMERICAN STATES FINANCIAL CORPORATION
Exhibit Index for the Report on Form 10-Q
for the Quarter Ended June 30, 1996
Exhibit Page
Number Description Number
- - -------- ---------------------------------- ------
10.0 (1) Investment Management Agreement, dated
July 1, 1996, between Lincoln Investment
Management, Inc. and American States
Lloyds Insurance Company 22
10.0 (2) Investment Management Agreement, dated
May 29, 1996, between Lincoln Investment
Management, Inc. and Registrant 37
10.0 (3) Investment Management Agreement, dated
June 1, 1996, between Lincoln Investment
Management, Inc. and American States Life
Insurance Company 54
10.0 (4) Investment Management Agreement, dated
July 1, 1996, between Lincoln Investment
Management, Inc. and American States
Insurance Company of Texas 69
10.0 (5) Investment Management Agreement, dated
June 1, 1996, between Lincoln Investment
Management, Inc. and American States
Insurance Company, American Economy
Insurance Company and American States
Preferred Insurance Company 84
11.0 Computations of Earnings Per Share 100
27.0 Financial Data Schedule 101
20
21
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
American States Financial Corporation
by: /s/ THOMAS M. OBER
----------------------
Thomas M. Ober
Vice President, Secretary and General Counsel
/s/ THOMAS R. KAEHR
----------------------
Thomas R. Kaehr
Vice President and Chief Accounting Officer
Date: August 12, 1996
21