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, 1997
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 [X] No [ ]
Shares of common stock outstanding as of July 1, 1997: 60,050,515
DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the Registrant's Form
8-K, dated June 6, 1997 are incorporated by reference in Part II of this Form
10-Q.
The exhibit index to this report is located on page 23.
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December, 31
1997 1996
----------- ------------
(Dollars in Thousands)
ASSETS
Investments:
Securities available-for-sale at fair value:
Fixed maturity (amortized cost: 1997 - $3,618,363; 1996 - $3,579,807) $ 3,787,582 $ 3,763,880
Equity (cost: 1997 - $362,082; $1996 - $362,720) 460,560 435,137
Mortgage loans 21,871 32,293
Short-term investments 74,194 73,276
Other invested assets 39,450 37,986
----------- ------------
Total investments 4,383,657 4,342,572
Cash 19,338 13,610
Premium receivable 482,774 413,444
Deferred policy acquisition costs 212,250 202,233
Properties to be sold 23,218 30,633
Property and equipment 31,800 31,143
Accrued investment income 64,932 64,602
Current federal income taxes recoverable 4,968 -
Deferred federal income taxes recoverable 121,066 128,742
Cost in excess of net assets of acquired subsidiaries 96,063 97,772
Ceded reinsurance on claims and claims expense reserves 175,149 179,445
Miscellaneous 36,658 36,887
----------- ------------
Total assets $ 5,651,873 $ 5,541,083
=========== ============
(continued on next page)
See accompanying notes to consolidated financial statements.
2
3
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, December, 31
1997 1996
---- ----
(Dollars in Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Losses, loss adjustment expense and future policy benefits $ 2,854,688 $ 2,868,348
Unearned premiums 746,058 711,955
----------- -----------
Total policy liabilities and accruals 3,600,746 3,580,303
Commissions and other expenses 103,702 120,872
Current federal income taxes payable - 5,303
Outstanding checks 64,128 69,901
Short-term debt due LNC 66,667 66,667
Notes payable 99,607 99,511
Debt due LNC 133,333 133,333
Other liabilities 166,731 129,154
----------- -----------
Total liabilities 4,234,914 4,205,044
Shareholders' equity:
Common stock, no par value: 195,000,000 shares authorized, shares
issued and outstanding: 1997 and 1996 - 60,050,515 304,500 304,493
Net unrealized gain on securities available-for-sale 171,494 163,647
Retained earnings 940,965 867,899
----------- -----------
Total shareholders' equity 1,416,959 1,336,039
----------- -----------
Total liabilities and shareholders' equity $ 5,651,873 $ 5,541,083
=========== ===========
See accompanying notes to consolidated financial statements.
3
4
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
--------- --------- --------- ---------
(Dollars in Thousands,
Except Per Share Data)
Revenue:
Premiums and other revenue $ 429,821 $ 424,483 $ 853,097 $ 848,477
Net investment income 66,525 66,156 133,003 134,489
Realized gain on investments 9,756 7,374 19,443 28,470
Gain on operating properties 4,208 - 6,671 -
---------- ----------- ----------- ----------
Total revenue 510,310 498,013 1,012,214 1,011,436
Benefits and expenses:
Benefits and settlement expenses 323,369 332,342 620,910 655,905
Commissions 71,657 72,510 140,762 144,382
Operating and administrative expenses 46,949 51,051 98,960 102,224
Taxes, licenses and fees 11,120 8,322 21,857 20,240
Interest on debt 5,227 1,835 10,392 1,835
---------- ----------- ----------- ----------
Total benefits and expenses 458,322 466,060 892,881 924,586
Income before federal income taxes 51,988 31,953 119,333 86,850
Federal income taxes (credit):
Current 4,842 (1,530) 17,617 14,401
Deferred 2,907 3,724 3,450 (4,223)
---------- ----------- ----------- ----------
Total federal income taxes 7,749 2,194 21,067 10,178
---------- ----------- ----------- ----------
Net income $44,239 $29,759 $98,266 $76,672
========== =========== =========== ==========
Net income per share $.74 $.55 $1.64 $1.48
========== =========== =========== ==========
Weighted average shares outstanding 60,050,515 53,644,692 60,050,515 51,832,414
========== =========== =========== ==========
See accompanying notes to consolidated financial statements.
4
5
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months Ended
June 30,
1997 1996
----------- -----------
(Dollars in Thousands)
Common stock:
Balance at beginning of period $ 304,493 $ 387,547
Public offering of common stock - 215,482
Common stock issued for employee benefit plans 7 1,161
Assumption and issuance of debt in exchange with LNC - (299,398)
----------- -----------
Balance at end of period 304,500 304,792
Net unrealized gain (loss) on securities available-for-sale:
Balance at beginning of period 163,647 211,767
Change during the period 7,847 (97,793)
----------- -----------
Balance at end of period 171,494 113,974
Retained earnings:
Balance at beginning of period 867,899 1,069,393
Dividend of assets to LNC prior to public offering - (299,866)
Dividends declared and paid on Common Stock ($.42 per share) (25,200) (46,134)
Net income 98,266 76,672
----------- -----------
Balance at end of period 940,965 800,065
----------- -----------
Total shareholders' equity $ 1,416,959 $ 1,218,831
=========== ===========
See accompanying notes to consolidated financial statements.
5
6
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1997 1996
----------- -----------
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 98,266 $ 76,672
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Deferred policy acquisition costs (9,149) (4,270)
Premiums and fees in course of collection (69,330) (37,052)
Accrual of discount on investments (9,445) (9,617)
Amortization of premium on investments 2,034 2,767
Accrued investment income (331) (1,800)
Policy liabilities and accruals 4,183 76,793
Federal income taxes (6,821) (25,110)
Provisions for depreciation 3,761 3,850
Gain on sale of investments (19,443) (28,470)
Gain on operating properties (6,671) -
Ceded reinsurance on claims and claims expense reserves 4,296 (36,914)
Other (11,359) (21,514)
----------- -----------
Net adjustments (118,275) (81,337)
----------- -----------
Net cash used in operating activities (20,009) (4,665)
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
Purchase of investments (335,737) (753,087)
Sales of investments 280,360 583,064
Maturities and redemptions 45,070 38,401
Purchase of mortgage loans and other investments (3,836) (7,011)
Sale or maturity of mortgage loans and other investments 11,684 3,945
Net increase in short-term investments (918) (59,495)
Net sale (purchase) of property and equipment 9,669 (4,472)
Other 28,379 16,518
----------- -----------
Net cash provided by (used in) investing activities 34,671 (182,137)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 7 215,482
Universal life investment contract deposits 25,334 24,837
Universal life investment contract withdrawals (9,075) (6,605)
Dividends paid (25,200) (46,134)
----------- -----------
Net cash provided by (used in) financing activities (8,934) 187,580
Net increase (decrease) in cash 5,728 778
Cash at beginning of period 13,610 12,708
----------- -----------
Cash at end of period $ 19,338 $ 13,486
=========== ===========
See accompanying notes to consolidated financial statements.
6
7
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 Form 10-K dated February 26, 1997. 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, 1997 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1997.
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
$215.2 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'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 six months ended
June 30, 1997 and 1996, 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,
1996, 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 eliminated. Certain amounts
from prior periods were reclassified to conform to the 1997 presentation. Net
income and shareholders' equity have not been affected by these
reclassifications.
7
8
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)
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. CHANGE IN ACCOUNTING PRINCIPLE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("FAS 128"), Earnings Per
Share which the Company will adopt in the fourth quarter of 1997. Earlier
adoption is not permitted. In accordance with FAS 128, the Company will
present "basic" and "diluted" earnings per share on the face of the income
statement regardless of the difference between the two calculations. When
calculating the diluted earnings per share, the treasury stock method will be
applied using the average market price for the period rather than the higher of
the average market price or the ending market price. Using the terms of FAS
128, the basic and diluted earnings per share for the first six months of 1997
would be $1.64. The basic and diluted earnings per share for the first six
months of 1996 would be $1.48.
In June of 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income". Statement 130 is effective for fiscal years beginning after December
15, 1997 and ASFC will adopt it in the first quarter of 1998. Adoption will
have no effect on net income but will require the reporting of "comprehensive
income," which will include net income and certain items currently reported in
stockholders' equity.
The FASB issued Statement 131, "Disclosures about Segments of an
Enterprise and Related Information" in June of 1997. FAS 131 changes the way
companies report information about business segments in annual financial
statements and requires the reporting of selected segment information in their
interim reports. FAS 131 is effective for financial statements for periods
beginning after December 15, 1997 except that providing interim information in
the initial year (1998) may be deferred until 1999. ASFC plans on providing
the required segment information in its 1998 annual report and in its interim
reports beginning in 1999. FAS 131 has no effect on net income.
3. FEDERAL INCOME TAXES
A consolidated federal income tax return is filed by LNC and includes the
Company. Pursuant to an agreement with LNC, the Company provides for income
taxes on the basis of a separate return calculation. The taxes computed are
remitted to or collected from LNC.
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.
8
9
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. NOTES PAYABLE AND DEBT DUE LNC
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 is obligated to 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 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 current rate on the Term Note is 6.7%. The Term Note is 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.
However, as disclosed in Note 6 to the Notes to Consolidated Financial
Statements, LNC will be paid the outstanding balance and accrued but unpaid
interest thereon of the Assumed Debt and Term Note pursuant to terms of the
pending Agreement and Plan of Merger by and among ASFC, SAFECO Corporation and
ASFC Acquisition Co. if and when the sale is consummated.
On May 29, 1996, the Company entered into a revolving credit agreement in
which the Company may borrow and repay amounts up to a maximum of $200 million
(the "Line of Credit"). Borrowings using 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, 1997.
5. 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 violated a number of civil rights laws (including, without
limitation, the Fair Housing Act). It was also alleged that the defendants'
actions constituted a civil conspiracy. Brought in the United States District
Court for the Western District of Missouri, the plaintiffs sought to represent
themselves and a putative class of similarly situated persons in the State of
Missouri. This action sought injunctive relief, unspecified compensatory
damages, punitive damages and attorney's fees. In response to motions filed by
the defendants, the court dismissed the conspiracy count by Order dated October
2, 1996 but required that the defendants answer the remaining counts. On June
19, 1997 the court denied class certification and dismissed the case for lack
of standing. On July 17, 1997 the same plaintiffs filed a separate action
against the same three property and casualty subsidiaries of the Company.
9
10
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. CONTINGENCIES (Continued)
The plaintiffs in this new case have asked that it be certified as a class
action and make substantially the same allegations and seek substantially the
same remedies as were sought in the original case. In addition, the plaintiffs
filed a notice of appeal in the original case on July 18, 1997. 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
defend these actions vigorously.
On August 29, 1996, the first of two actions were brought in Missouri
state courts alleging that underinsured motorist insurance coverage sold in
that state by three of the Company's property and casualty insurance
subsidiaries constitutes "phantom coverage" when sold at limits equal to the
State's financial responsibility requirements. In both actions, the plaintiffs
sought to represent themselves and a putative class of similarly situated
persons in the State of Missouri. Both actions sought compensatory and
punitive damages based upon a number of legal theories, including, without
limitation, breach of fiduciary duty, negligence, breach of contract, unjust
enrichment and misrepresentation. A motion to consolidate the two cases has
been entered. Discovery has begun. Management does not believe, based upon
current information, that the allegations have merit and it therefore intends
to defend the consolidated action vigorously.
6. RECENT DEVELOPMENTS
On June 6, 1997, ASFC entered into an Agreement and Plan of Merger dated
as of the same date (the "Merger Agreement"), by and among ASFC, SAFECO
Corporation ("Buyer") and ASFC Acquisition Co., a wholly owned subsidiary of
Buyer ("Buyer Sub"). The Merger Agreement provides for, among other things,
the merger of Buyer Sub with and into ASFC (the "Merger"), with ASFC surviving
the Merger as a wholly owned subsidiary of Buyer. Pursuant to the Merger
Agreement and upon consummation of the Merger each outstanding share of Common
Stock of ASFC ("ASFC Common Stock") will be converted into the right to receive
$47 in cash without interest thereon. Consummation of the Merger is subject to
certain conditions, including, among others, (a) the approval by certain state
insurance regulators of the Merger and (b) compliance with applicable
provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"). Early termination of the HSR Act waiting period was
received on July 15, 1997.
In connection with the Merger Agreement, LNC and Buyer entered into a
Voting, Support and Indemnification Agreement dated June 6, 1997 (the "Voting
Agreement"), certain sections of which were agreed to and acknowledged by ASFC.
Pursuant to the Voting Agreement, LNC agreed, among other things, (a) to vote
all ASFC Common Stock held by it or any of its subsidiaries in favor of the
Merger, the Merger Agreement and the transactions contemplated thereby, (b) to
grant Buyer an irrevocable proxy in all ASFC Common Stock held by it or any of
its subsidiaries for purposes of a vote at a meeting of the holders of ASFC
Common Stock held to consider the Merger and (c) to allocate between LNC and
Buyer certain tax and employee benefits liabilities; and Buyer agreed, among
other things, to pay to LNC (a) $100 million plus an amount equal to the
accrued but unpaid interest on the outstanding 7 1/8% notes due July 15, 1999,
originally issued to the public by LNC on July 15, 1992, in consideration of
the termination of the agreement relating to the Assumed Debt, and (b) the
outstanding principle balance of, plus accrued but unpaid interest on, the Term
Note, in consideration of the surrender of the Term Note by LNC to ASFC for
cancellation.
10
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF OPERATION
Three Months Ended June 30, 1997 and 1996
The discussion which follows compares the results of the second quarter
ended June 30, 1997 to the second quarter ended June 30, 1996.
CONSOLIDATED
The Company's revenues increased 2.5% or $12.3 million to $510.3 million
in the second quarter of 1997 from $498.0 million in the second quarter of
1996. Net premiums earned and other revenue increased 1.2% or $5.3 million to
$429.8 million in the second quarter of 1997 from $424.5 million in the second
quarter of 1996. Net investment income increased .5% or $.3 million to $66.5
million in the second quarter of 1997 from $66.2 million in the second quarter
of 1996. Realized gains on investments increased $2.4 million to $9.8 million
in the second quarter of 1997 from $7.4 million in the second quarter of 1996.
Benefits and settlement expenses decreased 2.7% or $8.9 million to $323.4
million in the second quarter of 1997 from $332.3 million in the second quarter
of 1996. Commissions decreased 1.1% or $.8 million to $71.7 million in the
second quarter of 1997 from $72.5 million in the second quarter of 1996.
Operating and administrative expenses decreased 8.2% or $4.2 million to $46.9
million in the second quarter of 1997 from $51.1 million in the second quarter
of 1996. The company incurred interest on debt of $5.2 million in the second
quarter of 1997 from the Assumed Debt and Term Note.
Net income for the second quarter of 1997 was $44.2 million or 74 cents
per share compared to $29.8 million or 55 cents per share for the second
quarter of 1996. Excluding realized gain on investments, the Company earned
$35.2 million or 59 cents per share for the second quarter of 1997 compared to
$26.5 million or 49 cents per share for the second quarter of 1996.
11
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
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, 1997 and 1996. All ratios are computed using data
reported in accordance with statutory accounting principles ("SAP").
Three Months Ended
June 30,
1997 1996
----------- -----------
(Dollars in Millions)
Net premiums written $ 431.3 $ 419.2
Net premiums earned and other revenue $ 415.5 $410.1
Losses and loss adjustment expense 310.4 319.9
Other costs and expenses 123.6 126.5
----------- -----------
Underwriting loss (18.5) (36.3)
Net investment income 57.2 57.6
Realized gain on investments 9.3 6.9
Gain on operating properties 4.2 -
Federal income tax expense 7.8 .8
----------- -----------
Net income $ 44.4 $ 27.4
=========== ===========
Loss ratio 64.0% 66.8%
Loss adjustment expense ratio 11.1 11.6
Underwriting expense ratio 29.7 30.6
Policyholder dividend ratio .2 .1
----------- -----------
Combined ratio 105.0% 109.1%
=========== ===========
Net Premiums Written
Net premiums written increased 2.9% or $12.1 million to $431.3 million in
the second quarter of 1997 from $419.2 million in the second quarter of 1996.
The increase in net premiums written can be attributed to the Company's various
growth initiatives working as anticipated as well as market acceptance of the
Company's realignment initiative. Net premiums written within the Company's
eight core states increased 5.3% or $11.1 million in the second quarter of 1997
compared to the second quarter of 1996. The eight core states include
Illinois, Washington, Indiana, Missouri, Ohio, Michigan, Kansas and Oregon.
Excluding the states of California and Florida, states in which the Company has
planned a reduction in exposure, net premiums written increased 4.1% or $15.4
million in the second quarter of 1997 compared to the second quarter of 1996.
Net premiums written for commercial lines products (excluding reinsurance
in run-off) increased 1.7% or $4.1 million to $249.1 million in the second
quarter of 1997 from $245.0 million in the second quarter of 1996. Increases
in businessowners, commercial multi-peril and commercial automobile lines were
offset in part by decreases in workers' compensation and general liability
lines. Net premiums written for personal lines products increased 4.7% or $8.2
million to $182.2 million in the second quarter of 1997 from $174.0 million in
the second quarter of 1996. Substantially all of the personal lines growth was
in private passenger auto.
12
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
PROPERTY AND CASUALTY
Net Premiums Earned and Other Revenue
Net premiums earned and other revenue (primarily finance and service fees)
increased 1.3% or $5.4 million to $415.5 million in the second quarter of 1997
from $410.1 million in the second quarter of 1996.
Losses and Loss Adjustment Expense ("LAE")
Losses and LAE decreased 3.0% or $9.5 million to $310.4 million in the
second quarter of 1997 from $319.9 million in the second quarter of 1996. The
SAP loss ratio for the second quarter of 1997 was 64.0% compared to 66.8% for
the second quarter of 1996. The 2.8 point decrease in the quarter was
primarily due to a decrease in natural peril losses. The Company incurred
heavy natural peril losses of $56.5 million in the second quarter of 1996
compared to natural peril losses of $34.4 million in the second quarter of
1997. The natural peril losses incurred in the second quarter of 1997 are in
line with historic norms.
The SAP LAE ratio declined to 11.1% in the second quarter of 1997 from
11.6% for the second quarter of 1996. This ratio decrease is due to continued
expense reductions resulting from the realignment initiative, as well as
slightly increased earned premiums.
Other Costs and Expenses
Other costs and expenses decreased 2.3% or $2.9 million to $123.6 million
in the second quarter of 1997 from $126.5 million in the second quarter of
1996. The realignment initiative and implementation of internal cost controls,
announced in the fourth quarter of 1995, continues to produce expense savings
which are in line with expectations. The SAP underwriting expense ratio
decreased by .9 points to 29.7%.
Combined Ratio
The SAP combined ratio, after policyholder dividends, was 105.0% and
109.1% for the second quarter of 1997 and 1996, respectively. The decrease in
the SAP combined ratio is primarily due to a decrease in natural peril losses.
Net Investment Income
Net investment income decreased .7% or $.4 million to $57.2 million in the
second quarter of 1997 from $57.6 million in the second quarter of 1996. This
decrease is due primarily to a decline in total average invested assets. The
pre-tax yield on invested assets (excluding realized and unrealized gains) was
6.4% for the second quarter of 1997 and 1996, respectively.
Federal Income Tax Expense
Federal income tax expense was $7.8 million for the second quarter of 1997
compared to $.8 million for the second quarter of 1996. The increase in
expense is due primarily to improved underwriting results.
13
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
LIFE
The following table sets forth certain summarized financial data for the
Company's life insurance operations for the quarters ended June 30, 1997 and
1996.
Three Months Ended
June 30,
1997 1996
----------- -----------
(Dollars in Millions)
Account values - Universal life and Annuities $ 352.7 $ 329.9
Life insurance in-force 15,208.8 15,518.9
Invested assets (at amortized cost) 482.9 454.8
Policy income $ 14.3 $ 14.4
Benefits and expenses 18.4 17.5
Net investment income 8.9 8.2
Realized gain (loss) on investments .4 .3
Federal income tax expense 1.8 2.0
----------- -----------
Net income $ 3.4 $ 3.4
=========== ===========
Policy income decreased .7% or $.1 million to $14.3 million in the second
quarter of 1997 from $14.4 million in the second quarter of 1996. Account
values at June 30, 1997 increased by 6.9% from June 30, 1996. Net investment
income increased 8.5% in the second quarter of 1997 compared to the second
quarter of 1996. The pre-tax yield on invested assets (excluding realized and
unrealized gains) was 7.5% and 7.3% for the second quarters of 1997 and 1996,
respectively. Net income for the second quarter of 1997 was $3.4 million
compared to $3.4 million for the second quarter of 1996.
14
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
Six Months Ended June 30, 1997 and 1996
The discussion which follows compares the results of the six months ended
June 30, 1997 to the six months ended June 30, 1996.
CONSOLIDATED
The Company's revenues increased .1% or $.8 million to $1,012.2 million in
the first six months of 1997 from $1,011.4 million in the first six months of
1996. Net premiums earned and other revenue decreased .5% or $4.6 million to
$853.1 million in the first six months of 1997 from $848.5 million in the first
six months of 1996. Net investment income decreased 1.1% or $1.5 million to
$133.0 million in the first six months of 1997 from $134.5 million in the first
six months of 1996. Realized gains on investments decreased $9.1 million to
$19.4 million in the first six months of 1997 from $28.5 million in the first
six months of 1996.
Benefits and settlement expenses decreased 5.3% or $35.0 million to $620.9
million in the first six months of 1997 from $655.9 million in the first six
months of 1996. Commissions decreased 2.5% or $3.6 million to $140.8 million in
the first six months of 1997 from $144.4 million in the first six months of
1996. Operating and administrative expenses decreased 3.1% or $3.2 million to
$99.0 million in the first six months of 1997 from $102.2 million in the first
six months of 1996. The company incurred interest on debt of $10.4 million in
the first six months of 1997 from the Assumed Debt and Term Note.
Net income for the first six months of 1997 was $98.3 million or $1.64 per
share compared to $76.7 million or $1.48 per share for the first six months of
1996. Excluding realized gain on investments, the Company earned $81.4 million
or $1.36 per share for the first six months of 1997 compared to $59.8 million
or $1.15 per share for the first six months of 1996.
15
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
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, 1997 and 1996. All ratios are computed using data
reported in accordance with SAP.
Six Months Ended
June 30,
1997 1996
----------- -----------
(Dollars in Millions)
Net premiums written $ 854.2 $ 824.9
Net premiums earned and other revenue $ 824.1 $ 819.6
Losses and loss adjustment expense 595.1 630.9
Other costs and expenses 250.0 255.8
----------- -----------
Underwriting gain (loss) (21.0) (67.1)
Net investment income 114.3 117.3
Realized gain on investments 19.1 28.1
Gain on operating properties 6.7 -
Federal income tax expense 21.0 7.1
----------- -----------
Net income $ 98.1 $ 71.2
=========== ===========
Loss ratio 61.4% 65.9%
Loss adjustment expense ratio 11.1 11.5
Underwriting expense ratio 30.1 31.2
Policyholder dividend ratio .3 .2
----------- -----------
Combined ratio 102.9% 108.8%
=========== ===========
Net Premiums Written
Net premiums written increased 3.6% or $29.3 million to $854.2 million in
the first six months of 1997 from $824.9 million in the first six months of
1996. The increase in net premiums written can be attributed to the Company's
various growth initiatives as well as market acceptance of the Company's
realignment initiative. Net premiums written within the Company's eight core
states increased 6.4% or $26.0 million in the first six months of 1997 compared
to the first six months of 1996. The eight core states include Illinois,
Washington, Indiana, Missouri, Ohio, Michigan, Kansas and Oregon. Excluding
the states of California and Florida, states in which the Company has planned a
reduction in exposure, net premiums written increased 4.9% or $36.1 million in
the first six months of 1997 compared to the first six months of 1996.
Net premiums written for commercial lines products (excluding reinsurance
in run-off) increased 2.2% or $10.7 million to $496.9 million in the first six
months of 1997 from $486.2 million in the first six months of 1996. Increases
in businessowners, commercial multi-peril and commercial automobile lines were
offset in part by decreases in workers' compensation and general liability
lines. Net premiums written for personal lines products increased 5.6% or
$18.9 million to $357.1 million in the first six months of 1997 from $338.2
million in the first six months of 1996. Substantially all of the personal
lines growth was in private passenger auto.
16
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
PROPERTY AND CASUALTY
Net Premiums Earned and Other Revenue
Net premiums earned and other revenue (primarily finance and service fees)
increased .5% or $4.5 million to $824.1 million in the first six months of
1997 from $819.6 million in the first six months of 1996.
Losses and Loss Adjustment Expense
Loss and LAE decreased 5.7% or $35.8 million to $595.1 million in the
first six months of 1997 from $630.9 million in the first six months of 1996.
The SAP loss ratio for the first six months of 1997 was 61.4% compared to 65.9%
for the first six months of 1996. The 4.5 point decrease was due to an
decrease in natural peril losses. The Company incurred heavy natural peril
losses of $57.2 million in the first six months of 1997 compared to natural
peril losses of $99.3 in the first six months of 1996. The natural peril
losses incurred in the first six months of 1997 are in line with historic
norms.
The SAP LAE ratio declined to 11.1% in the first six months of 1997 from
11.5% for the first six months of 1996. This ratio decrease is due to
continued expense reductions resulting from the realignment initiative, as well
as slightly increased earned premiums.
Other Costs and Expenses
Other costs and expenses decreased 2.3% or $5.8 million to $250.0 million
in the first six months of 1997 from $255.8 million in the first six months of
1996. The realignment initiative and implementation of internal cost controls
announced in the fourth quarter of 1995, continues to produce expense savings
which are in line with expectations. The SAP underwriting expense ratio
decreased 1.1 points to 30.1%.
Combined Ratio
The SAP combined ratio, after policyholder dividends, was 102.9% and
108.8% for the first six months of 1997 and 1996, respectively. The decrease
in SAP combined ratio is primarily due to a decrease in natural peril losses.
Net Investment Income
Net investment income decreased 2.6% or $3.0 million to $114.3 million in
the first six months of 1997 from $117.3 million in the first six months of
1996. This decrease is due primarily to a decline in total average invested
assets. The pre-tax yield on invested assets (excluding realized and
unrealized gains) was 6.4% and 6.6% for the first six months of 1997 and 1996,
respectively.
Federal Income Tax Expense
Income tax expense was $21.0 million for the first six months of 1997
compared to $7.1 million for the first six months of 1996. The increase in
expense is due primarily to improved underwriting results.
17
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
LIFE
The following table sets forth certain summarized financial data for the
Company's life insurance operations for the six months ended June 30, 1997 and
1996.
Six Months Ended
June 30,
1997 1996
----------- -----------
(Dollars in Millions)
Account values - Universal life and Annuities $ 352.7 $ 329.9
Life insurance in-force 15,208.8 15,518.9
Invested assets (at amortized cost) 482.9 454.8
Policy income $ 28.9 $28.9
Benefits and expenses 36.3 35.7
Net investment income 17.7 16.8
Realized gain (loss) on investments .2 .2
Federal income tax expense 3.7 3.7
----------- -----------
Net income $ 6.8 $ 6.5
=========== ===========
Policy income was $28.9 million in the first six months of 1997 and 1996.
Account values at June 30, 1997, increased by 6.9% from June 30, 1996. Net
investment income increased 5.4% in the first six months of 1997 compared to
the first six months of 1996. The pre-tax yield on invested assets (excluding
realized and unrealized gains) was 7.5% and 7.6% for the first six months of
1997 and 1996, respectively. Net income for the first six months of 1997 was
$6.8 million compared to $6.5 million for the first quarter of 1996.
18
19
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 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, 1997 (dollars in millions):
Fixed maturity securities:
Tax-exempt municipal $2,123.5 48.4%
US government 222.6 5.1
Mortgage-backed and asset-backed 294.5 6.7
Corporate and other 1,079.5 24.6
Redeemable preferred stock 67.4 1.5
Equities:
Perpetual preferred stock 186.9 4.3
Common stock 273.7 6.3
Mortgage loans 21.9 .5
Short-term investments 74.2 1.7
Other 39.5 .9
-------- -----
Total $4,383.7 100.0%
======== =====
The total investment portfolio increased $41.1 million in the first six
months of 1997. This increase is primarily due to investment of current period
operating earnings, as well as an increase in unrealized gains on securities
available-for-sale.
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, 1997,
approximately 89% of the Company's bond portfolio is rated "A" or higher, or
was a U.S. government obligation, and $29.8 million, or .8% 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 $280.4 million of securities are private placements for
which ratings have been assigned by the Company based generally on equivalent
ratings supplied by the National Association of Insurance Commissioners.
19
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
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 Used by Operations
Net cash used by operating activities was $13.3 million for the first six
months of 1997 compared to $4.7 million for the first six months of 1996. The
increase in cash used by operating activities is primarily due to the receipt
of $61.5 million in conjunction with a settlement of policy liabilities assumed
during the first quarter of 1996 and the payment of $10.3 million in debt
service during the first half of 1997, partially offset by a decrease in paid
losses.
Notes Payable and Debt due LNC
As disclosed in Note 4 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 minimum
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%.
However, as disclosed in Note 6 to the Notes to Consolidated Financial
Statements, LNC will be paid the outstanding balance and accrued but unpaid
interest thereon of the Assumed Debt and Term Note pursuant to terms of the
pending Agreement and Plan of Merger by and among ASFC, SAFECO Corporation and
ASFC Acquisition Co., if and when the sale is consummated.
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, 1997.
20
21
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.
2 Agreement and Plan of Merger, dated June 6, 1997, between American
States Financial Corporation, SAFECO Corporation, and ASFC
Acquisition Co.
3.2 (1) Bylaws of American States Financial Corporation, as amended April
10, 1997 to amend Section I of Article I and June 6, 1997 to add
Section 13 of Article I.
10.9 (2) Amendment to Section 4.1 of American States Financial Corporation
Employees' Savings and Profit-Sharing Plan.
10.27 Voting, Support and Indemnification Agreement, dated June 6, 1997,
between Lincoln National Corporation and SAFECO Corporation.
10.28 (1) Incentive Letter Agreement, dated April 1, 1997, between American
States Financial Corporation and R. A. Anker.
10.28 (2) Incentive Letter Agreement, dated April 1, 1997, between American
States Financial Corporation and J. R. Coffin.
10.28 (3) Incentive Letter Agreement, dated April 1, 1997, between American
States Financial Corporation and J. T. Gallogly.
10.28 (4) Incentive Letter Agreement, dated April 1, 1997, between American
States Financial Corporation and D. N. Hafling.
10.28 (5) Incentive Letter Agreement, dated April 1, 1997, between American
States Financial Corporation and T. R. Kaehr.
10.28 (6) Incentive Letter Agreement, dated April 1, 1997, between American
States Financial Corporation and W. J. Lawson.
10.28 (7) Incentive Letter Agreement, dated April 1, 1997, between American
States Financial Corporation and T. M. Ober.
10.28 (8) Incentive Letter Agreement, dated April 1, 1997, between American
States Financial Corporation and H. R. Simpson.
10.28 (9) Incentive Letter Agreement, dated April 1, 1997, between American
States Financial Corporation and T. R. Stephenson.
10.28 (10) Incentive Letter Agreement, dated April 1, 1997, between American
States Financial Corporation and J. E. Stoddard-Smith.
21
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits (Continued)
10.28 (11) Incentive Letter Agreement, dated April 1, 1997, between American
States Financial Corporation and R. K. Young.
11 Computations of Earnings Per Share.
27 Financial Data Schedule.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
b) Reports on Form 8-K.
The Registrant filed a Form 8K Current Report, dated June 6, 1997, pertaining
to the Registrant entering into an Agreement and Plan of Merger with SAFECO
Corporation.
22
23
AMERICAN STATES FINANCIAL CORPORATION
Exhibit Index for the Report on Form 10-Q
for the Quarter Ended June 30, 1997
Exhibit Page
Number Description Number
------- ----------- ------
2 Agreement and Plan of Merger, dated June 6, 1997,
between American States Financial Corporation, SAFECO
Corporation, and ASFC Acquisition Co. *
3.2 (1) Bylaws of American States Financial Corporation, as
amended April 10, 1997 to amend Section I of Article I
and June 6, 1997 to add Section 13 of Article I. 26
10.9 (2) Amendment to Section 4.1 of American States Financial
Corporation Employees' Savings and Profit-Sharing Plan. 39
10.27 Voting, Support and Indemnification Agreement,
dated June 6, 1997, between Lincoln National Corporation
and SAFECO Corporation. *
10.28 (1) Incentive Letter Agreement, dated April 1, 1997, between
American States Financial Corporation and R. A. Anker. 40
10.28 (2) Incentive Letter Agreement, dated April 1, 1997, between
American States Financial Corporation and J. R. Coffin. 47
10.28 (3) Incentive Letter Agreement, dated April 1, 1997, between
American States Financial Corporation and J. T. Gallogly. 57
10.28 (4) Incentive Letter Agreement, dated April 1, 1997, between
American States Financial Corporation and D. N. Hafling. 67
10.28 (5) Incentive Letter Agreement, dated April 1, 1997, between
American States Financial Corporation and T. R. Kaehr. 77
10.28 (6) Incentive Letter Agreement, dated April 1, 1997, between
American States Financial Corporation and W. J. Lawson. 86
10.28 (7) Incentive Letter Agreement, dated April 1, 1997, between
American States Financial Corporation and T. M. Ober. 96
10.28 (8) Incentive Letter Agreement, dated April 1, 1997, between
American States Financial Corporation and H. R. Simpson. 106
10.28 (9) Incentive Letter Agreement, dated April 1, 1997, between
American States Financial Corporation and T. R. Stephenson. 116
10.28 (10) Incentive Letter Agreement, dated April 1, 1997, between
American States Financial Corporation and
J. E. Stoddard-Smith. 126
* Incorporated by Reference to certain portions of the Registrant's Form 8-K,
dated June 6, 1997.
23
24
Exhibit Page
Number Description Number
------ ----------- ------
10.28 (11) Incentive Letter Agreement, dated April 1, 1997, between
American States Financial Corporation and R. K. Young. 136
11 Computations of Earnings Per Share. 146
27 Financial Data Schedule. 147
24
25
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 13, 1997
----------------
25