SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
September 30, 1994 No. 1-7361
AMERICAN FINANCIAL CORPORATION
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0624874
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of November 1, 1994, there were 18,971,217 shares of the Registrant's
Common Stock outstanding, all of which were privately owned.
Page 1 of 17
AMERICAN FINANCIAL CORPORATION 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
September 30, December 31,
1994 1993
Assets
Cash and short-term investments $ 172,803 $ 167,950
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $4,345,000 and $3,959,400) 4,547,247 3,788,732
Available for sale - at market
(amortized cost - $1,863,583 and $2,216,328) 1,826,183 2,349,528
Other stocks - principally at market
(cost - $140,938 and $207,056) 216,738 339,156
Investment in investee corporations 850,945 899,800
Loans receivable 642,985 630,932
Real estate and other investments 153,768 139,319
8,237,866 8,147,467
Recoverables from reinsurers and prepaid
reinsurance premiums 913,939 756,060
Trade receivables 373,033 298,240
Other receivables 214,453 213,507
Prepaid expenses, deferred charges and other assets 382,464 320,299
Cost in excess of net assets acquired 174,398 173,965
$10,468,956 $10,077,488
Liabilities and Capital
Insurance claims and reserves $ 3,720,393 $ 3,422,657
Annuity policyholders' funds accumulated 4,489,712 4,256,674
Long-term debt:
Parent company 492,837 571,874
Subsidiaries 587,865 482,132
Accounts payable, accrued expenses and other
liabilities 593,813 648,462
Minority interest 107,172 109,219
9,991,792 9,491,018
Capital subject to mandatory redemption 43,136 49,232
Preferred Stock (redemption value - $278,719
and $278,889) 168,428 168,588
Common Stock without par value 904 904
Retained earnings 236,296 210,846
Net unrealized gain on marketable securities,
net of deferred income taxes 28,400 156,900
$10,468,956 $10,077,488
2
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
Three months ended Nine months ended
September 30, September 30,
1994 1993 1994 1993
Income:
Property and casualty insurance premiums $361,728 $326,115 $1,013,591 $1,173,991
Investment income 149,449 136,191 434,133 453,213
Realized gains on sales of securities 19,961 17,681 43,104 58,654
Equity in net earnings (losses) of
investee corporations (21,066) 23,068 (8,844) 76,314
Gains on sales of investee corporations - 28,313 1,694 80,367
Sales of other products and services - - - 152,100
Other income 27,408 24,371 85,453 142,817
537,480 555,739 1,569,131 2,137,456
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 253,201 230,679 710,578 833,451
Commissions and other underwriting
expenses 104,395 104,805 311,144 361,307
Benefits to annuity policyholders 61,277 57,015 180,701 173,662
Interest on borrowed money 28,285 33,629 87,141 124,503
Cost of sales - - - 134,900
Other operating and general expenses 74,885 45,948 197,091 298,204
522,043 472,076 1,486,655 1,926,027
Earnings before income taxes and
extraordinary items 15,437 83,663 82,476 211,429
Provision for income taxes 7,991 8,444 25,078 29,440
Earnings before extraordinary items 7,446 75,219 57,398 181,989
Extraordinary items - loss on prepayment
of debt (501) (4,559) (16,938) (4,559)
Net Earnings $ 6,945 $ 70,660 $ 40,460 $ 177,430
3
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Nine months ended September 30,
1994 1993
Operating Activities:
Net earnings $ 40,460 $ 177,430
Adjustments:
Extraordinary losses from retirement of debt 16,938 4,559
Depreciation and amortization 16,178 29,206
Benefits to annuity policyholders 180,701 173,662
Equity in net losses (earnings) of
investee corporations 8,844 (76,314)
Changes in reserves on assets 7,482 5,156
Realized gains on investing activities (52,471) (140,884)
Increase in reinsurance and other receivables (252,345) (296,084)
Increase in prepaid expenses, deferred charges
and other assets (62,368) (96,089)
Increase in insurance claims and reserves 300,359 309,935
Increase (decrease) in other liabilities 55,943 (21,418)
Increase in minority interest 5,456 36,221
Dividends from investees 15,753 20,326
Other, net (1,956) (19,188)
278,974 106,518
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,296,238) (2,288,747)
Equity securities (2,574) (15,328)
Investees and subsidiaries (23,852) (24,484)
Real estate, property and equipment (18,988) (36,562)
Maturities and redemptions of fixed maturity
investments 310,472 575,088
Sales of:
Fixed maturity investments 543,939 1,091,925
Equity securities 111,522 149,113
Investee and subsidiaries 27,621 150,591
Real estate, property and equipment 2,619 64,402
Cash and short-term investments of former subsidiary - (308,725)
Decrease in other investments 11,441 2,612
Other (12,536) (9,579)
(346,574) (649,694)
Financing Activities:
Annuity receipts 313,077 294,986
Annuity benefits and withdrawals (244,175) (238,288)
Additional long-term borrowings 198,271 330,912
Reductions of long-term debt (173,354) (482,711)
Repurchases of capital stock (4,466) (2,542)
Cash dividends paid (16,900) (15,193)
72,453 (112,836)
Net Increase (Decrease) in Cash and Short-term Investments 4,853 (656,012)
Cash and short-term investments at beginning of period 167,950 837,429
Cash and short-term investments at end of period $ 172,803 $ 181,417
4
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting Policies
Basis of Presentation The accompanying consolidated financial statements
for American Financial Corporation ("AFC") and subsidiaries are unaudited,
but management believes that all adjustments (consisting only of normal
recurring accruals unless otherwise disclosed herein) necessary for fair
presentation have been made. The results of operations for interim
periods are not necessarily indicative of results to be expected for the
year. The financial statements have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information and
footnotes necessary to be in conformity with generally accepted accounting
principles.
Changes in ownership levels of subsidiaries and investees have resulted in
certain differences in the financial statements and have affected
comparability between years. Certain reclassifications have been made to
prior years to conform to the current year's presentation. All
significant intercompany balances and transactions have been eliminated.
All acquisitions have been treated as purchases. The results of
operations of companies since their formation or acquisition are included
in the consolidated financial statements.
AFC's ownership of subsidiaries and significant investees with publicly
traded shares was as follows:
September 30, December 31,
1994 1993 1992
American Annuity Group, Inc. ("AAG") 80% 80% 82%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Premier Underwriters, Inc. 40% 41% 51%
(formerly The Penn Central Corporation)
Chiquita Brands International, Inc. 46% 46% 46%
Citicasters Inc. (formerly Great American 32% 20% 40%
Communications Company - "GACC")
General Cable Corporation (a) 45% 45%
Spelling Entertainment Group Inc. ("Spelling") - (b) 48%
<FN>
(a) Sold in June 1994.
(b) Sold in March 1993.
Investments AFC implemented Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," beginning December 31, 1993. This standard requires (i) debt
securities be classified as "held to maturity" and reported at amortized
cost if AFC has the positive intent and ability to hold them to maturity,
(ii) debt and equity securities be classified as "trading" and reported at
fair value, with unrealized gains and losses included in earnings, if they
are bought and held principally for selling in the near term and (iii)
debt and equity securities not classified as held to maturity or trading
be classified as "available for sale" and reported at fair value, with
unrealized gains and losses reported as a separate component of
shareholders' equity. Only in certain limited circumstances, such as
significant issuer credit deterioration or if required by insurance or
other regulators, may a company change its intent to hold a certain
security to maturity without calling into question its intent to hold
other debt securities to maturity in the future.
5
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Premiums and discounts on collateralized mortgage obligations are
amortized over their expected average lives using the interest method.
Gains or losses on sales of securities are recognized at the time of
disposition with the amount of gain or loss determined on the specific
identification basis. When a decline in the value of a specific
investment is considered to be other than temporary, a provision for
impairment is charged to earnings and the carrying value of that
investment is reduced.
Investment in Investee Corporations Investments in securities of 20%- to
50%-owned companies are carried at cost, adjusted for AFC's proportionate
share of their undistributed earnings or losses. Investments in less than
20%-owned companies are accounted for by the equity method when, in the
opinion of management, AFC can exercise significant influence over
operating and financial policies of the investee.
Due to GACC's financial difficulties, AFC transferred all GACC securities
and loans to the investee account and reduced the carrying value of that
investment to estimated net realizable value ($35 million) at the end of
1992. AFC resumed equity accounting for its investment following GACC's
reorganization at the end of 1993.
Cost in Excess of Net Assets Acquired The excess of cost of subsidiaries
and investees (purchased subsequent to October 1970) over AFC's equity in
the underlying net assets ("goodwill") is being amortized over 40 years.
The excess of AFC's equity in the net assets of other subsidiaries and
investees over its cost of acquiring these companies ("negative goodwill")
has been allocated to AFC's basis in these companies' fixed assets,
goodwill and other long-term assets and is amortized on a 10- to 40-year
basis.
Insurance Claims and Reserves Insurance claims and reserves include
unpaid losses and loss adjustment expenses in addition to unearned
insurance premiums. As discussed under "Reinsurance" below, amounts have
not been reduced for reinsurance recoverable.
The net liabilities stated for unpaid claims and for expenses of
investigation and adjustment of unpaid claims are based upon (a) the
accumulation of case estimates for losses reported prior to the close of
the accounting period on the direct business written; (b) estimates
received from ceding reinsurers and insurance pools and associations; (c)
estimates of unreported losses based on past experience and (d) estimates
based on experience of expenses for investigating and adjusting claims.
These liabilities are subject to the impact
of changes in claim amounts and frequency and other factors. In spite of
the variability inherent in such estimates, management believes that the
liabilities for unpaid losses and loss adjustment expenses are adequate.
Changes in estimates of the liabilities for losses and loss adjustment
expenses are reflected in the Statement of Earnings in the period in which
determined.
Unearned insurance premiums represent that portion of premiums written
which is applicable to the unexpired terms of policies in force, generally
computed by the application of daily pro rata fractions. On reinsurance
assumed from other insurance companies or written through various
underwriting organizations, unearned premiums are based on reports
received from such companies and organizations.
6
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Policy acquisition costs (principally commissions, premium taxes and other
underwriting expenses) related to the production of new business are
deferred and included in "Prepaid expenses, deferred charges and other
assets". For the property and casualty companies, the deferral of
acquisition costs is limited based upon their recoverability without any
consideration for anticipated investment income. Deferred policy
acquisition costs ("DPAC") are charged against income ratably over the
term of the related policies. For the annuity company, DPAC is amortized,
with interest, in relation to the present value of expected gross profits
on the policies.
Reinsurance In the normal course of business, AFC's insurance
subsidiaries cede reinsurance to other companies to diversify risk and
limit maximum loss arising from large claims. To the extent that any
reinsuring companies are unable to meet obligations under the agreements
covering reinsurance ceded, AFC's insurance subsidiaries would remain
liable. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsurance
policies. AFC insurance subsidiaries report as assets (a) the estimated
reinsurance recoverable on unpaid losses, including an estimate for losses
incurred but not reported, and (b) amounts paid to reinsurers applicable
to the unexpired terms of policies in force. AFC insurance subsidiaries
also assume reinsurance from other companies. Income on reinsurance
assumed is recognized based on reports received from ceding reinsurers.
Annuity Policyholders' Funds Accumulated Annuity premium deposits and
benefit payments are generally recorded as increases or decreases in
"annuity policyholders' funds accumulated" rather than as revenue and
expense. Increases in this liability for interest credited are charged to
expense and decreases for surrender charges are credited to other income.
Statement of Cash Flows For cash flow purposes, "investing activities"
are defined as making and collecting loans and acquiring and disposing of
debt or equity instruments and property and equipment. "Financing
activities" include obtaining resources from owners and providing them
with a return on their investments, borrowing money and repaying amounts
borrowed. Annuity receipts, benefits and withdrawals are also reflected
as financing activities. All other activities are considered "operating".
Short-term investments having original maturities of three months or less
when purchased are considered to be cash equivalents for purposes of the
financial statements.
Income Taxes AFC files consolidated federal income tax returns which
include all 80%-owned U.S. subsidiaries. Deferred income taxes are
calculated using the liability method. Under this method, deferred income
tax assets and liabilities are determined based on differences between
financial reporting and tax bases and are measured using enacted tax
rates. Deferred tax assets are recognized if it is more likely than not
that a benefit will be realized.
Benefit Plans AFC's Employee Stock Ownership Retirement Plan ("ESORP") is
a noncontributory, trusteed plan which invests in securities of AFC and
affiliates for the benefit of the employees of AFC and certain of its
subsidiaries. The ESORP covers all employees of participating companies
who are qualified as to age and length of service. Contributions are
discretionary by the directors of participating companies and are charged
against earnings in the year for which they are declared.
7
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Under AFC's Book Value Incentive Plan, units may be granted at initial
values between 80% and 120% of "book value" to key employees. Units may
be exercised at any time, to the extent vested. Payments are made to the
holder 50% in cash and the remainder in installments over a ten-year
period with an assumed interest factor of 12% per annum. "Book value" is
determined in accordance with generally accepted accounting principles
except that all equity securities (including investees and subsidiaries
with publicly traded shares) are reflected at market value. The value of
the units is the excess of the current book value of a share of AFC Common
Stock, as defined, over the initial value of the units at the date of
grant. This value is being accrued over the vesting period (five years).
AFC and many of its subsidiaries provide health care and life insurance
benefits to eligible retirees. The projected future cost of providing
these benefits is expensed over the period the employees qualify for such
benefits.
Effective January 1, 1994, AFC implemented SFAS No. 112, "Employers'
Accounting for Postemployment Benefits" which covers benefits provided to
former or inactive employees (primarily those on disability) who were not
deemed retired under other company plans. This standard requires
companies to accrue the projected future cost of providing postemployment
benefits instead of recognizing an expense for these benefits when paid.
The implementation of SFAS No. 112 did not have a material effect on AFC's
financial position or results of operations.
Debt Discount Debt discount and expenses are amortized over the lives of
respective borrowings, generally on the interest method. Unamortized
balances are charged off in the event of early retirement of the related
debt.
B. Sales of Investees
General Cable In June 1994, AFC sold its investment in General Cable
common stock to an unaffiliated company for $27.6 million in cash. AFC
realized a $1.7 million pretax gain on the sale (excluding its share of
American Premier's loss on its sale of General Cable notes).
American Premier In August 1993, AFEI, whose assets consisted primarily
of investments in American Premier, General Cable and AAG, sold
4.5 million shares of American Premier common stock in a secondary public
offering. AFEI used the net proceeds of approximately $151 million to
retire most of its debt. AFC recognized a pretax gain of $28 million,
before minority interest, on the sale, including recognition of a
portion of previously deferred gains related to sales of assets to
American Premier from AFC subsidiaries.
Spelling In March 1993, AFC sold its common stock investment in Spelling
to Blockbuster Entertainment Corporation in exchange for 7.6 million
shares of Blockbuster common stock and warrants to purchase an additional
two million Blockbuster shares at $25 per share. AFC realized a
$52 million pretax gain on the sale.
8
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
C. Segments of Operations Through subsidiaries, AFC is engaged in several
financial businesses, including property and casualty insurance, annuities
and portfolio investing. AFC also owns significant portions of the voting
equity securities of certain companies (investee corporations - see Note
D). The following table (in thousands) shows AFC's revenues by
significant business segment. Intersegment transactions are not
significant.
Nine months ended September 30,
Revenues (a) 1994 1993
Property and casualty insurance:
Underwriting $1,013,591 $1,173,991
Investment and other income 245,146 332,351
1,258,737 1,506,342
Annuities (b) 283,244 289,565
Other 35,994 265,235
1,577,975 2,061,142
Equity in net earnings (losses)
of investee corporations (8,844) 76,314
$1,569,131 $2,137,456
<FN>
(a) See Notes A and B for a discussion of certain sales of subsidiaries and
investees affecting the comparability of revenues in the table above.
(b) Represents primarily investment income and realized gains.
D. Investee Corporations Investment in investee corporations represents
AFC's ownership of securities of certain companies. All of the companies
named in the following table are subject to the rules and regulations of
the SEC. Market value of the investments was approximately $970 million
and $940 million at September 30, 1994 and December 31, 1993,
respectively. AFC's investment (and common stock ownership percentage) in
these investees was as follows (dollars in thousands):
Investment (Ownership %)
September 30, December 31,
1994 1993
American Premier (a) $529,330 (40%) $559,116 (41%)
Chiquita 254,931 (46%) 277,854 (46%)
Citicasters (a) 66,684 (32%) 36,892 (20%)
General Cable (b) 25,938 (45%)
$850,945 $899,800
<FN>
(a) In March 1994, American Premier changed its name from The Penn Central
Corporation to reflect its identity as a property and casualty insurance company.
In May 1994, Citicasters changed its name from Great American Communications
Company to reflect its identity as a pure broadcaster focused on metropolitan
markets.
(b) Sold in June 1994.
In June 1994, AFEI purchased 1.2 million shares of Citicasters common
stock for $23.9 million in cash.
9
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summarized financial information for AFC's major investees follows (in
millions):
Nine months ended September 30,
American Premier 1994 1993
Revenues $1,304 $1,241
Income (Loss) from Continuing Operations (14) 192
Discontinued Operations (1) (1)
Net Income (Loss) (15) 191
In connection with the acquisition of General Cable in June 1994 by an
unaffiliated company, American Premier sold long-term notes receivable
from General Cable to that company and recorded a $76 million pretax loss.
American Premier's results for 1993 included a tax benefit of $125 million
attributable to an increase in American Premier's net deferred tax asset.
Nine months ended September 30,
Chiquita 1994 1993
Net Sales $1,879 $1,966
Operating Income 106 123
Income (Loss) before Extraordinary Item (14) 9
Extraordinary Item (23) -
Net Income (Loss) (37) 9
Chiquita's 1994 results included charges and losses aggregating
$57 million recorded in the third quarter resulting from the shutdown of
non-productive banana farms in Honduras and a scaling back of Japanese
operations.
E. Long-Term Debt Long-term debt consisted of the following (in thousands):
September 30, December 31,
1994 1993
American Financial Corporation (Parent Company):
9-3/4% Debentures due 2004 $203,759 $ -
12% Debentures due 1999
(including Series A and B) 120,463 189,099
10% Debentures due 1999
(including Series A) 89,620 150,017
12-1/4% Debentures due 2003 51,556 128,294
13-1/2% Debentures due 2004
(including Series A) - 73,546
Other 27,439 30,918
$492,837 $571,874
Subsidiaries:
Great American Holding Corporation $334,117 $198,931
American Annuity Group, Inc. 182,435 225,862
American Financial Enterprises, Inc. 12,000 15,000
Other 59,313 42,339
$587,865 $482,132
In April 1994, AFC completed an offer to issue 9-3/4% Debentures due
April 20, 2004 in exchange for its publicly traded debentures. In the
exchange offer, AFC issued approximately $203.8 million of the 9-3/4%
Debentures. A cash premium of
10
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
$6.5 million on the debentures exchanged is included in extraordinary
items in the Statement of Earnings. AFC also redeemed at par all 13-1/2%
Debentures not tendered in the exchange for approximately $63.2 million in
cash.
At September 30, 1994, sinking fund and other scheduled principal payments
on debt for the balance of 1994 and the subsequent five years were as
follows (in thousands):
Parent
Company Subsidiaries Total
1994 $ 2,970 $ 1,129 $ 4,099
1995 261 61,743 62,004
1996 261 1,500 1,761
1997 5,695 40,402 46,097
1998 261 193,063 193,324
1999 225,827 28,645 254,472
AFC may, at its option, apply debentures otherwise purchased in excess of
scheduled payments to satisfy any sinking fund requirement. The scheduled
principal payments shown above assume that debentures purchased are
applied to the earliest scheduled retirements.
F. Capital Subject to Mandatory Redemption Capital subject to mandatory
redemption includes AFC's Mandatory Redeemable Preferred Stock and capital
subject to a put option.
Mandatory Redeemable Preferred Stock The outstanding shares of Mandatory
Redeemable Preferred Stock are nonvoting, cumulative and consisted of the
following:
September 30, December 31,
1994 1993
Series E - $10.50 par value per share; annual
dividends per share $1. 504,711 504,711
Series I - $28.00 liquidation value per share;
annual dividends per share $2.66. - 150,212
In February 1994, AFC redeemed the outstanding shares of Series I
Preferred Stock. Approximately 45% of the Series E Preferred Stock is
scheduled to be retired in December 1994; the balance is to be retired in
December 1995.
Capital Subject to Put Option Under an agreement entered into in 1983,
certain members of the Lindner family (the "Group") who, in the aggregate,
owned 1,848,235 shares of AFC Common Stock, were granted options to
purchase an additional 1,225,000 shares. The options, which expire two
years after the death of Robert D. Lindner, are exercisable at $6.65 per
share plus $.40 per share per year from April 1983. Holders have the
right to "put" to AFC any shares of AFC Common Stock or options at any
time at a price equal to AFC's book value per share, adjusted to reflect
all equity securities (including investees and subsidiaries with publicly
traded shares) at market prices. The purchase price is to be paid one-
third in cash and the balance in a five-year installment note bearing
interest at a rate equal to the five-year U.S. Treasury note rate plus 3%.
AFC has the right to "call" any AFC shares owned by the Group after
11
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Robert D. Lindner's death at the same price as described under the "put"
(but not less than $6.65 per share plus 10% compounded annually from April
1983). Further, AFC has a right of first refusal on shares owned by
members of the Group.
At September 30, 1994, the Group owned 1,533,767 shares of AFC Common
Stock and options to purchase an additional 762,500 shares. The aggregate
purchase price for all shares covered by the put is included in "capital
subject to mandatory redemption" and amounted to $38 million and
$40 million at September 30, 1994 and December 31, 1993, respectively.
Changes in the aggregate purchase price are charged or credited directly
to retained earnings without affecting earnings.
G. Other Preferred Stock The outstanding shares of other preferred stock are
nonvoting, cumulative and consisted of the following:
September 30, December 31,
1994 1993
Series F - $20.00 liquidation value per share;
annual dividends per share $1.80; 10% may
be retired annually at AFC's option between
1994 and 1996. 13,744,754 13,753,254
Series G - $10.50 liquidation value per share;
annual dividends per share $1.05; may be
retired at AFC's option. 364,158 364,158
In the second quarter of 1994, AFC purchased 8,500 shares of Series F
Preferred Stock from a subsidiary's profit sharing plan for $159,000.
H. Common Stock At September 30, 1994, Carl H. Lindner and certain members
of the Lindner family owned all of the outstanding Common Stock of AFC.
I. Extraordinary Items Extraordinary items consisted of the following (in
thousands):
1994 1993
Premium paid on AFC debentures exchanged $ 6,454 $ -
Loss on subsidiary's prepayment of debt
(net of minority interest of $216 and $681) 1,448 4,559
Share of loss on investee's prepayment of debt 9,036 -
$16,938 $4,559
J. Cash Flows - Fixed Maturity Investments "Investing activities" related to
fixed maturity investments in AFC's 1994 Statement of Cash Flows consisted
of the following (in thousands):
Held to Available
Maturity For Sale Total
Purchases $897,460 $398,778 $1,296,238
Maturities and paydowns 142,561 167,911 310,472
Sales 7,781 536,158 543,939
K. Pending Legal Proceedings Counsel has advised AFC that there is little
likelihood of any substantial liability being incurred from any litigation
pending against AFC and subsidiaries.
12
AMERICAN FINANCIAL CORPORATION 10-Q
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
AFC is organized as a holding company with almost all of its operations being
conducted by subsidiaries and investees. The parent corporation, however, has
continuing expenditures for administrative expenses and corporate services
and, most importantly, for the payment of principal and interest on borrowings
and redemptions of and dividends on AFC Preferred Stock. Therefore, certain
analyses are best done on a parent only basis while others are best done on a
total enterprise basis. In addition, since many of its businesses are
financial in nature, AFC does not prepare its consolidated financial
statements using a current-noncurrent format. Consequently, certain
traditional ratios and financial analysis tests are not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
Ratios The ratio of AFC's (parent only) long-term debt to equity (excluding
Capital Subject to Mandatory Redemption) was 1.14 at September 30, 1994,
compared to 1.06 at December 31, 1993. Adding AFC's Capital Subject to
Mandatory Redemption to its debt changes these ratios to 1.23 and 1.16;
whereas, adding it to equity changes the ratios to 1.03 and .98 at those same
dates. AFC's ratio of earnings to fixed charges on a total enterprise basis
was 2.16 for the first nine months of 1994 compared to 2.62 for the entire
year of 1993; ratios of earnings to fixed charges and preferred dividends were
1.79 and 2.26 for the same periods.
Sources of Funds A wholly-owned subsidiary, Great American Holding
Corporation ("GAHC"), has a revolving credit agreement with several banks
under which it can borrow up to $300 million. The credit line converts to a
four-year term loan in December 1996 with scheduled principal payments to
begin in March 1997. Borrowings under the credit line are made by GAHC and
are advanced to AFC. The line is guaranteed by AFC and secured by 50% of the
stock of Great American Insurance Company ("GAI"). GAHC had no outstanding
borrowings under the agreement at December 31, 1993 and $135 million borrowed
at September 30, 1994.
Investments Significant portions of equity and, to a lesser extent, fixed
income investments are concentrated in a relatively limited number of major
positions. This approach allows management to more closely monitor these
companies and the industries in which they operate. Some of the investments,
because of their size, may not be as readily marketable as the typical small
investment position. Alternatively, a large equity position may be attractive
to persons seeking to control or influence the policies of a company. While
management believes this investment philosophy will produce higher overall
returns, such concentrations subject the portfolio to greater risk in the
event one of the companies invested in becomes financially distressed.
Approximately 95% of the bonds and redeemable preferred stocks held by AFC
were rated "investment grade" (credit rating of AAA to BBB) at September 30,
1994. Investment grade securities generally bear lower yields and lower
degrees of risk than those that are unrated and non-investment grade.
The cost basis of investments other than investees was determined after
deducting cumulative provisions for impairment aggregating $45 million at
September 30, 1994, and $47 million at December 31, 1993.
13
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS
General Due to a decrease in ownership percentage, AFC ceased accounting for
American Premier as a subsidiary and began accounting for it as an investee on
April 1, 1993. As a result, current year income statement components are not
comparable to prior years and are not necessarily indicative of future years.
Pretax earnings in the first nine months of 1994 were $129 million less than
in the comparable 1993 period, primarily due to (i) AFC's share ($54 million)
of charges recorded by investees in 1994 (see "Investee Corporations" below),
(ii) GAI's $26 million charge in 1994 relating to a potential rate rollback
liability in California, (iii) a $52 million pretax gain on the sale of
Spelling in 1993, (iv) AFC's share ($49 million) of a tax benefit recorded by
American Premier in the second and third quarters of 1993 and (v) a
$28 million pretax gain resulting from AFEI's sale of 4.5 million shares of
American Premier in 1993. These items were partially offset by a reduction in
interest expense.
Property and Casualty Insurance Underwriting profitability is measured by the
combined ratio which is a sum of the ratio of underwriting expenses to
premiums written and the ratio of losses and loss adjustment expenses to
premiums earned. When the combined ratio is under 100%, underwriting results
are generally considered profitable; when the ratio is over 100%, underwriting
results are generally considered unprofitable. The combined ratio does not
reflect investment income, other income or federal income taxes.
The combined underwriting ratio (statutory basis, after policyholders'
dividends) of GAI and its property and casualty insurance subsidiaries was
101.9% for the first nine months of 1994 compared to 103.8% for the same
period in 1993 and 103.9% for the entire year of 1993. The 1994 ratio does
not reflect the third quarter charge for California's Proposition 103.
During the third quarter of 1994, the California Supreme Court upheld
Proposition 103, an insurance reform measure passed by California voters in
1988. In addition to increasing rate regulation, Proposition 103 gives the
California insurance commissioner power to mandate rate rollbacks for most
lines of property and casualty insurance. Insurers will petition the United
States Supreme Court for review; however, it is uncertain whether the case
will be accepted. Although the ultimate outcome of the rate rollback
regulations cannot be determined, GAI recorded a charge of $26 million
(included in "Other Operating and General Expenses")in the third quarter of
1994 in response to the California court decision.
Property and casualty insurance premiums were $160 million less than in the
first nine months of 1993, reflecting the deconsolidation of American Premier
beginning in the second quarter of 1993. Insurance premiums for the remainder
of AFC's insurance group increased $94 million (10%) and insurance expenses
increased $71 million (7%). The increase in premiums was due to an increase
in sales of specialized niche products and workers' compensation insurance and
a decrease in the percentage of business ceded to reinsurers.
Investment Income Excluding American Premier, investment income increased
$20 million (5%) from 1993 due to an increase in investments held.
14
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Realized Gains Realized capital gains have been an important part of AFC's
return on its investments in marketable securities. Individual securities are
sold creating gains and losses from time to time as investment strategies
change or as market opportunities appear to present optimal conditions.
Investee Corporations Equity in net earnings of investee corporations
(companies in which AFC owns a significant portion of the voting stock)
represents AFC's proportionate share of the investees' earnings and losses.
AFC's equity in net earnings (losses) of investee corporations in the first
nine months of 1994 includes its share ($28 million) of American Premier's
loss on the sale of General Cable notes and its share ($26 million) of charges
and losses recorded by Chiquita pertaining to the shutdown of banana farms in
Honduras and a scaling back of operations in Japan. Included in AFC's equity
in American Premier's earnings for the six months ended September 30, 1993,
was $49 million representing AFC's share of an American Premier tax benefit.
Gains on Sales of Investee Corporations The gain on sale of investee
corporation in 1994 represents a pretax gain on the sale of General Cable
common stock. The gains on sales of investees in 1993 include (i) a pretax
gain of $52 million in the first quarter on the sale of Spelling and (ii) a
pretax gain of $28 million in the third quarter on the public sale by AFEI of
4.5 million shares of American Premier common stock.
Sales of Other Products and Services Sales of other products and services in
1993 represent American Premier's revenues from systems and software
engineering services and the manufacture and supply of industrial products and
services.
Benefits to Annuity Policyholders Benefits to annuity policyholders increased
4% over those of the comparable nine month period in 1993. An increase in
average annuity policyholder funds accumulated has been partially offset by a
decrease in the average crediting rate on these funds. The average crediting
rate on funds held has decreased from 6.2% at December 31, 1992 to 5.3% at
December 31, 1993 and 5.4% at September 30, 1994. The rate at which interest
is credited on annuity policyholders' funds is subject to change based on
management's judgment of market conditions.
Interest on Borrowed Money The decrease in interest expense is due primarily
to the deconsolidation of American Premier, repayments of borrowings by AFC
and certain subsidiaries and the AFC debt exchange in 1994. Interest expense
included in AFC's Statement of Earnings was comprised of (in millions):
Nine months ended
September 30,
1994 1993
AFC Parent $43.7 $ 53.3
Great American Holding Company 17.2 17.8
Great American Insurance 9.3 10.4
American Premier - 17.2
American Annuity 16.3 15.3
American Financial Enterprises .5 9.6
Other Companies .1 .9
$87.1 $124.5
15
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Other Operating and General Expenses Included in operating and general
expenses in the first nine months of 1994 and 1993 are charges of $5.9 million
and $32.9 million, respectively, for minority interest. Also included are (i)
a charge of $26 million in 1994 for Proposition 103, (ii) a credit of
$9.1 million in 1994 for units outstanding under AFC's Book Value Incentive
Plan and (iii) a charge of $8 million in 1993 for the estimated costs of
moving AAG's annuity operations from Los Angeles to Cincinnati.
Income Taxes The 1993 provision for income tax includes a $15 million first
quarter benefit due to American Premier's revision of estimated future taxable
income likely to be generated during the company's tax loss carryforward
period.
New Accounting Standards Effective January 1, 1994, AFC implemented SFAS 112,
"Employers' Accounting for Postemployment Benefits"; the implementation of
this standard did not have a material adverse effect on AFC.
16
AMERICAN FINANCIAL CORPORATION 10-Q
PART II
OTHER INFORMATION
Items pertaining to Part II of this form have been omitted since they are
either inapplicable or not required.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, American
Financial Corporation has duly caused this Report to be signed on its behalf
by the undersigned duly authorized.
American Financial Corporation
November 14, 1994 BY:/s/ FRED J. RUNK
Fred J. Runk
Vice President and Treasurer
17