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
March 31, 1995 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 May 1, 1995, there were 53,000,000 shares of the Registrant's
Common Stock outstanding, all of which were owned by American Premier
Group, Inc. (At the Annual Meeting on June 6, 1995, shareholders of
American Premier Group, Inc. will vote on a proposal to change that
Company's name to American Financial Group, Inc.)
Page 1 of 15
AMERICAN FINANCIAL CORPORATION 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
March 31, December 31,
1995 1994
Assets
Cash and short-term investments $ 156,767 $ 171,335
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $4,623,200 and $4,336,700) 4,739,842 4,629,633
Available for sale - at market
(amortized cost - $2,023,414 and $1,938,853) 2,022,214 1,862,653
Other stocks - principally at market
(cost - $132,026 and $137,106) 190,526 208,706
Investment in investee corporations 857,462 832,637
Loans receivable 629,207 641,964
Real estate and other investments 162,353 154,262
8,601,604 8,329,855
Recoverables from reinsurers and prepaid
reinsurance premiums 923,447 902,063
Agents' balances and premiums receivable 348,661 363,156
Other receivables 200,173 197,119
Prepaid expenses, deferred charges and other assets 453,429 410,657
Cost in excess of net assets acquired 173,442 175,866
$10,857,523 $10,550,051
Liabilities and Capital
Unpaid losses and loss adjustment expenses $ 2,968,587 $ 2,916,985
Unearned premiums 844,161 824,691
Annuity policyholders' funds accumulated 4,706,267 4,618,108
Long-term debt:
Parent company 490,024 490,065
Subsidiaries 633,479 616,682
Accounts payable, accrued expenses and other liabilities 638,260 579,151
Minority interest 114,408 105,506
10,395,186 10,151,188
Mandatory Redeemable Preferred Stock 2,880 2,880
Preferred Stock (redemption value - $278,719) 168,484 168,484
Common Stock without par value 904 904
Retained earnings 252,769 223,095
Net unrealized gain on marketable securities,
net of deferred income taxes 37,300 3,500
$10,857,523 $10,550,051
2
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
Three months ended March 31,
1995 1994
Income:
Property and casualty insurance premiums $349,133 $313,049
Investment income 152,334 141,070
Realized gains on sales of securities 3,476 14,967
Equity in net earnings of investee corporations 22,901 21,694
Other income 25,348 32,867
553,192 523,647
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 243,643 231,017
Commissions and other underwriting expenses 119,611 105,668
Benefits to annuity policyholders 64,262 59,223
Interest charges on borrowed money 29,129 32,293
Other operating and general expenses 57,445 60,434
514,090 488,635
Earnings before income taxes and extraordinary items 39,102 35,012
Provision for income taxes 9,237 8,319
Earnings before extraordinary items 29,865 26,693
Extraordinary items, net of income taxes - (15,693)
Net Earnings $ 29,865 $ 11,000
3
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Three months ended March 31,
1995 1994
Operating Activities:
Net earnings $ 29,865 $ 11,000
Adjustments:
Extraordinary losses from retirement of debt - 15,693
Depreciation and amortization 7,723 4,505
Benefits to annuity policyholders 64,262 59,223
Equity in net earnings of investee corporations (22,901) (21,694)
Changes in reserves on assets (1,154) 3,831
Realized gains on investing activities (3,568) (21,551)
Decrease (increase) in reinsurance and
other receivables 8,641 (7,082)
Increase in prepaid expenses, deferred charges
and other assets (49,619) (49,818)
Increase in insurance claims and reserves 71,072 94,060
Decrease in other liabilities (13,960) (74,251)
Increase in minority interest 3,102 8,585
Dividends from investees 5,815 5,250
Other, net (1,197) (1,243)
98,081 26,508
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (254,863) (522,111)
Equity securities - (1,269)
Real estate, property and equipment (5,331) (7,936)
Maturities and redemptions of fixed maturity
investments 49,019 100,553
Sales of:
Fixed maturity investments 54,732 292,081
Equity securities 9,007 48,932
Real estate, property and equipment 2,079 491
Decrease (increase) in other investments (3,574) 9,853
(148,931) (79,406)
Financing Activities:
Annuity receipts 119,420 94,906
Annuity surrenders, benefits and withdrawals (99,374) (86,400)
Additional long-term borrowings 29,750 18,077
Reductions of long-term debt (13,176) (8,586)
Repurchases of capital stock (147) (4,294)
Cash dividends paid (191) (4,086)
36,282 9,617
Net Decrease in Cash and Short-term Investments (14,568) (43,281)
Cash and short-term investments at beginning
of period 171,335 167,950
Cash and short-term investments at end
of period $156,767 $124,669
4
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Merger On April 3, 1995, American Financial Corporation
("AFC") merged with a newly formed subsidiary of American
Premier Group, Inc. ("New American Premier"), another new
company formed to own 100% of the common stock of both AFC and
American Premier Underwriters, Inc. ("American Premier"). In
the transaction, Carl H. Lindner and members of his family, who
owned 100% of the Common Stock of AFC, exchanged their AFC
Common Stock for approximately 55% of New American Premier
voting common stock. Former shareholders of American Premier,
including AFC and its subsidiaries, received shares of New
American Premier stock on a one-for-one basis. No gain or loss
will be recorded on the exchange of shares.
AFC will continue to be a separate SEC reporting company with
publicly traded debentures and preferred stock. Holders of AFC
Series F and G Preferred Stock were granted voting rights equal
to approximately 21% of the total voting power of AFC
shareholders immediately prior to the merger.
B. Accounting Policies
Basis of Presentation The accompanying consolidated financial
statements for American Financial Corporation and subsidiaries
are unaudited, but management believes that all adjustments
(consisting only of normal recurring accruals unless otherwise
disclosed herein) necessary for fair presentation have been
made. The results of operations for interim periods are not
necessarily indicative of results to be expected for the year.
The financial statements have been prepared in accordance with
the instructions to Form 10-Q and therefore do not include all
information and footnotes necessary to be in conformity with
generally accepted accounting principles.
Certain reclassifications have been made to prior 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:
March 31, December 31,
1995 1994 1993
American Annuity Group, Inc. ("AAG") 80% 80% 80%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Premier Underwriters, Inc. (a) 45% 42% 41%
Chiquita Brands International, Inc. 45% 46% 46%
Citicasters Inc. 38% 37% 20%
General Cable Corporation - (b) 45%
<FN>
(a) Exchanged for shares of New American Premier in April 1995.
(b) Sold in June 1994.
Investments Debt securities are classified as "held to
maturity" and reported at amortized cost if AFC has the
positive intent and ability to hold them to maturity. Debt and
equity securities are classified as (i) "trading" and reported
at fair value with unrealized gains and losses included in
earnings if the securities are bought and held principally for
selling in the near term and
5
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(ii) as "available for sale" and reported at fair value, with
unrealized gains or losses reported as a separate component of
shareholders' equity if the debt or equity securities are not
classified as held to maturity or trading. 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.
Premiums and discounts on mortgage-backed securities 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.
Short-term investments are carried at cost; loans receivable
are stated primarily at the aggregate unpaid balance.
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.
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 As discussed under "Reinsurance" below, unpaid
losses and loss adjustment expenses and unearned premiums have
not been reduced for reinsurance recoverable.
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's 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's insurance
subsidiaries also assume reinsurance from other companies.
Income on reinsurance assumed is recognized based on reports
received from ceding reinsurers.
6
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred Policy Acquisition Costs 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 terms 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.
Unpaid Losses and Loss Adjustment Expenses 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) esti-
mates 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.
Premium Recognition Premiums are earned over the terms of the
policies on a pro rata basis. Unearned premiums represent that
portion of premiums written which is applicable to the
unexpired terms of policies in force. 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.
Annuity Policyholders' Funds Accumulated Annuity receipts and
benefit payments are generally recorded as increases or
decreases in "annuity policyholders' funds accumulated" rather
than as revenue and expense. Increases in this liability for
interest credited are charged to expense and decreases for
surrender charges are credited to other income.
Income Taxes 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
AFC and many of its subsidiaries provide health care and life
insurance benefits to eligible retirees. AFC also provides
postemployment benefits to former or inactive employees
(primarily those on disability) who were not deemed retired
under other company plans. The projected future cost of
providing these benefits is expensed over the period the
employees qualify for such benefits.
In connection with the 1995 merger, full vesting was granted to
holders of units under AFC's Book Value Incentive Plan and the
plan was terminated. Cash payments, which were made in April
to holders of the units, were accrued at December 31, 1994.
Debt Discount Debt discount and expenses are being amortized
over the lives of respective borrowings, generally on the
interest method.
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.
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.
Three months ended March 31,
1995 1994
Revenues
Property and casualty insurance:
Underwriting $349,133 $313,049
Investment and other income 71,485 83,258
420,618 396,307
Annuities (*) 97,507 92,465
Other 12,166 13,181
530,291 501,953
Equity in net earnings of
investee corporations 22,901 21,694
$553,192 $523,647
<FN>
(*) Represents primarily investment income and realized gains.
8
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 $860 million and $890 million at
March 31, 1995 and December 31, 1994, respectively. AFC's
investment (and common stock ownership percentage) in these
investees was as follows (dollars in thousands):
Investment (Ownership %)
March 31, December 31,
1995 1994
American Premier $535,906 (45%) $525,927 (42%)
Chiquita 251,481 (45%) 237,015 (46%)
Citicasters 70,075 (38%) 69,695 (37%)
$857,462 $832,637
American Premier is a specialty property and casualty insurance
company. Chiquita is a leading international marketer,
processor and producer of quality food products. Citicasters
owns and operates radio and television stations.
As discussed in Note A, AFC received shares of New American
Premier in exchange for its American Premier stock on a one-
for-one basis in April 1995.
Summarized financial information for AFC's investees follows
(in millions):
Three months ended March 31,
American Premier 1995 1994
Revenues $433 $358
Net Earnings (Loss) 16 (56)
American Premier's 1994 results included a $75.8 million loss
on notes receivable from General Cable which American Premier
sold back to General Cable at a discount in June.
Three months ended March 31,
Chiquita 1995 1994
Net Sales $1,028 $1,056
Operating Income 80 82
Income before Extraordinary Item 38 36
Extraordinary Item - (23)
Net Income 38 13
Three months ended March 31,
Citicasters 1995 1994
Net Revenues $29 $48
Operating Income 5 7
Net Earnings (Loss) 1 (2)
In the third and fourth quarters of 1994, Citicasters sold four
network-affiliated television stations for $355 million in cash
and a warrant to purchase common stock of the purchaser. The
proceeds were used to reduce debt and repurchase shares of
common stock.
9
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Long-Term Debt Long-term debt consisted of the following (in
thousands):
March 31, December 31,
1995 1994
American Financial Corporation
(Parent Company):
9-3/4% Debentures due 2004 $203,759 $203,759
12% Debentures due 1999
(including Series A and B) 120,463 120,463
10% Debentures due 1999
(including Series A) 89,620 89,620
12-1/4% Debentures due 2003 51,556 51,556
Other 24,626 24,667
$490,024 $490,065
Subsidiaries:
Great American Holding Corporation $386,253 $359,185
American Annuity Group, Inc. 174,168 183,242
American Financial Enterprises, Inc. 15,300 16,000
Other 57,758 58,255
$633,479 $616,682
In furtherance of the previously announced plan to use American
Premier cash following the merger to retire debt, AFC (i)
repaid $187 million of borrowings under its bank credit
agreement in April 1995 and (ii) redeemed all of its
outstanding 12% Debentures and 12-1/4% Debentures in May 1995,
using funds borrowed under a new $675 million subordinated line
of credit with American Premier. Borrowings under the American
Premier credit line bear interest at
11-5/8% and convert to a four-year term loan in March 2005.
At March 31, 1995, sinking fund and other scheduled principal
payments on debt for the balance of 1995 and the subsequent
five years, adjusted to reflect the debt transactions in April
and May, were as follows (in thousands):
Parent
Company Subsidiaries Total
1995 $ - $ 61,069 $ 61,069
1996 - 1,600 1,600
1997 5,520 16,746 22,266
1998 - 175,114 175,114
1999 93,895 1,697 95,592
2000 - 6,856 6,856
Debentures purchased in excess of scheduled payments may be
applied to satisfy any sinking fund requirement. The scheduled
principal payments shown above assume that debentures purchased
are applied to the earliest scheduled retirements.
F. Mandatory Redeemable Preferred Stock At March 31, 1995 and
December 31, 1994, there were 274,242 shares of $10.50 par
value Series E Preferred Stock outstanding. These shares are
nonvoting, cumulative and are to be retired, at par, in
December 1995.
10
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. Other Preferred Stock Under provisions of both the Nonvoting
(55.8 million shares authorized, including the redeemable
issues) and Voting (3.5 million shares authorized, none
outstanding) Cumulative Preferred Stock, the Board of Directors
is authorized to divide the authorized stock into series and to
set specific terms and conditions of each series. In
connection with the merger discussed in Note A, in April 1995,
the aggregate number of shares authorized was reduced to
38.1 million and voting rights were granted to the Series F and
G shares. At March 31, 1995, the outstanding shares of other
preferred stock consisted of the following:
March 31, December 31,
1995 1994
Series F - $20.00 liquidation value per share;
annual dividends per share $1.80; 10% may
be retired annually at AFC's option in
1995 and 1996. 13,744,754 13,744,754
Series G - $10.50 liquidation value per share;
annual dividends per share $1.05; may be
retired at AFC's option. 364,158 364,158
H. Common Stock At March 31, 1995, Carl H. Lindner and certain
members of the Lindner family owned all of the outstanding
Common Stock of AFC. In connection with the April 1995 merger
discussed in Note A, AFC issued 762,500 common shares upon
exercise of stock options and increased the number of
authorized common shares to 53.5 million. Following the
merger, New American Premier owns 100% of the Common Stock.
I. Extraordinary Items Extraordinary items consisted of the
following (in thousands):
1994
Premium paid on AFC debentures retired in
exchange offer ($ 6,159)
Loss on subsidiary's prepayment of debt
(net of minority interest of $74) (498)
Share of loss on investee's prepayment of debt
(net of income tax benefit of $374) (9,036)
($15,693)
J. Cash Flows - Fixed Maturity Investments "Investing activities"
related to fixed maturity investments in AFC's Statement of
Cash Flows consisted of the following (in thousands):
Held to Available
1995 Maturity For Sale Total
Purchases $ 97,511 $157,352 $254,863
Maturities and paydowns 26,700 22,319 49,019
Sales - 54,732 54,732
1994
Purchases $373,379 $148,732 $522,111
Maturities and paydowns 51,480 49,073 100,553
Sales 7,781 284,300 292,081
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.
11
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 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
most 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.
MERGER
As discussed in Note A to the financial statements, on April 3, 1995,
AFC merged with a newly formed subsidiary of American Premier Group,
Inc., another new company formed to own both AFC and American Premier.
Following the merger, AFC borrowed funds from American Premier to retire
$187 million of its bank debt. In April 1995, AFC called an additional
$185 million of its publicly traded debt for redemption in May. AFC
financed this transaction with borrowings from American Premier (See
"Sources of Funds" below).
LIQUIDITY AND CAPITAL RESOURCES
Ratios The ratio of AFC's (parent only) long-term debt to equity
(excluding Mandatory Redeemable Preferred Stock) was 1.07 at March 31,
1995, compared to 1.24 at December 31, 1994. AFC's ratio of earnings to
fixed charges on a total enterprise basis was 1.84 for the first three
months of 1995 compared to 1.69 for the entire year of 1994; ratios of
earnings to fixed charges and preferred dividends were 1.52 and 1.40 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 borrowings of $160 million outstanding under
the agreement at December 31, 1994 and $187 million borrowed at
March 31, 1995.
In April 1995, AFC entered into a subordinated credit agreement with
American Premier under which it can borrow up to $675 million. The
credit line bears interest at 11-5/8% and converts to a four-year term
loan in March 2005 with scheduled principal payments to begin in April
2005. During April and May 1995, AFC borrowed $549 million under the
agreement using the proceeds for debt retirements and other corporate
purposes.
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,
12
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
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 94% of the bonds and redeemable preferred stocks held by
AFC were rated "investment grade" (credit rating of AAA to BBB) at
March 31, 1995. Investment grade securities generally bear lower yields
and lower degrees of risk than those that are unrated and non-investment
grade.
RESULTS OF OPERATIONS
General Pretax earnings in the first three months of 1995 increased
$4 million from the comparable 1994 period due to a $10 million
improvement in underwriting results of the property and casualty
insurance segment and an $11 million increase in investment income.
These items were partially offset by an $18 million decrease in realized
gains on the sales of securities and other investments.
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 (based on generally accepted accounting
principles) of GAI and its property and casualty insurance subsidiaries
was 103.6% for the first three months of 1995 compared to 107.1% for the
same period in 1994 and 102.4% for the entire year of 1994. The
improvement in first quarter underwriting results reflects (i) the
relatively mild winter weather in 1995 compared to 1994 and (ii) the
impact of the California earthquake on 1994's results which were
somewhat offset by adverse development in several lines of business in
1995.
Earned premiums increased $36 million (12%) and insurance expenses
increased $27 million (8%) during the first quarter of 1995. The
increase in premiums was due to an increase in sales of specialized
niche products and workers' compensation insurance.
Investment Income Investment income increased $11 million (8%) from
1994 due to an increase in average investments held.
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.
13
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Benefits to Annuity Policyholders Benefits to annuity policyholders
increased $5 million (9%) over those of the comparable three month
period in 1994 due primarily to an increase in average annuity
policyholder funds accumulated. 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 Interest expense on borrowed money decreased
$3.2 million (10%) from 1994 as lower rates more than offset an increase
in average borrowings. The reduction in rates reflects the April 1994,
issuance of approximately $204 million of 9-3/4% Debentures in exchange
for higher cost debentures and redemption of approximately $63 million
of 13-1/2% Debentures with lower cost borrowings under the bank credit
line.
Other Operating and General Expenses Included in operating and general
expenses in the first three months of 1995 and 1994 are charges of
$3.4 million and $2.1 million, respectively, for minority interest.
14
AMERICAN FINANCIAL CORPORATION 10-Q
PART II
OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule - Included in Report filed
electronically with the Securities and Exchange Commission.
(b) Report on Form 8-K:
Date of Report Item Reported
April 7, 1995 Acquisiton of American
Financial Corporation by
American Premier Group, Inc.
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
May 12, 1995 BY: FRED J. RUNK
Fred J. Runk
Vice President and Treasurer
15